In reporting fourth quarter and year-end results, Levi Strauss & Co portrayed the upside of direct-to-consumer growth and the downside of the expenses that go with it.
In a Nutshell: Levi Strauss & Co. reported strong gains in revenue for the fourth quarter and year, but special charges and high costs related to growing its direct-to-consumer business and increased investments in advertising sunk net income.
Levi’s said it experienced sales gains in all regions and in retail and wholesale channels, and in its e-commerce business. The company said gross margin for the fourth quarter and year were both down slightly, as the benefit from revenue growth in the higher-margin direct-to-consumer channel was offset by growth in lower-margin businesses and negative impacts from foreign currency translations.
Sales: Net revenue for the fourth quarter ended Nov. 25 grew 9 percent to $1.59 billion from $1.47 billion in the year-ago period. In the Americas, net revenues were up 8 percent to $923 million, reflecting higher revenues across wholesale and direct-to-consumer channels.
In Europe, net revenues rose 13 percent to $421 million, with broad-based growth across all markets and channels, notably in the women’s and tops businesses. In Asia, net revenue advanced 5 percent to $248 million thanks to expansion and a strong performance in direct-to-consumer business.
For the year, net revenue increased 14 percent to $5.58 billion compared to net revenue of $4.9 billion in fiscal 2017.
Net revenues related to the company’s direct-to-consumer business rose 13 percent for the fourth quarter and 18 percent for the full year, due primarily to performance and expansion of the company’s retail network, as well as growth in its e-commerce business. The company had 74 more company-operated stores at the end of fiscal 2018 than it did at the end of fiscal 2017.
Net revenues related to the company’s wholesale business grew 7 percent for the fourth quarter and 11 percent for the full year, primarily reflecting higher revenues from the Americas and Europe.
Earnings: Fourth quarter net income declined 17 percent to $97 million from $116 million in the prior-year quarter, primarily due to a tax charge related to the impact of the Tax Cuts and Jobs Act. Full-year net income was flat, as higher operating income, lower interest expenses, gains on hedging contracts in the current year and a debt refinancing charge in the prior year were partially offset by a one-time $143 million tax charge related to the Tax Act.
Fourth quarter adjusted earnings before interest and taxes (EBIT) decreased 18 percent to $129 million compared to $157 million in the prior-year period, as higher revenues were more than offset by higher costs related to the expansion of the company’s direct-to-consumer business, higher compensation expense reflecting stronger company performance and increased advertising investments.
Full year adjusted EBIT increased 13 percent to $542 million from $481 million in fiscal 2017, due to higher revenues and gross margins, partially offset by higher costs related to the expansion of the company’s direct-to-consumer business, increased advertising investments and higher compensation expense reflecting stronger company performance.
CEO’s Take: Chip Bergh, president and CEO, said: “We had an outstanding year, with reported net revenues of $5.6 billion, growing 14 percent year-over-year on a reported basis. It’s clear our strategies to diversify our product portfolio, expand our direct-to-consumer business and deepen our connection with consumers worldwide have worked, resulting in both higher annual revenues and gross margins.”