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Levi’s Income Surges Despite $60M Supply Chain Hit

Levi Strauss & Co. said supply chain constraints impacted net revenues by approximately $60 million in the first quarter.

In a Nutshell: Levi Strauss reaffirmed expectations for fiscal 2022, with net revenue forecast to grow 11 percent to 13 percent compared to 2021, to $6.4 billion to $6.5 billion, with adjusted diluted earnings per share (EPS) projected to be $1.50 to $1.56.

“We achieved excellent financial results in the first quarter, driving strong double-digit revenue growth and record gross margin enabling us to deliver adjusted EBIT margin of 14.9 percent,” said Harmit Singh, chief financial officer of the denim giant. “The ongoing consumer demand across our portfolio of brands and our proven ability to deliver profitable growth give us the confidence to reaffirm our full-year outlook despite the incremental headwinds from ongoing macro challenges.”

Selling, general and administrative (SG&A) expenses were $709 million compared to $583 million in the prior-year quarter. Adjusted SG&A in the period was $708 million compared to $579 million in the same quarter in 2021. As a percentage of net revenues, adjusted SG&A was 44.5 percent, approximately 20 basis points higher than the prior-year period, reflecting higher investments in advertising and promotion and higher distribution expenses, partially offset by leverage in selling expenses.

Cash and cash equivalents at the end of the quarter of $678 million and short-term investments of $99 million were complemented by $837 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $1.6 billion. Net debt was $248 million.

Total inventories increased 20 percent compared to the end of the corresponding-year period, as the company builds core inventory through the first half of the year to mitigate supply chain risk and capture consumer demand.

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Sales: Net revenue for the first quarter ended Feb. 27 increased 22 percent to $1.6 billion versus the same period in 2021 driven by strong growth across all geographical segments.

Global direct-to-consumer (DTC) net revenue was up 35 percent year over year, reflecting a 48 percent gain in company-operated stores and a 10 percent rise in e-commerce. Global wholesale net revenues grew 15 percent versus the comparable period in 2021, reflecting strong demand for the Levi’s brand.

Net revenue through all digital channels expanded 16 percent and represented approximately 25 percent of first quarter net revenue.

In the Americas, net revenue grew 26 percent, driven by growth across both DTC and wholesale channels. DTC net revenues increased 31 percent due to strength in company-operated stores as consumers returned to in-person shopping. Wholesale net revenues grew 24 percent thanks to strong performance across brands, particularly Levi’s. Net revenues through all digital channels rose 24 percent and represented 24 percent of the segment’s sales in the quarter.

In Europe, net revenue was up 13 percent, as DTC increased 46 percent, driven by strength in company-operated stores as the severity of the pandemic lessened, allowing consumers to return to stores. Wholesale net revenue decreased 4 percent and net revenue through all digital channels declined 8 percent following an 84 percent increase in the same period last year and represented 29 percent of the segment’s sales in the quarter.

In Asia, net revenue increased 11 percent, spurred by DTC and wholesale channels, despite a few markets continuing to experience Covid-related impacts. DTC net revenues rose 17 percent on strong performance in company-operated stores, as well as e-commerce, which was up 22 percent. Wholesale net revenue increased 5 percent, driven by strength of the Levi’s brand across several markets. Net revenue through all digital channels grew 17 percent and accounted for 14 percent of segment sales.

Earnings: Net income in the quarter was up 37 percent to $196 million from $143 million in the year-earlier period. Diluted EPS was 48 cents and adjusted diluted EPS was 46 cents, up from 34 cents in the 2021 quarter.

Gross margin was 59.3 percent and adjusted gross margin was 59.4 percent, up 170 basis points from the 2021 period. The company said the increase in gross margin reflected a higher proportion of sales in its DTC channel, lower promotions, higher share of full price sales and price increases, partially offset by higher product costs.

Operating margin was 14.7 percent and adjusted earnings before interest and taxes (EBIT) margin of 14.9 percent was up from 13.3 percent year over year.

CEO’s Take: Chip Bergh, president and CEO, said: “We started the year with strong consumer demand and solid momentum across geographies, channels and categories. Our teams’ disciplined execution of our strategic priorities enabled us to deliver strong top and bottom-line growth as we capitalize on structural tailwinds and successfully manage a dynamic operating environment. The strength of our brands and strategy position us to deliver sustainable growth well into the future.”