Levi Strauss & Co. (Levi’s) said earnings in the third quarter ended August 25 topped analyst’s targets but sales fell short. Sales grew 5 percent for the flagship Levi’s brand and 19 percent at Beyond Yoga, but fell 15 percent at Dockers as the company indicated it’s exploring a sale of the khakis brand.
“The underlying fundamentals of our business are getting stronger, driven by the Levi’s brand, which grew 5 percent globally in Q3, a significant acceleration from H1 and the highest revenue growth in two years. We are making progress against our strategic priorities, including double-digit growth in our direct-to-consumer business, continued positive performance in the U.S., and Europe inflecting to growth,” said Michelle Gass, president and CEO, Levi Strauss & Co. “Looking to Q4 and beyond, we will amplify our focus on the Levi’s brand, exemplified by our new campaign with Beyoncé and an innovative product pipeline designed to build momentum with our fans around the world.”
Gass also said that through a transformational pivot to operating as a DTC-first company, Levi’s is narrowing its focus to realize the full potential of the Levi’s brand as well as accelerate Beyond Yoga.
Beyond Yoga was reportedly up 19 percent year-over-year, an acceleration from Q2, driven by strength in wholesale and e-commerce.
“Under Nancy Green’s leadership, we have reset the Beyond Yoga strategy to drive more disciplined growth and profitability,” Gass shared on the call. “Despite the impairment charge we took, which Harmit will share more about, we are confident in this brand based on the strategic direction Nancy and her team has laid out, and remain committed to fulfilling its long-term potential.”
EVP and Chief Financial and Growth Officer Harmit Singh said that consolidated operating margins was 2.0 percent of sales in the third quarter, compared to 2.3 percent in Q3 2023, inclusive of an Goodwill and other intangible asset impairment charges of $111 million related to the Beyond Yoga acquisition.
Net Revenues of $1.5 billion were said to be flat on a reported basis despite 160 basis points of FX headwind, but 2 percent higher year-over-year on a constant-currency basis versus Q3 2023. Adjusting for the $15 million impact of the exit of the Denizen business, net revenues would have been up 1 percent on a reported basis and 3 percent in constant-currency. The Levi’s brand was up 5 percent globally.
- In the Americas , net revenues decreased 1 percent on a reported basis and were flat on a constant-currency basis. Adjusting for the exit of the Denizen business, the Americas was up 2 percent.
- In Europe , net revenues increased 6 percent on a reported basis and 7 percent on a constant-currency basis, reflecting positive growth across a majority of markets and in both channels.
- Asia net revenues were roughly in line with prior year on a reported basis and up 4 percent on a constant-currency basis.
- Other Brands net revenues decreased 7 percent on a reported basis and 5 percent on a constant-currency basis. Dockers decreased 15 percent on a reported basis and 13 percent on a constant-currency basis. Beyond Yoga increased 19 percent on a reported and constant-currency basis.
DTC (Direct-to-Consumer) net revenues increased 10 percent on a reported basis and 12 percent on a constant-currency basis. DTC growth reflected a 12 percent increase in the U.S. and a 9 percent increase in Europe. Net revenues from e-commerce grew 16 percent on a reported basis and 18 percent on a constant-currency basis. DTC comprised 44 percent of total net revenues in the third quarter.
Wholesale net revenues decreased 6 percent on a reported basis and 5 percent on a constant-currency basis. Adjusting for the exit of the Denizen business, wholesale net revenues declined 3 percent.
“We delivered significant margin expansion and double-digit adjusted diluted EPS growth in Q3,” said Singh. “Based on the continued strength of the Levi’s brand, we expect sequential progression to continue into Q4 as we accelerate revenue and profitability. We are also taking decisive actions to address the areas where we’ve underperformed, including our decision to evaluate strategic alternatives for Dockers. We remain confident in our ability to drive long-term shareholder value.”
Operating margin was 2.0 percent compared to 2.3 percent in Q3 2023 inclusive of an impairment charge of $111 million related to the Beyond Yoga acquisition. Adjusted EBIT margin increased 250 basis points to 11.6 percent from 9.1 percent last year on a reported basis primarily due to higher gross margin.
- Gross margin increased 440 basis points to 60.0 percent from 55.6 percent in Q3 2023 primarily driven by lower product costs and favorable channel and brand mix.
- Selling, general and administrative (SG&A) expenses were $766 million compared to $713 million in Q3 2023. Adjusted SG&A was up 4.8 percent to $735 million compared to $702 million last year. As a percentage of sales, adjusted SG&A was 48.5 percent compared to 46.4 percent last year.
- Restructuring charges were $3 million related to Project Fuel.
- Goodwill and other intangible asset impairment charges were $111 million related to the Beyond Yoga acquisition.
Interest and other expenses, net , which include foreign exchange losses, were $11 million in the aggregate compared to $38 million in Q3 2023.
The effective income tax rate was (4.1) percent, compared to 386.6 percent in Q3 2023.
Net income was $21 million compared to net income of $10 million in Q3 2023. Adjusted net income was $132 million compared to $112 million in Q3 2023.
Diluted earnings per share was 5 cents in Q3, compared to 2 cents in Q3 2023. Adjusted diluted earnings per share was 33 cents for the quarter compared to 28 cents in Q3 2023.
Balance Sheet Review as of August 25, 2024
- Cash and cash equivalents were $577 million, while total liquidity was approximately $1.3 billion.
- Total inventories decreased 7 percent on a dollar basis.
Shareholder Returns
The company returned approximately $69 million to shareholders in the third quarter, a 45 percent increase over prior year, including:
- Dividends of $52 million, representing a dividend of $0.13 per share.
- Share repurchases of $18 million, reflecting 1.0 million shares retired.
As of August 25, 2024 , the company had $621 million remaining under its current share repurchase authorization, which has no expiration date.
The company has declared a dividend of 13 cents per share totaling approximately $52 million. The dividend is payable in cash on November 14, 2024, to the holders of record of Class A common stock and Class B common stock at the close of business on October 29, 2024.
Review of Strategic Alternatives for Dockers
The company announced that it has initiated a formal review of strategic alternatives for the Dockers brand, which could include a potential sale or other strategic transaction. The company has retained Bank of America as its financial advisor. The company has not set a deadline or definitive timetable for the completion of the strategic alternatives review process, and there can be no assurance that this process will result in any transaction or particular outcome.
Fiscal 2024 Guidance
- Reported net revenues are expected to grow approximately 1 percent, and constant-currency net revenues are expected to grow 1.5 percent to 2 percent.
- The company expects adjusted diluted EPS to be at the mid-point of the previously guided range of $1.17 to $1.27.
Image courtesy Beyond Yoga