Levi Strauss & Co. reported profits on an adjusted basis grew 34.9 percent in the first quarter ended February 27 as sales ran up 22 percent. Both earnings and sales topped Wall Street targets.

First-Quarter 2022 

  • Net revenues of $1.6 billion increased 22 percent on a reported basis and 26 percent on a constant-currency basis, excluding $38 million in unfavorable currency impacts. Direct-to-consumer (DTC) net revenues increased 35 percent, driven by company-operated stores and e-commerce. As a percentage of first-quarter company net revenues, sales from DTC stores and e-commerce comprised 30 percent and 9 percent, respectively, for a total of 39 percent. Wholesale net revenues increased 15 percent, reflecting demand for Levi’s brand globally. The company’s global digital net revenues grew approximately 16 percent compared to the same period in the prior year and comprised approximately 25 percent of first-quarter fiscal 2022 net revenues.
  • Gross profit was $944 million, compared to $760 million in the same quarter in the prior year. Gross margin was 59.3 percent of net revenues, up from 58.2 percent in the prior year’s same quarter. Adjusted gross margin, which excludes COVID-19 and acquisition-related charges, was 59.4 percent, increasing 170 basis points compared to the same period in the prior year. The increase in gross margin reflects a higher proportion of sales in our DTC channel, lower promotions, higher share of full-price sales, and price increases, partially offset by higher product costs.
  • Selling, general and administrative (SG&A) expenses were $709 million compared to $583 million in the same quarter in the prior year. Adjust SG&A expenses in the first quarter of fiscal 2022 was $708 million compared to $579 million in the same quarter in the prior year. As a percentage of net revenues, adjusted SG&A was 44.5 percent, approximately 20 basis points higher than the prior-year period, reflecting higher investments in advertising and promotion and higher distribution expenses, partially offset by leverage in selling expenses.
  • Operating income of $234 million compared to $177 million in the same quarter in the prior year. Adjusted EBIT of $238 million compared to $174 million in the prior year’s same quarter. The increases were primarily due to higher net revenues and gross margin, partially offset by higher SG&A expenses in the current year.
  • Net income was $196 million compared to $143 million in the same quarter of the prior year, and Adjusted net income was $189 million compared to $140 million in the same quarter of the prior year. The company recognized lower interest expenses offset by higher income taxes. Additionally, the company recognized a COVID-19 government subsidy gain within net income in the current year.
  • The effective income tax rate was 20.4 percent for the first quarter, compared to 7.9 percent for the same prior-year period. The increase in the effective tax rate was primarily driven by lower tax benefits from the foreign-derived intangible income deduction and stock-based compensation equity awards in the quarter as compared to the same prior-year period.
  • Adjusted diluted earnings per share increased to $0.46 compared to $0.34 for the same prior-year period.

Adjusted earnings of 46 cents topped Wall Street’s consensus estimate of 42 cents.  Sales of $1.59 billion were ahead of the $1.55 billion expected.

First-Quarter Segment Overview
In the Americas, net revenues grew 26 percent on a reported basis and 27 percent on a constant-currency basis, driven by growth across its DTC and wholesale channels. DTC net revenues increased 31 percent due to strength in company-operated stores as consumers returned to in-person shopping. Wholesale net revenues grew 24 percent, driven by strong performance across brands, particularly the Levi’s brand. Net revenues through all digital channels grew 24 percent and represented 24 percent of the segment’s sales in the quarter.

Operating income for the segment increased due to higher net revenues and gross margins.

In Europe, net revenues grew 13 percent on a reported basis and 21 percent on a constant-currency basis. DTC net revenues increased 46 percent, driven by strength in company-operated stores as the severity of the pandemic lessened, allowing consumers to return to our stores. Wholesale net revenues decreased 4 percent on a reported basis while increasing 3 percent on a constant-currency basis. Net revenues through all digital channels declined 8 percent following an 84 percent increase in the same period last year and represented 29 percent of the segment’s sales in the quarter.

Operating income for the segment increased due to higher net revenue and gross margins, partially offset by higher SG&A expenses as a percentage of net revenues.

In Asia, net revenues increased 11 percent on a reported basis and 14 percent on a constant-currency basis. The increase in net revenues was driven by DTC and wholesale channels and most markets, despite several markets continuing to experience COVID-related impacts. DTC net revenues increased 17 percent, driven by strong performance in company-operated stores and e-commerce, up 22 percent. Wholesale net revenues increased 5 percent, driven by the strength of the Levi’s brand across several markets. Net revenues through all digital channels grew 17 percent and represented 14 percent of the segment’s sales in the quarter.

Operating income for the region increased due to higher net revenue, gross margin, and lower SG&A expenses as a percentage of net revenues.

For Other Brands, Dockers and Beyond Yoga combined, net revenues and operating income increased, reflecting growth across channels for the Dockers brand and the acquisition of Beyond Yoga, which had net revenues of approximately $26 million.

Cash Flow and Balance Sheet
Cash and cash equivalents at the end of the first quarter of fiscal 2022 of $678 million and short-term investments of $99 million were complemented by $837 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $1.6 billion.

Net debt at the end of the first quarter of fiscal 2022 was $248 million. The company’s leverage ratio was 1.1 at the end of the first quarter of fiscal 2022 compared to 6.8 at the end of the first quarter of fiscal 2021.

Cash from operations for the first three months of fiscal 2022 increased to $86 million compared to $69 million for the first three months of fiscal 2021. The increase in cash provided by operating activities was primarily driven by higher collections of trade receivables, partially offset by higher spending on inventory and SG&A expenses, reflective of the increase in sales in comparison to the same period in the prior year.

Adjusted free cash flow for the first three months of fiscal 2022 was negative $124 million, a decrease of $115 million compared to the first three months of fiscal 2021, primarily reflecting higher repurchases of common stock, higher capital expenditures, and higher dividends, partially offset by higher cash from operations.

Total inventories increased 20 percent compared to the end of the corresponding prior-year period as the company builds core inventory through the first half of the year to mitigate supply chain risk and capture consumer demand.

The company declared a dividend of $0.10 per share totaling approximately $40 million, payable in cash on or after May 24, 2022 to the holders of record of Class A common stock and Class B common stock at the close of business on May 6, 2022.

During the three months ended February 27, 2022, 3 million shares were repurchased. Subsequent to quarter-end, the company completed its $200 million share repurchase program by repurchasing an additional 2 million shares for $40 million.

Guidance
The company reaffirms expectations for fiscal 2022, which are as follows:

  • Net revenues growth of 11 percent to 13 percent compared to FY 2021, between $6.4 billion and $6.5 billion; and
  • Adjusted diluted EPS of $1.50-to-$1.56.

Photo courtesy Levi Strauss