Despite a precipitous drop in net income in the fourth quarter that flattened out full-year results, Levi Strauss & Co. executives painted a picture of a venerable company on the rise, as it is said to be eyeing an initial public offering (IPO).
Speaking to analysts on a conference call after releasing financial results on Tuesday, Chip Bergh, president and CEO, said, “We’re gaining market share as the growth we’re delivering outpaces the category. These results reflect the strength and diversification of our business and Levi’s evolution into a lifestyle brand.”
Bergh said the Levi’s brand “continued its momentum and maintained its position at the center of culture,” with 13 percent revenue growth in 2018 after delivering 9 percent growth in 2017. Overall company net revenue for the fourth quarter ended Nov. 25 grew 9 percent to $1.59 billion. For the year, net revenue increased 14 percent to $5.58 billion.
The Levi’s strategy to grow its profitable core business while becoming “a leading omnichannel retailer,” according to Bergh, continues to pay off. In the core business, total men’s bottoms—the biggest area—was up 3 percent for the year, he noted.
“Our top 10 wholesale customers grew 10 percent for the year,” Bergh said as evidence of the brand strength. “U.S. revenues were up 8 percent, and our next four largest markets grew 10 percent collectively.”
At the same time, he said the plan to diversify the business continued to deliver strong results. Total women’s business grew 28 percent, exceeding $1.6 billion in revenue and now represents nearly one-third of total business, he said, adding that this was the 14th consecutive quarter of growth in women’s, with the last eight quarters in excess of 10 percent growth.
“Yet despite this important impressive performance, we remain underpenetrated in women’s and have a long runway of growth ahead of us,” Bergh said.
Another noncore growth area is the overall tops business, which saw sales increase 37 percent, surpassing the $1 billion mark.
“This business has more than doubled since 2015, reflecting growth across a wide spectrum of tops,” Bergh said. ‘Not just graphic Ts, but fleece, outerwear and trucker jackets for men and women.”
One area that had increased costs and investments that cut into the bottom line was direct-to-consumer, which for Levi’s means its retail network and e-commerce business. Bergh said that plan is nothing less than “to become a world-class omnichannel retailer.”
The company reported that direct-to-consumer business grew 16 percent for the year, with Bergh noting that it has now grown in double-digit percentages for 11 consecutive quarters. He cited the new flagship store in New York’s Times Square, which is the largest Levi’s mainline store in the world, as major achievement. “It’s an incredible shopping experience and it is far outperforming our previous Times Square location,” he said.
In 2018, the company continued to make progress in key focus areas: U.S. wholesale, China and Dockers.
“Despite more than 300 wholesale door closures last year, we grew our U.S. wholesale business 7 percent, driven by Levi’s women’s and Signature,” Bergh said. “We fully expect that this channel will continue to be challenging, but just as we demonstrated last year, we are going to continue to play to our strengths and look for ways to profitably grow our business.”
Strengthening the business in China continues to be a priority, according to Bergh, who noted that while China represents roughly 20 percent of the global apparel market, it’s less than 5 percent of the company’s business today.
“So we see China as a huge long-term opportunity,” Bergh said. “We believe we have the right leadership and plans in place to grow our business in this key market and deepen our engagement with the Chinese consumer.”
Harmit J. Singh, chief financial officer and executive vice president of Levi Strauss, said operating income in Asia was down $7 million year-over-year, “primarily reflecting that the region’s higher revenues were more than offset by incremental marketing investment and an increase in omnichannel investments.” The company had cited similar reasons for the overall net income performance, as well as a one-time tax charge.
“Specifically, in China, revenue was flat, which is what we expected,” Singh said. “We are starting to see some traction in our China turnaround, and our business there is improving, as growth in direct-to-consumer offset a planned decline in e-commerce. We still have significant untapped potential in this market.”
Meanwhile, the company is determined to turn around the Dockers business, he said, “and we’re pleased to see pockets of growth this year, driven by the relaunch of the Signature Khaki and ongoing marketing investments around the ‘Always On’ campaign.” He added, “The brand is doing especially well in Europe, growing 16 percent for the year, driven by the casual, Khaki and cargo pants, as well as tops.”
Providing guidance for fiscal 2019, Singh said the sales growth momentum is expected to continue, “albeit at a more modest pace, in part due to ongoing challenges at U.S. wholesale as well as geopolitical risks, including Brexit and the trade conditions with China.”
Now a private company, it successfully completed an initial public offering back in 1971. The company reports its quarterly financial results because it has public debt.
Credits ratings firm Fitch Ratings last week upgraded the company’s long-term issuer default rating. The upgrade has the rating now at “BB+” from “BB,” With a stable outlook. Fitch said the upgrade recognizes Levi’s performance, with accelerating growth in revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) in 2018, as well a meaningful cash flow generation.
In November, several media outlets reported that the company was planning an IPO again and is hoping to raise between $400 million to $800 million. Berg did not comment on the matter on the conference call.