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After Optimistic Q4, Levi’s Eyes Untapped Markets

Not even the oldest denim brand in history was able to emerge from 2020 unscathed.

Heritage denim brand Levi’s shared its fourth-quarter and year-end financial results in a conference call earlier this week, noting a significant overall loss of $127 million last year. Despite the looming figure, its fourth quarter was the most successful of the year, clocking in at just a 12 percent revenue decline from the previous year. In Q2 and Q3, the company experienced a 62 percent and 27 percent decline in revenue, respectively.

Levi’s president and CEO Chip Bergh continues to remain cautiously optimistic, referencing the brand’s ongoing resilience.

“We were operating against several scenarios and I’m proud to say that we beat our internal expectations and overall delivered a really strong year, given the backdrop,” he said. “Our performance further validated the power of our brand, the strength of our strategies and our ongoing ability to adapt to the changing expectations of our consumers.”

As a result of spiking Covid-19 cases in certain regions, the company was operating severely under capacity in the fourth quarter: 40 percent of the full store footprint in Europe, and 17 percent globally of all company-operated doors and franchisee doors are currently closed and others are operating on reduced hours. Still, brick-and-mortar locations are an integral part of the company’s strategy, and as such, Levi’s continued to expand its physical presence with the introduction of 21 Next-Gen stores in Q4. In the U.S. alone, Levi’s now has five Next-Gen stores, which offer digitally connected experiences for shoppers as well as assortments based on local customer data.

“We will continue expanding our retail footprint capturing white space opportunities with a focus on these more productive store formats,” said Bergh.

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Unsurprisingly, it was the company’s digital initiatives that helped make up for the loss of the physical stores’ revenue in Q4. The company reported that its e-commerce business grew 35 percent last quarter. Mobile app downloads also significantly increased, with 65 percent more downloads than the previous quarter—and 70 percent of users are Gen Z or millennials.

Levi’s also experienced “steady fundamental improvements” through the holiday season, despite the fact that it chose to not run Black Friday promotions. During that time, revenue growth in the digital ecosystem accelerated to 33 percent, which was ahead of the market.

While the team projects net revenues, earnings and cash flows will continue to be negatively impacted for the first half of 2021, Levi’s CFO Harmit Singh believes the second half could return to “pre-Covid” levels.

“Given the very low near-term visibility, we’re taking the approach of planning our 2021 fiscal year one-half at a time,” said Singh. “We’re expecting first-half revenue growth in the range of 18 to 20 percent versus 2020. And based on the underlying strength of demand for our brands and assuming conditions improve as the vaccines roll out, we continue to believe that revenues should return to pre-pandemic levels during the second half of the year, with Q4 of 2021 the first full quarter with revenues above the comparable quarter of 2019.”

He added that progress could be seen even sooner in regions like China and Europe, where the coronavirus pandemic began earlier.

Bergh indicated four main opportunities for 2021, including a heavier focus on brands, a DTC-first approach, expansion in untapped areas and a digital transformation. He added that DTC had only accounted for 29 percent of total revenue in 2015, but shot up to 39 percent in 2020—and he believes the number could travel as high as 60 percent.

Still, wholesale will also make up a large focus this year, as the company recently announced its Levi’s for Target limited-edition home and lifestyle collection. Similarly, its Red Tab rollout at Target is on track to expand to 500 doors by the fall. Even though Target is a mass retailer,  Bergh said the average unit retail going out the door at Target is higher than the U.S. wholesale average AUR. This, he added, is helping Levi’s “premiumize in this marketplace.”

In terms of products, the team noted several areas of opportunity, including women’s. In 2015, women’s represented only 20 percent of total revenues, and it now represents 34 percent, with the ability to grow to 50 percent. Women’s high-rise and relaxed fits are showing promising results as comfort drives pandemic consumers.

For this same reason, non-denim pieces will be a top focus in the coming year, as Levi’s already teased with its recently launched Red Tab Sweats, a unisex Gen Z-focused pilot collection that sold out in weeks. Similarly, a line of underwear for men also recently debuted in Europe.

To further appeal to the younger market, the brand is planning exciting collaborations, including an upcycled collection with Miu Miu, Valentino and others.

And despite the volatility of recent events, Levi’s remains hyper-focused on sustainability, noting that it was one of only three apparel companies recently named to the Carbon Disclosure Project’s A list. It also held four virtual line assortment meetings and reduced the need for physical samples by leveraging digitized assortments.

“Our brand and our values reinforce each other, making us a stronger company,” said Bergh. “A great example of this is our sustainability work. It was the focus of our fall product line and marketing campaign and will be again in the spring.”