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Wholesale Delays Cost Levi’s Nearly $45 Million

Levi Strauss & Co. saw fourth-quarter revenue dip 6 percent to $1.59 billion on a reported basis, and remain flat on a constant-currency basis as strong direct-to-consumer growth offset a decline in wholesale. Net income was $151 million, on adjusted diluted earnings per share of 34 cents.

Despite the revenue decline, both sales and adjusted profit topped Wall Street expectations of $1.57 billion and 29 cents per share, respectively.

In a Nutshell: For 2023, Levi’s forecasts net revenues between $6.3 billion and $6.4 billion, reflecting reported year-over-year revenue growth of 1.5 percent to 3 percent, inclusive of 200 basis points (2 percentage points) of headwinds from foreign exchange and suspending Russian business operations. Adjusted diluted earnings per share (EPS) is anticipated to be between $1.30 and $1.40.

Levi Strauss & Co. CEO Chip Bergh said in an earnings call that the Levi’s brand grew 11 percent in 2022, and expanded its global market share more than any other denim brand for the second year in a row, led by share gains in both men’s and women’s. The brand’s merchandise saw average selling prices increase 6 percent in 2022.

“Levi’s is bigger than the next three brands combined, reflecting market share gains for five out of the last six years,” Bergh said. “According to Euromonitor, in 2022, the denim category grew low-single-digits globally, outpacing total apparel for the full-year and is projected to grow at a similar rate in 2023 and at a mid-single-digit CAGR over the next several years.”

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Despite the quarterly sales drop, Levi’s market share gains are a major positive for a brand shooting to generate between $9 billion and $10 billion in revenue by 2027.

In the call, chief financial and growth officer Harmit Singh said the company is “not planning any major price increase” going forward, noting that average unit retail (AUR) will be “driven by mix more than pricing.”

Singh also shared more insight into Levi’s brick-and-mortar growth strategy. In the U.S., the company plans to open around 15 full-priced Levi’s NextGen doors this year, on track for about 80 total under the new concept by the end of 2023 as the company plans to run 100 NextGen doors in the U.S.

Globally, Levi Strauss & Co. anticipates opening more than 80 net new company-operated stores in the full year. In the fourth quarter, the company opened the first two brick-and-mortar stores for Beyond Yoga, the activewear brand it acquired in 2021.

During the fourth quarter, the denim giant said that inventory delays and supply chain disruptions prevented the company from fulfilling select U.S. wholesale customer orders, affecting about $35 million to $45 million of revenue.

Total inventories increased 58 percent on a dollar basis to $1.41 billion over the prior year’s $898 million. The increase relative to the third quarter was in line with the company’s expectations and primarily attributable to the U.S. ERP implementation that will take place in April 2023. In an effort to mitigate unpredictable lead times and prepare the ERP implementation, Levi’s intentionally ordered core future-season inventory earlier than normal during the second half of fiscal year 2022.

As of Nov. 27, the company had $420.1 million of inventory in transit, including inventory received earlier than needed and not yet able to be processed because distribution centers were too backed up.

Excluding the ERP build and goods in transit, inventory is up roughly 35 percent over the prior year.

Core product represents more than two-thirds of total inventories. Levi expects the fourth-quarter inventory growth will be the high point, and anticipates bringing inventory back to normal levels by the end of the second quarter. To do so, the company is planning to reduce inventory buys 25 percent through the period.

Gross margin was 55.8 percent, down from 57.8 percent in the year prior. Adjusted gross margin was also 55.8 percent, down 230 basis points. Unfavorable currency exchange accounted for approximately 1 percent of the decline, while the balance reflects the impact of higher product costs and lower full-priced sales, partially offset by price increases and favorable channel mix.

Cash and cash equivalents were $430 million and short-term investments were $71 million, while total liquidity was approximately $1.5 billion. Total capital expenditures for fiscal 2023 are expected to be approximately $280 million.

