Levi Strauss & Co.’s (LS&Co.) third-quarter earnings call serves as a reminder that 100-plus years of denim expertise aside, the jeanswear leader is not immune to the myriad of disruptions apparel companies are experiencing on a global scale.
Continued supply chain disruption, primarily in the U.S., resulted in estimated missed sales of approximately $30 to $40 million, or 2 percent to 3 percent of growth.
In Europe, revenues were 9 percent lower on a constant currency basis, which includes a 4 percent negative impact from the suspension of its operations in Russia. While macro pressures, including inflation and extreme heat negatively impacted it European business, LS&Co. CFO Harmit Singh said several of its large markets (U.K. and Spain) posted growth. “Levi’s remains by far the most popular denim brand in Europe,” he said.
Meanwhile, Asia accelerated with “greater than anticipated” revenue, up 53 percent despite Covid-related restrictions negatively impacting markets including China. Singh said the Asia segment (excluding China) grew 68 percent with broad-based growth across market, led by India, Malaysia, Australia/New Zealand, Indonesia and Thailand.
Though the company saw momentum in September U.S. direct-to-consumer sales and feels “confident in the strength” of its deep consumer connections, Singh said the company is “tempering our outlook” for the remainder of the year. “We missed our own internal high bar. Things progressed fairly quickly through the quarter,” he said.
Pointing to ongoing supply chain disruption and macro-economic pressures, the company now predicts sales will grow 6.7 percent to 7.0 percent, or 11.5 percent to 12 percent on a constant-currency basis, meaning they will be $6.15 billion to $6.17 billion instead of $6.4 billion to $6.5 billion.
Singh noted that the outlook reflects a more cautious view about supply chain challenges, particularly in the U.S. into the fourth quarter.
While LS&Co. expects conditions to remain challenging in the near term, Singh said the company is confident in its “ability to leverage our strengths to deliver sustainable, profitable long-term growth and emerge in a stronger position.”
“Our brands and the structural economics of our business remain as strong as ever. On top of our resilient core, we are making good progress in attractive growing and high margin areas, including our women’s tops, international, and direct-to-consumer business. We are focused on controlling the controllable,” he said.
What it can control is how it translates new consumer habits and demands into new products. The Levi’s brand grew 6 percent in Q3 versus prior year and almost 10 percent ahead of 2019.
Across the denim category as a whole, Levi’s jeans turned in an outlier performance in the quarter, however.
Citing NPD Group data, LS&Co. president and CEO Chip Bergh said Levi’s “significantly outperformed” the overall U.S. jean market, which declined by mid-single-digits during the June through August quarter, and the overall U.S. apparel market, which “slowed to only 1 percent growth.”
The brand has achieved this, in part, by capitalizing on the rising interest in looser fits with a new women’s Baggy Dad fit based on a ’90s style and new bootcut and straight fit launches. The trend toward looser fits in women’s was also accompanied by a shift from high to mid rises, Bergh added, which were up 20 percent.
Likewise, the 501 family of products posted double-digit growth across men’s and women’s.
“We’re driving growth in our bottoms business by delivering a pipeline of fresh and innovative products as we define new trends and introduce new fits,” Bergh said.
Levi’s premiumization also continues. In the U.S., the Levi’s brand was up low-single digits. This growth was offset by a 12 percent decline in the company’s value brands, Signature and Denizen, which Bergh said are “most sensitive to changes in consumer discretionary spending.” Further, the value business was impacted by a reduction in Denizen women’s distribution at Target as the retailer expanded its Levi’s Red Tab assortments. Levi’s values brands only comprise a mid-single digit percentage of the brand’s total net revenues, Bergh added.
Other wins during the quarter included Levi’s sold-out collaboration with Ganni, its Denim Tears team-up landing on Rolling Stone’s digital October issue featuring 2022 NBA Finals MVP Steph Curry, and the reboot of its “Buy Better, Wear Longer” campaign.
“This campaign underscores the durability of a pair of Levi’s, important in today’s environment where consumers are looking for quality and value for money. This is the highest-scoring ad in copy testing that we’ve had since I joined the company over a decade ago—a reflection of how much this message resonates,” Bergh said.