Levi Strauss & Co. reported a strong earnings uptick in the fiscal second quarter that ended May 26 as sales grew 8 percent with strong double-digit growth in the Americas, with Beyond Yoga’s sales growing 13 percent.

Sales of $1.44 billion were slightly below Wall Street’s consensus target of $1.45 billion. Earnings on an adjusted basis of 16 cents topped analysts’ consensus estimate of 11 cents. Levi’s reaffirmed its guidance for the year.

“We delivered another strong quarter driven by the Levi’s brand’s prominence at the center of culture, a robust pipeline of newness and innovation, and continued momentum in our global direct-to-consumer channel. Our amplified focus on women’s and denim lifestyle is delivering outsized growth and driving meaningful market share gains,“ said Michelle Gass, president and CEO of Levi Strauss & Co. “Our transformational pivot to operating as a DTC-first company is yielding positive results around the world, giving me great confidence that we will achieve accelerated, profitable growth for the rest of the year and beyond.“

“We are pleased to have delivered earnings that significantly exceeded expectations for a second consecutive quarter. The structural economics of our business continue to strengthen, driven by record gross margins resulting in improved profitability across both DTC and wholesale and lower than expected inventory,“ said Harmit Singh, chief financial and growth officer at Levi Strauss & Co. “Our positive cash flow generation enabled us to raise the quarterly dividend for the first time in six quarters. The strength in our business fueled by our expanded product portfolio increases our total addressable market and gives us confidence in our ability to drive long-term shareholder value.”

Financial Highlights
Net Revenues of $1.4 billion were 8 percent higher on a reported basis and 9 percent higher on a constant-currency basis versus Q2 2023. Adjusting for the approximate $100 million shift in wholesale shipments from Q2 to Q1 2023 related to the U.S. ERP implementation and the exit of the Denizen business, net revenues would have been up 1 percent to the prior year and 2 percent in constant currency.

  • In the Americas, net revenues increased 17 percent on a reported basis and 16 percent on a constant-currency basis. Adjusting for the shift in wholesale shipments and the exit of the Denizen business, the Americas was up 3 percent, and the U.S. was up 2 percent.
  • In Europe, net revenues decreased 2 percent on a reported and constant-currency basis, reflecting a sequential improvement from Q1 across wholesale and DTC.
  • Asia net revenues were roughly in line with the prior year on a reported basis and up 6 percent on a constant-currency basis, on top of 27 percent growth in the previous year on a constant-currency basis, reflecting growth across most markets.
  • Other Brands net revenues increased 10 percent on both a reported and constant-currency basis.
  • Dockers’ sales grew 8.6 percent on a reported basis and 9.1 percent on a constant-currency basis.
  • Beyond Yoga’s sales grew 13.0 percent on both a reported and constant-currency basis.
  • DTC net revenues increased 8 percent on a reported basis and 11 percent on a constant-currency basis. DTC growth reflected a 12 percent increase in the U.S. and a 7 percent increase in Europe. Revenues from e-commerce grew 19 percent on a reported and constant-currency basis, reflecting double-digit growth across the Levi’s and Beyond Yoga brands. DTC comprised 47 percent of total net revenues in the second quarter.
  • Wholesale net revenues grew 7 percent on a reported basis and 8 percent on a constant-currency basis. Adjusting for the approximate $100 million shift in wholesale shipments from the U.S. ERP implementation from Q2 to Q1 2023 and the exit of the Denizen business, global wholesale net revenues decreased 4 percent to the prior year, reflecting a sequential improvement from Q1.

Operating margin was 1.5 percent compared to 0.7 percent in Q2 2023 from higher net revenue and gross margin. Adjusted EBIT margin increased 360 basis points to 6.0 percent from 2.4 percent last year on a reported basis, also primarily due to higher net revenue and gross margin.

  • Gross margin increased 180 basis points to 60.5 percent from 58.7 percent in Q2 2023, primarily due to lower product costs and favorable mix shift, partially offset by currency exchange impacts.
  • SG&A expenses were $795 million compared to $768 million in Q2 2023. Adjusted SG&A was up 4.3 percent to $785 million compared to $753 million last year. As a percentage of sales, adjusted SG&A was 54.4 percent compared to 56.3 percent last year, leveraging 190 basis points mostly from our cost control actions.
  • Restructuring charges were $55 million related to Project Fuel, consisting primarily of severance and post-employment benefit charges primarily due to the strategic shift to third-party-run distribution centers.

Net interest and other expenses, including foreign exchange losses, were $10 million in the aggregate compared to $17 million in Q2 2023.

The effective income tax rate was (49.4) percent, reflecting a $7.5 million favorable adjustment, compared to 78.4 percent in Q2 2023.

Net income was $18 million compared to a net loss of $2 million in Q2 2023. Adjusted net income was $66 million compared to $15 million in Q2 2023. Diluted earnings per share was $0.04 compared to diluted loss per share of $(0.00) in Q2 2023. Adjusted diluted earnings per share was $0.16 compared to $0.04 in Q2 2023.

Balance Sheet Review as of May 26, 2024

  • Cash and cash equivalents were $641 million, while total liquidity was approximately $1.4 billion.
  • Total inventories decreased 7 percent on a dollar basis and 19 percent, excluding the impact of modified terms with a majority of the company’s suppliers; this now results in its taking ownership of inventory for goods brought into the Americas closer to the point of shipment rather than destination. 

Shareholder Returns
The company returned approximately $65 million to shareholders in the second quarter, a 36 percent increase over prior year, including:

  • Dividends of $48 million, representing a dividend of $0.12 per share.
  • Share repurchases of $17 million, reflecting 0.8 million shares retired.

As of May 26, 2024, the company had $639 million remaining under its current share repurchase authorization, which has no expiration date.

The company reported an 8 percent increase in the dividend to $0.13 per share, totaling approximately $52 million. The dividend is payable in cash on August 20, 2024 to the holders of record of Class A common stock and Class B common stock at the close of business on August 2, 2024.

Project Fuel Update
As part of Levi’s ongoing global productivity initiative, Project Fuel, the company will transition from a primarily owned-and-operated distribution and logistics network in the U.S. and Europe to one that will be more balanced between owned and third-party logistics providers. In the near term, these changes will reportedly require the parallel operation of new and old facilities for the rest of 2024, resulting in a transitory increase in distribution costs. This strategic shift aligns with the company’s goal of creating a “seamless omni-channel experience which will deliver best-in-class service to our customers globally.”

Fiscal 2024 Guidance

  • The company reaffirmed reported net revenues to increase from 1 percent to 3 percent year-over-year.
  • Adjusted diluted EPS is expected to continue to come in between $1.17 to $1.27, which includes a $0.05 adverse impact to EPS attributable to its new distribution and logistics strategy, increased marketing spend in H2 and incremental FX headwinds.

 Image courtesy Levi’s