Levi Strauss & Co. reported earnings for the third quarter that ended August 28 came in slightly ahead of Wall Street’s estimates despite sales coming up short. Guidance was reduced for the year due to more modest expectations for the fourth quarter.

The company reported net revenue growth of 1 percent, or 7 percent, on a constant-currency basis compared to the third quarter of 2021 driven by growth in its DTC business and increases across the U.S., Asia and Latin America. 

On a constant-currency basis, Levi’s brand net revenues grew 6 percent, and Dockers brand net revenue grew 13 percent compared to the prior year.

The continued strength of the company’s brands offset macroeconomic pressure in Europe and the U.S. and currency headwinds globally. 

Continued supply chain disruption, primarily in the U.S., also resulted in estimated missed sales of approximately $30 million to $40 million or 2 percent to 3 percent of growth. 

Given more modest expectations for the fourth quarter, the company reduced its financial outlook for fiscal year 2022. Despite these near-term challenges, the company believes it remains well-positioned to achieve its long-term growth plan.

“Despite a more challenging environment, we delivered solid third-quarter results. The Levi’s brand grew 6 percent constant-currency hitting a ten-year record third quarter sales result,” said Chip Bergh, president and CEO, Levi Strauss & Co. “While we expect the macroeconomic backdrop to remain unpredictable over the next few quarters, our strong brands, diversified business model and proven team position us to deliver on our long-term objectives. We have separated ourselves from the competition by making the right moves in challenging times, and this environment is no different. We will operate with discipline and lean into our strengths to further expand our lead for the years to come.”

Third-Quarter Financial Highlights

  • Reported net revenues of $1.5 billion increased 1 percent and 7 percent on a constant-currency basis versus Q3 2021 driven by growth in the Levi’s and Dockers brands;
  • Gross margin was 56.9 percent. Adjusted gross margin was 56.9 percent, 60 basis points below Q3 2021;
  • Operating margin was 13.1 percent. Adjusted EBIT margin was 12.4 percent, down from 14.8 percent in Q3 2021;
  • Net income was $173 million. Adjusted net income was $161 million compared to $197 million in Q3 2021;
  • Diluted EPS was $0.43. Adjusted diluted EPS was $0.40, including an adverse currency exchange impact of $0.04; and
  • The company returned approximately $74 million in capital to shareholders.

Adjusted EPS of 40 cents exceeded Wall Street’s consensus estimate of 37 cents. Sales of $1.52 billion were well below Wall Street’s consensus estimate of $1,624 million.

“We delivered healthy results in the third quarter, growing net revenues by 7 percent in constant-currency while protecting the bottom line to deliver adjusted diluted EPS ahead of expectations,” said Harmit Singh, CFO, Levi Strauss & Co. “We have taken swift and decisive action to successfully navigate the dynamic operating environment. We are controlling discretionary spending while maintaining our commitment to investing strategically to capitalize on our long-term growth opportunities. The strength of our brands around the globe, our diversified business model and our proven operational excellence gives us confidence in our ability to manage through the industry’s near-term challenges while achieving our long-term growth and value-creation objectives.”

Third-Quarter 2022 Specifics

  • Net revenues of $1.5 billion increased by 1 percent on a reported basis and 7 percent on a constant-currency basis, excluding $76 million in unfavorable currency impacts.
  • DTC net revenues increased 2 percent compared to Q3 2021, or 8 percent on a constant-currency basis, driven by constant-currency company-operated e-commerce growth of 16 percent. As a percentage of third-quarter company net revenues, sales from DTC stores and e-commerce comprised 29 percent and 6 percent, respectively, for a total of 35 percent.
  • Wholesale net revenues increased 1 percent versus Q3 2021 and 6 percent on a constant-currency basis, reflecting global demand for the Levi’s brand.
  • The company’s global digital net revenues grew 9 percent in the prior year compared to the same period and comprised approximately 21 percent of the third quarter fiscal 2022 net revenues.
  • Gross profit was $863 million compared to $862 million in the same quarter of the prior year. Gross margin was 56.9 percent of net revenues versus 57.6 percent in the prior year. Adjusted gross margin was 56.9 percent, down 60 basis points compared to the same period in the prior year. Unfavorable currency exchange accounted for approximately half of the decline, while the balance reflected the impact of higher product costs and lower full-priced sales, partially offset by price increases and a favorable channel mix.
  • SG&A expenses were $664 million compared to $646 million in the same quarter of the prior year. Adjusted SG&A was $675 million compared to $640 million in the same quarter of the prior year. As a percentage of net revenues, Adjusted SG&A was 44.5 percent, 180 basis points above the prior year period, reflecting higher distribution expenses and ongoing strategic investments in IT and our direct-to-consumer business.
  • Operating income was $199 million compared to $216 million in the same quarter of the prior year due to the factors described above.
  • Adjusted EBIT was $188 million compared to $222 million in the same quarter of the prior year due to lower Adjusted gross margins and higher Adjusted SG&A expenses, which were partially offset by higher net revenues. As a result, Adjusted EBIT margin was 12.4 percent, 240 basis points below the third quarter of 2021 on a reported basis, and 200 basis points lower on a constant-currency basis.
  • Below the operating line, interest and other expenses, which include foreign exchange losses, were $13 million compared to $13 million in the prior year. The effective income tax rate was 7.2 percent for the third quarter, compared to 4.8 percent in the prior year’s same quarter. The lower effective tax rate relative to the company’s updated full-year outlook for mid-teens was driven by the planned execution of certain tax-related transactions.
  • Net income was $173 million compared to $193 million in the same quarter of the prior year, primarily due to the decrease in operating income described above. Adjusted net income was $161 million compared to $197 million in the same quarter of the prior year. The decrease was due to the lower operating income described above.
  • Diluted earnings per share were $0.43 compared to $0.47 in the same quarter of the prior year. Adjusted diluted earnings per share were $0.40 compared to $0.48 in the same quarter of the prior year. This quarter’s figure includes an adverse foreign currency impact of $0.04 per share.

