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Levi Strauss Battles Logistics, Covid Headwinds to Score Sales and Income Gains

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Levi Strauss said strong direct-to-consumer sales helped improve margins in the third quarter, even as results in Asia faltered.

In a Nutshell: Levi Strauss & Co., in announcing financial results for the third quarter on Wednesday, said expectations for the fourth quarter are for net revenue growth of 20 percent to 21 percent compared to the fourth quarter of fiscal 2020, which represents growth of 6 percent to 7 percent versus the fourth quarter of fiscal 2019.

Adjusted diluted earnings per share (EPS) for the fourth quarter are expected to be 38 cents to 40 cents, bringing the full-year adjusted diluted EPS outlook to $1.43 to $1.45.

“Adjusted EBIT margin exceeded our expectations driven by strong brand momentum,” said Harmit Singh, chief financial officer of Levi Strauss & Co. “We have taken pricing actions and believe we have pricing power to mitigate inflationary pressures. Our third quarter performance combined with our confidence in our outlook also enables us to allocate capital across all of our core priorities–investing in our business, paying down debt, closing an inorganic acquisition and returning cash to shareholders in the form of dividends and a newly authorized $200 million share repurchase program.”

During the quarter, the company completed the acquisition of Beyond Yoga, for an aggregate purchase price of approximately $400 million, diversifying the business into the high growth activewear segment.

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The company said it continued to experience temporary door closures during the third quarter due to the resurgence of COVID-19 cases and resultant lockdowns in affected geographies. Approximately 10 percent of company operated doors were closed globally during the quarter, primarily in Asia, where traffic remained at low levels and approximately 20 percent of company-operated and a large portion of third-party retail locations were closed. Currently, approximately 4 percent of company-operated stores around the globe are closed.

Sales: Net revenue for the third quarter ended Aug. 29 increased 41 percent versus the same period in 2020 and were up 3 percent compared to 2019 to $1.5 billion.

Direct-to-consumer (DTC) net revenues rose 34 percent versus the 2020 comparable period and were up 4 percent against 2019, due to increased revenues from company-operated stores. Global wholesale net revenues grew 45 percent against 2020 and 3 percent versus the 2019 same period, reflecting strong demand in the U.S. and Europe.

Net revenues through all digital channels grew 10 percent from the year-earlier period and 76 percent versus 2019. Digital sales represented approximately 20 percent of total third quarter revenues.

In the Americas, wholesale net revenues grew 11 percent driven by strong performance of the Levi’s brand and Signature. The region’s DTC net revenues increased 4 percent primarily due to growth in e-commerce net revenues, which were up 40 percent, driven by higher traffic and conversion. Net revenues through all digital channels grew 65 percent and represented 18 percent of the region’s sales in the quarter.

Compared to the third quarter of fiscal 2019, Europe net revenues grew 7 percent, driven by growth across all channels. Wholesale net revenues increased 3 percent, pushed by digital pure-players, while DTC net revenues increased 12 percent on strong performance in outlet stores. Company e-commerce net revenues grew 41 percent versus the third quarter of fiscal 2019. Net revenues through all digital channels rose 87 percent and represented 24 percent of the region’s sales in the quarter.

In Asia, net revenues declined 23 percent compared to the 2019 period, driven by the ongoing impact of COVID-19 in the region. Wholesale and DTC store net revenues fell, while company operated e-commerce net revenues increased 62 percent. Net revenues through all digital channels grew 93 percent and represented 20 percent of the region’s sales in the quarter.

Earnings: Net income for the quarter was $193.33 million compared to $27.05 million in the same 2020 period.

Gross profit was $862 million, compared to $577 million in the same quarter in the prior year. Gross margin was 57.6 percent of net revenues, up from 54.3 percent in the same quarter of the prior year. Adjusted gross margin, which excludes the COVID-19 related charges, was 57.5 percent, an increase of 390 basis points compared to the same period in the prior year.

The increase in gross margin reflects a higher proportion of sales in the DTC channel, price increases, lower promotions and a higher share of full price sales.

Diluted EPS was 47 cents, while adjusted diluted EPS was 48 cents, up from 8 cents a year earlier and 31 cents in 2019.

CEO’s Take: Chip Bergh, president and CEO of Levi Strauss & Co., said: “We delivered a strong quarter with revenue growth versus pre-pandemic 2019 levels, despite a more difficult macro-environment than we expected. These results reflect the strength of the Levi’s brand, improving momentum in our direct-to-consumer business and the scale and agility of our supply chain network where we have executed against macro-headwinds exceptionally well.”

“Our future is bright given our iconic Levi’s brand and the acquisition of Beyond Yoga, which establishes our position in the fast growing, high-margin premium activewear market as we continue to capitalize on global casualization trends,” Bergh added.