Net Sales: Net revenues of $1.59 billion decreased 6 percent on a reported basis from the $1.68 billion in the 2021 fourth quarter, and was flat on a constant-currency basis.

Direct-to-consumer (DTC) net revenues dipped 2 percent on a reported basis and increased 6 percent on a constant-currency basis, driven by strong growth in company-operated stores in the Americas and Asia, offsetting a decline in Europe primarily due to store closures in Russia. DTC net revenues excluding Russia were up 10 percent on a constant-currency basis, driven by the Americas, Asia and Europe.

As a percentage of fourth-quarter company net revenues, DTC stores and e-commerce comprised 31 percent and 8 percent of sales respectively.

Wholesale net revenues declined 8 percent on a reported basis, or 4 percent on a constant-currency basis. Excluding the effects of currency, strong growth in Asia and Latin America was more than offset by wholesale declines in the U.S. and Europe.

Total e-commerce revenues were down 7 percent year-over-year, yet up approximately 29 percent versus pre-pandemic numbers. Digital sales across DTC and wholesale comprised approximately 20 percent of fourth-quarter fiscal 2022 net revenues, as compared to 16 percent of fourth-quarter fiscal 2019 net revenues.

By region, net revenues in the Americas decreased 5 percent on both reported and constant-currency bases to $840 million, as growth in the DTC business was offset by wholesale declines. Latin America delivered 15 percent growth across all channels, according to Singh.

In Europe, net revenues decreased 18 percent on a reported basis to $370 million. On a constant-currency basis, net revenues declined 8 percent, including a 4 percent negative impact from the suspension of the company’s business in Russia.

Net revenues in Asia increased 1 percent on a reported basis and 17 percent on a constant-currency basis to $251 million. The increase in net revenues was driven by both wholesale and DTC channels and in most markets outside of China, where net revenues declined 22 percent on a reported basis and 14 percent on a constant-currency basis.

For the company’s “other brands” segment, combined net revenues for Dockers and Beyond Yoga increased 28 percent on a reported basis and 33 percent on a constant-currency basis to $127 million. The Dockers brand saw revenues jump 20 percent on a reported basis and 25 percent on a constant-currency basis, while Beyond Yoga contributed net revenues of approximately $27 million.

Full-year reported net revenues of $6.17 billion grew 7 percent versus 2021’s $5.76 billion and increased 12 percent on a constant-currency basis.

Net Earnings: Net income at Levi Strauss & Co. was $151 million on diluted EPS of 38 cents, compared to $153 million last year on diluted EPS of 37 cents. Adjusted net income was $137 million on adjusted diluted EPS of 34 cents, down from the $170 million on adjusted diluted EPS of 41 cents in the prior-year period.

Operating income was $137 million, down from $186 million in the 2021 second quarter, while adjusted EBIT was $142 million compared to $203 million last year due to lower reported net revenues and adjusted gross profit.

For all of 2022, net income was $569 million on diluted EPS of $1.41, increasing from the $554 million in 2021 profit on diluted EPS of $1.35.

CEO’s Take: In 2023, Levi’s is celebrating the 150th anniversary of the iconic five-pocket 501 jean, which saw sales growth of 30 percent in 2022. The denim brand has more in store for the 501, including several limited-edition drops including the original 1873 XX Waist Overalls, which were the first pair of Levi’s blue jeans ever sold.

Other pairs Bergh previewed included the Men’s 501 1954 jean, the Original Women’s 501 introduced in 1981 and a new sustainable version of the classic jean.

“We’ve got a plant-based 501 that brings a real sustainability, ecologically minded approach to the 501, which is comprised of 97 percent plant-based and bio-based inputs,” Bergh said. “It’s dyed in plant-based indigo and that’s also with a 100 percent organic cotton made at Cone Mills, which is our oldest denim partner.. You all have probably picked up the news that we’ve made an investment in Stony Creek Colors. So, just a lot of good stuff there.”