Third-Quarter Segment Overview

  • In the Americas, net revenues grew 3 percent on reported and constant-currency bases, driven primarily by growth in its DTC channels. 
  • DTC net revenues increased 7 percent, driven by company-operated mainline and outlet stores. 
  • Wholesale net revenues grew 1 percent, driven by the growth of Levi’s brand in the U.S. and Latin America. 
  • Digital net revenues grew 24 percent and represented 20 percent of the segment’s sales in the quarter.
  • Operating income for the segment decreased due to lower gross margins and higher SG&A expenses, partially offset by higher net revenues.
  • In Europe, net revenues decreased 19 percent on a reported basis.
  • On a constant-currency basis, net revenues declined 9 percent, including a 4 percent negative impact from the suspension of its business in Russia. 
  • DTC net revenues decreased 21 percent on a reported basis and 14 percent on a constant-currency basis. 
  • Wholesale net revenues decreased 16 percent on a reported basis and 5 percent on a constant-currency basis, reflecting the ongoing macroeconomic challenges in the region. 
  • Net revenues through all digital channels declined 18 percent and represented 24 percent of the segment’s sales in the quarter.
  • Operating income for the segment decreased due to lower net revenues and gross margins and higher SG&A expenses as a percentage of net revenues.
  • In Asia, net revenues increased 36 percent on a reported basis and 53 percent on a constant-currency basis. The increase in net revenues was driven by both wholesale and DTC channels and most markets outside of China. 
  • DTC net revenues increased 33 percent on a reported basis and 50 percent on a constant-currency basis, driven by strength in company-operated mainline and outlet stores and e-commerce.
  • Wholesale net revenues increased 39 percent on a reported basis and 55 percent on a constant-currency basis, driven by strength in India, among other markets. 
  • Net revenues through digital channels grew 13 percent and represented 17 percent of the segment’s sales in the quarter.
  • Operating income for the segment increased due to higher net revenues and gross margins and lower SG&A expenses as a percentage of net revenues.
  • For Other Brands, Dockers and Beyond Yoga combined, net revenues increased 37 percent on a reported basis and 44 percent on a constant-currency basis. The Dockers brand was up 7 percent on a reported basis and 13 percent on a constant-currency basis, reflecting growth across channels, while the acquisition of Beyond Yoga contributed incremental net revenues of approximately $22 million. Other Brands operating income decreased due to investments to expand Beyond Yoga.

Balance Sheet Review As Of August 28, 2022

  • Cash and cash equivalents were $499 million, and short-term investments were $101 million. Total liquidity was approximately $1.4 billion.
  • The company’s leverage ratio was 1.1 compared to 1.6 at the end of the third quarter of fiscal 2021.
  • Total inventories increased 43 percent compared to the end of the corresponding prior year period. The primary drivers of the increase are approximately one-third related to COGS inflation and the normalization of last year’s unusually low inventory level. Another third of the increase relates to intentional earlier receipts of core inventory to mitigate supply chain risks and the U.S. implementing a new ERP system. The final third was driven by an increase of goods in transit. Core product, which can be sold across multiple future seasons, represented approximately two-thirds of total inventories. The company remains comfortable with the quality and composition of inventory.

Guidance
As a result of the incremental currency headwinds from the stronger U.S. dollar and a more cautious outlook for North America and Europe due to macroeconomic conditions and ongoing supply chain disruptions, the company adjusted its expectations for fiscal year 2022:

  • Reported net revenues growth of 6.7 percent to 7.0 percent, representing 11.5 percent to 12 percent net revenues growth on a constant-currency basis—previously, net revenues growth of 11 percent to 13 percent compared to FY 2021.
  • Adjusted diluted EPS of $1.44 to $1.49, including incremental FX headwinds of $0.0 since last reported in July—previously, adjusted diluted EPS of $1.50 to $1.56.

Photo courtesy Levi Strauss