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Levi’s Eyes China for Sales Growth, But Pulls Back on Sourcing

While Levi Strauss & Co. isn’t stressing over potential tariffs on apparel imports from China, company executives are focused on expanding business in the Chinese consumer market.

The company said last month that it has been drawing down its reliance on China as a source for its jeans and sportswear in recent years. Imports from China now represent less than 8 percent of its overall production and the company said it was in the process of “actively managing this down to very low-single-digits by fiscal year 2020.”

But China is a target for expanded consumer sales, executives noted on a conference call with analysts Tuesday. The market there, however, is complicated and requires continued fine-tuning.

The China conundrum

Harmit Singh, executive vice president and chief financial officer at Levi Strauss, said, “Tariffs have been on again, off again recently, and it’s difficult to predict what the future holds for tariff policy. But as we have previously communicated, we have taken steps to insulate our business from the long-term negative impact of these kind of measures. Should additional tariffs be enacted on imports to the U.S. from China and Mexico, we can mitigate the financial impact to our business over the near term.”

In Asia, Singh said net revenues were up 6 percent in the second quarter ended May 26 on a reported basis, and 12 percent in constant currency. China’s revenues grew on strong performance of company-operated stores and e-commerce channels.

“We continue to make progress in that critical market, though we still have more work to do in the franchise channel over the next year,” Singh said.

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China, according to Levi’s president and CEO Charles Bergh, accounts for about 3 percent of the firm’s business and roughly 20 percent of the apparel category globally.

“So clearly, it represents a significant untapped opportunity for us,” Bergh said. “We have been growing there now for the last couple of quarters, but…it is a little bit of a heavy lift. We spent the last 18 months or so on closing a number of poor-performing doors, mostly franchise doors, cleaning up our store footprint.”

The CEO said there hasn’t been any “Chinese consumer backlash against the Levi’s brand” over the U.S.-China trade war, and, he added, “there hasn’t really been any significant negativity in the press or anything else about Levi’s or strong American iconic brands…The equity in the brand there is very, very strong. We’ve seen that. Now we just have to build on it.”

Strengths and weaknesses

For the second quarter Levi’s revenues were up 5 percent from the prior year to $1.3 billion, with the men’s wear business growing 6 percent and the women’s business increasing 16 percent. Bottoms were up 8 percent, tops up 14 percent and global wholesale rose 6 percent, while global direct-to-consumer business increased 14 percent.

“The Levi’s brand remained strong and grew 10 percent this quarter,” Bergh said. “We grew in all three regions across men’s, women’s, tops and bottoms and continue to strengthen our lifestyle brand appeal with consumers around the world…Our total men’s bottoms business, our biggest business, was up 5 percent for the quarter. Performance-focused fabrics with higher stretch content and tapered silhouettes continue to resonate with consumers. The 502, 512 and 514 drove global growth, while newer products, such as the Levi’s Engineered Jeans performed well internationally, and Dockers grew 1 percent globally.”

The company plans to diversify the business by expanding more into tops, women’s, under-penetrated markets and with its value brands. In tops, sales grew 14 percent in the period, driven by strong performance in sweatshirts and trucker jackets.

Levi’s Signature and Denizen brands collectively delivered 9 percent growth on top of the 60 percent growth in the second quarter of last year.

“While we continue to post growth in the U.S., we’re rolling these brands out in new markets as well,” Bergh said.

Another key strategy is to become a leading omnichannel retailer. Direct-to-consumer, which includes the brick-and-mortar stores and e-commerce sites the company operates, increased 14 percent for the quarter and has now grown double digits for 13 consecutive quarters.

Revenue from company-owned brick-and-mortar stores was up 12 percent in the quarter, reflecting positive comp performance in ongoing expansion of the network, which had 78 more stores by the end of the quarter than in year prior. E-commerce sales gained 25 percent for the quarter.

“We’ve begun to roll out a ship-from-store program in U.S., which will allow us to optimize inventory, augment sales and improve store productivity,” Bergh said.

On the wholesale side, Singh said revenue was down 2 percent, attributable to the impact of the bankruptcies and door closures that some of its customers experienced over the last year, as well as a decline in discounted sales to the off-price channel, reflecting, he said, “that we’re…carrying substantially healthier inventory in comparison to the prior year.”

“We will remain focused on optimizing execution in the U.S. wholesale channel going forward, but we do expect ongoing pressure for the remainder of the year due to a weak department store environment, continued door closures and pressure on our customers’ open-to-buy budgets,” Singh told analysts. “The U.S. market is unlike any other in the world due to the dominance of wholesale, but our opportunity is to continue to diversify across channels, products, genders and customers as we are doing elsewhere.”

Laser tag

On a positive note, Bergh said, is the digital disruption in denim finishing.

“We use lasers instead of hand finishing and over time, that is going to drive a fairly significant savings in production cost because we’re finishing it with a machine instead of people. And it should over time also deliver some balance sheet benefits from a supply chain and inventory benefits, as well.”

Today, roughly 25 percent of the Levi’s denim bottoms business on a global basis is finished with its F.L.X. technology.

“The full potential is about half of our total bottoms business, and so we should ramp from 25 percent to that full potential over the next two years or so, so through 2021.”