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IPO Costs Thin Levi’s Bottom Line in Second Quarter as Revenue Rises

Levi Strauss & Co. saw net income plummet in the second quarter, hit by underwriting costs from its IPO and negative foreign currency exchange.

In a Nutshell: In its first full quarter since going public in March, Levi Strauss scored strong revenue gains across regions and channels. The company reiterated that it anticipates capital expenditures of around $190 million to $200 million and plans to open nearly 100 new company-operated stores in fiscal 2019.

Levi Strauss updated annual guidance for fiscal 2019, putting constant-currency net revenue growth at the high end of the mid-single digit percentage range and constant-currency adjusted earnings before interest and taxes (EBIT) margin slightly up in the range of 10 basis points.

The company noted that due to the timing of its fiscal year ending the final Sunday of November, fiscal 2019 will not contain the benefit of a Black Friday, which normally represents about a half-point of annual net revenues and an additional 25 basis-points of adjusted EBIT margin.

Sales: Net revenue for the second quarter ended May 26 grew 5 percent to $1.31 billion on a reported basis and 9 percent on a constant-currency basis, excluding $44 million in unfavorable currency effects.

The company’s direct-to-consumer business increased 9 percent in the quarter, primarily due to performance and expansion of the retail network and e-commerce growth. The company had 78 more company-operated stores at the end of the second quarter of 2019 than it did a year prior. The company’s wholesale business reported that revenues rose 3 percent, reflecting growth in all regions.

In the Americas, net revenue rose 3 percent to $693 million, reflecting increases across wholesale and direct-to-consumer channels across the region. In Europe, net revenues grew 9 percent to $398 million, thanks to broad-based growth across direct-to-consumer and wholesale channels.

In Asia, net revenue increased 6 percent to $222 million on strong performance across traditional wholesale and direct-to-consumer channels.

Earnings: Second quarter net income decreased 63 percent to $29 million, primarily due to the costs associated with the company’s initial public offering (IPO) in March, inclusive of $25 million of underwriting commissions paid on behalf of the selling stockholders. The company raised $623.3 million from its IPO. Second quarter adjusted net income was down 17 percent to $69 million, which the company attributed to $10 million lower net gains on foreign exchange derivatives.

Gross profit in the period rose 4 percent to $700 million. Gross margin was 53.3 percent of net revenues compared with 53.9 percent in the same quarter of fiscal 2018, primarily due to 100 basis points of unfavorable currency, which was partially offset by less discounted sales and the margin benefit from growth in the company’s global direct-to-consumer channel.

CEO’s Take: Chip Bergh, president and CEO, said: “Our second quarter and first half results reflect the continued strength of our diversified business model, as we delivered broad-based growth across all brands, regions and key product categories despite a challenging retail and macroeconomic environment. For both periods, the Levi’s brand grew in all three regions across men’s, women’s, tops and bottoms, and maintained its position at the center of culture through iconic products and consumer experiences.”

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