Levi Strauss & Co. reduced guidance for its fiscal year while reporting earnings in its fiscal second quarter ended May 28 arrived slightly below Wall Street targets amid pressures at the U.S. wholesale channel. 

Levi Strauss & Co. wholesale revenues were down 22 percent in the quarter. Beyond Yoga was a bright spot, increasing revenues by 28 percent.

The quarter showed break-even results compared to analysts’ expectations calling for earnings of 2 cents a share. Sales were down 9 percent to $1.3 billion, also below the analyst consensus target of $1.34 billion

“Our strong Q2 DTC and international results in a challenging environment demonstrate the resilience of our business model and the health of Levi’s brand globally,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “While U.S. wholesale remains pressured, we are pursuing initiatives to stabilize this business and drive market share gains. We are confident in our ability to navigate near-term headwinds and remain as optimistic as ever about the company’s future.”

“We achieved our Q2 expectations across key metrics, including significant progress on inventory and the implementation of our U.S. ERP,” said Harmit Singh, chief financial and growth officer of Levi Strauss & Co. “While we are adjusting our full-year outlook, we expect H2 revenues up mid-single-digits and a low-double-digit adjusted EBIT margin as strong growth in our large DTC and International businesses continue. As wholesale stabilizes and COGS improve, our business model is uniquely positioned to generate significant financial leverage beyond 2023.”

Revenue Highlights

  • Net Revenues of $1.3 billion decreased 9 percent on reported and constant-currency bases versus Q2 2022. Net revenues related to the planned shift in wholesale shipments from Q2 to Q1, primarily due to the U.S. ERP implementation, negatively impacted Q2 by approximately $100 million or 7 percent of net revenues.
  • DTC net revenues increased 13 percent on a reported basis and 14 percent on a constant-currency basis, driven by broad-based growth in both company-operated mainline and outlet stores and e-commerce. E-commerce increased 20 percent on a reported basis and 21 percent on a constant-currency basis reflecting double-digit growth across all segments.
  • Wholesale net revenues decreased 22 percent on reported and constant-currency bases as strong growth in Asia and Latin America, was offset by declines in North America and Europe. Adjusting for the shift in wholesale shipments from Q2 into Q1, global wholesale net revenues were down low-double-digits on top of nearly 20 percent constant-currency growth in the prior year. Global wholesale net revenues in the first half were up low single digits versus 2019.
  • In the Americas, net revenues decreased 22 percent to $609 million on reported and constant-currency bases. DTC net revenues increased 6 percent, driven by strong performances in our company-operated mainline stores and e-commerce. Wholesale net revenues decreased 33 percent, primarily driven by the shift mentioned above in wholesale shipments and softer performance in the U.S.
  • In Europe, net revenues decreased 2 percent to $361 million on reported and constant-currency bases; excluding Russia, net revenues increased 1 percent on a constant-currency basis. DTC net revenues increased 7 percent on a reported basis and 6 percent on a constant-currency basis, and 14 percent excluding Russia, driven by strength in company-operated stores and e-commerce. Wholesale net revenues decreased 10 percent on reported and constant-currency bases, reflecting the cautious order environment among wholesale partners.
  • Asia net revenues increased 18 percent to $262 million on a reported basis and 27 percent on a constant-currency basis, reflecting growth across almost all markets, including strong growth in China. DTC net revenues rose 30 percent on a reported basis and 41 percent on a constant-currency basis, driven by strength in our company-operated mainline and outlet stores and e-commerce. Wholesale net revenues increased 5 percent on a reported basis and 13 percent on a constant-currency basis.
  • For Other Brands, Dockers and Beyond Yoga combined, net revenues decreased 1 percent to $105 million on a reported basis and 2 percent on a constant-currency basis. Beyond Yoga rose 28 percent on reported and constant-currency bases. Dockers declined 9 percent on a reported basis and 10 percent on a constant-currency basis as strong growth internationally and in DTC was offset by U.S. wholesale. In H1, Other Brands’ net revenues increased 11 percent, reflecting Dockers’ net revenues growth of 8 percent and Beyond Yoga’s increase of 19 percent.

Profit Highlights

  • Operating margin declined 450 basis points to 0.7 percent from 5.2 percent in Q2 2022. Adjusted EBIT margin declined 750 basis points to 2.4 percent from 9.9 percent last year as gross margin expansion was offset by SG&A deleverage on lower net revenues and higher marketing and DTC expenses.
  • Gross margin was up 60 basis points to 58.7 percent from 58.1 percent in Q2 2022. Adjusted gross margin was up 50 basis points to 58.7 percent from 58.2 percent last year. Gross margin and Adjusted gross margin expansion were driven primarily by favorable channel and geographic mix, price increases, lower air freight expenses, and favorable currency exchange. These benefits were partially offset by the impact of lower full-price sales and higher product costs.
  • SG&A expenses were $774 million compared to $779 million in Q2 2022. Adjusted SG&A was $753 million compared to $711 million last year, reflecting higher planned advertising and promotion to support the 501’s 150th-anniversary campaign and higher expenses to support DTC expansion.
  • Interest and other expenses, which include foreign exchange losses, were a $17 million expense compared to a net gain of $2 million in Q2 2022.
  • The effective tax rate was 78.4 percent compared to 36.1 percent in Q2 2022; the year-to-date effective tax rate of 14.3 percent aligns with full-year expectations of low- to mid-teens.
  • Net loss was $2 million compared to net income of $50 million in Q2 2022. Adjusted net income was $15 million compared to $117 million in Q2 2022.
  • Diluted loss per share was $(0.00) compared to diluted earnings per share of $0.12 in Q2 2022. Adjusted diluted earnings per share was $0.04 compared to $0.29 in Q2 2022.

Balance Sheet Review as of May 28, 2023

  • Cash and cash equivalents were $472 million, while total liquidity was approximately $1.3 billion.
  • The company’s leverage ratio was 1.6 compared to 1.1 at the end of Q2 2022.
  • Total inventories increased 18 percent on a dollar basis and 8 percent on a unit basis over the prior year. The 15 points of sequential improvement on a dollar basis relative to Q1 were primarily attributable to reducing receipts and implementing the U.S. ERP. Core product represents more than two-thirds of total inventories. The company expects sequential improvement, achieving inventory levels below the prior year by year-end. Improvement in inventory contributed to adjusted free cash flow turning positive in Q2 to $211 million.
  • Additional information regarding leverage ratio, a non-GAAP financial measure, is provided at the end of this press release.

Shareholder Returns

  • The company returned approximately $48 million to shareholders in the second quarter, in dividends representing $0.12 per share, up 20 percent from Q2 2022.
  • The company did not repurchase any shares in the quarter. At quarter end, the company had $680 million remaining under its current share repurchase authorization, which has no expiration date.
  • The company declared a dividend of $0.12 per share, totaling approximately $48 million. The dividend is payable in cash on August 17, 2023, to the holders of record of Class A and Class B common stock at the close of business on August 4, 2023.

Fiscal 2023 Guidance

  • Reported net revenues are now expected to grow between 1.5 percent to 2.5 percent year-over-year versus prior expectations of 1.5 percent to 3 percent.
  • Adjusted diluted EPS is now expected between $1.10 to $1.20 versus $1.30 to $1.40.
  • More details will be provided during the earnings conference call.
  • This outlook also assumes no significant worsening of macroeconomic pressures on the consumer, inflationary pressures, supply chain disruptions, or currency impacts.

Photo courtesy Levi’s