Levi Strauss reported earnings in the fiscal fourth quarter ended November 27 that exceeded Wall Street’s estimates while delivering an upbeat sales outlook for fiscal 2023.

EPS in the quarter of 34 cents a share topped Wall Street’s consensus target of 29 cents. Revenue of $1.59 billion beat the $1.57 billion expected.

For fiscal 2023, adjusted EPS was targeted at $1.30 to $1.40 on sales in the range of $6.3 billion and $6.4 billion. Wall Street was estimating $6.27 billion in sales and $1.35 earnings per share.

“In 2022, we delivered strong, profitable growth as well as significant market share expansion, demonstrating the enduring strength of our brands, the diversity of our business and our team’s focused execution of our strategic plan,” said Chip Bergh, president and chief executive officer, Levi Strauss & Co. “We continue to make progress against our strategic priorities, positioning us for further success in 2023. We remain the category leader in denim globally, making consistent market share gains year-over-year. Our high-margin DTC business is delivering exceptional results and our diversification efforts provide additional growth drivers for sustainable long-term growth.”

“Additionally, I am excited to announce that Harmit Singh’s role has expanded to chief financial and growth officer, effective immediately,” continued Bergh. “Harmit has been a trusted partner and an integral part of this company for the past ten years. Last year, he served as the key architect behind the five-year growth plan laid out at our Investor Day, and his expanded role will enable more direct control to execute against our strategic initiatives.”

Financial Highlights for the Fourth-Quarter

  • Reported net revenues of $1.6 billion contracted 6 percent compared to Q4 2021, but was flat on a constant-currency basis as strong growth in the direct-to-consumer channel offset a decline in wholesale;
  • Gross margin was 55.8 percent; Adjusted gross margin was 55.8 percent, 230 basis points below Q4 2021 inclusive of approximately 100 basis points of adverse currency impacts; however, 150 basis points above Q4 2019’s pre-pandemic level;
  • Operating margin was 8.6 percent; Adjusted EBIT margin was 9.0 percent, compared to 12.0 percent in Q4 2021;
  • Net income was $151 million; Adjusted net income was $137 million, versus $170 million in Q4 2021;
  • Diluted EPS was $0.38; Adjusted diluted EPS was $0.34, despite a 4-cent adverse currency impact, compared to $0.41 in Q4 2021; and
  • The company paid a dividend of $0.12 per share, up 47 percent from the prior year; $82 million in capital was returned to shareholders.

Full Year Financial Highlights 

  • Reported net revenues of $6.2 billion grew 7 percent versus FY 2021 and 12 percent on a constant-currency basis
  • Gross margin was 57.5 percent; Adjusted gross margin was 57.6 percent, 30 basis points below FY 2021 inclusive of approximately 50 basis points of adverse currency impacts, up 380 basis points versus FY 2019
  • Operating margin was 10.5 percent; Adjusted EBIT margin was 11.6 percent, compared to 12.4 percent in FY 2021 and 10.6 percent for FY 2019
  • Net income was $569 million; Adjusted net income was $604 million, up from $601 million in FY 2021
  • Diluted EPS was $1.41; Adjusted diluted EPS was $1.50, despite a 12-cent adverse currency impact, and up from $1.47 in FY 2021
  • The Company returned $350 million in capital to shareholders, an 84 percent year-over-year increase while continuing to reinvest to drive profitable, long-term growth

“We achieved strong results in 2022 by focusing on execution and the controllable of the business,” said Harmit Singh, chief financial and growth officer of Levi Strauss & Co. “Our results, especially in a very challenging business environment in the second half of the year, demonstrated the strength of our brands and diversified business model, and we continued to drive value by investing in high ROI growth initiatives while returning $350 million to our shareholders. We exited the holiday with continued momentum in our direct-to-consumer business and improving trends in Europe. Coupled with the strength of our brands and diverse portfolio, we are confident in our outlook for 2023 and our long-term growth targets.”

Fourth-Quarter 2022 compared to Fourth-Quarter 2021
Net revenues of $1.6 billion decreased 6 percent on a reported basis and were flat on a constant-currency basis.

  • Direct-to-Consumer (DTC) net revenues decreased 2 percent on a reported basis and increased 6 percent on a constant-currency basis, driven by strong growth in company-operated stores in the Americas and Asia, offsetting a decline in Europe primarily due to store closures in Russia. DTC net revenues excluding Russia were up 10 percent on a constant-currency basis, driven by the Americas, Asia and Europe. As a percentage of fourth-quarter company net revenues, sales from DTC stores and e-commerce comprised 31 percent and 8 percent respectively.
  • Wholesale net revenues declined 8 percent on a reported basis, or 4 percent on a constant-currency basis. Excluding the effects of currency, strong growth in Asia and Latin America was more than offset by Wholesale declines in the U.S. and Europe.
  • The company’s global digital net revenues were down 7 percent year-over-year, yet up approximately 29 percent versus pre-pandemic, as consumers returned to in-store shopping. Digital sales comprised approximately 20 percent of fourth quarter fiscal 2022 net revenues, as compared to 16 percent of fourth quarter fiscal 2019 net revenues.

Gross profit was $887 million compared to $974 million last year. Gross margin was 55.8 percent, down from 57.8 percent. Adjusted gross margin was also 55.8 percent, down 230 basis points. Unfavorable currency exchange accounted for approximately 100 basis points of the decline, while the balance reflects the impact of higher product costs and lower full-priced sales, partially offset by price increases and a favorable channel mix.

Selling, general and administrative (SG&A) expenses were $738 million compared to $791 million last year. Adjusted SG&A was $745 million compared to $776 million last year. As a percentage of net revenues, Adjusted SG&A was 47 percent, up 90 basis points reflecting higher distribution expenses and ongoing strategic investments in IT and the company’s DTC business.

Operating income was $137 million compared to $186 million last year, while Adjusted EBIT was $142 million compared to $203 million last year due to lower reported net revenues and Adjusted gross profit partially offset by lower Adjusted SG&A expenses. As a result, Adjusted EBIT margin was 9.0 percent, 300 basis points lower on a reported basis and 210 basis points lower on a constant-currency basis.

Below the operating line, interest and other expenses, which include foreign exchange losses, were $3 million compared to $19 million last year. The company had an $11 million Income tax benefit in the fourth quarter driven by the execution of certain tax-related transactions, compared to an expense of $14 million last year.

Net income was $151 million compared to $153 million last year and Adjusted net income was $137 million compared to $170 million last year. The decrease was driven by the decrease in Adjusted EBIT described above.

Diluted earnings per share were $0.38 compared to $0.37 last year. Adjusted diluted earnings per share were $0.34 compared to $0.41 last year. This quarter’s figure includes an adverse currency impact of $0.04 per share.

Fourth-Quarter Segment Overview

  • In the Americas, net revenues decreased 5 percent on both reported and constant-currency bases, as growth in the DTC business was offset by a decline in the wholesale channel. DTC net revenues increased 7 percent driven primarily by higher traffic and AURs in company-operated stores in the U.S. Wholesale net revenues decreased 10 percent primarily due to supply chain challenges and retailers rebalancing inventory in the U.S. Latin America delivered another strong quarter with growth across all channels. Net revenues through all digital channels declined 7 percent and represented 18 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 Europe, net revenues decreased 18 percent on a reported basis. On a constant-currency basis, net revenues declined 8 percent, including a 4 percent negative impact from the suspension of the company’s business in Russia. DTC net revenues decreased 17 percent on a reported basis and 8 percent on a constant-currency basis, or up 3 percent excluding Russia. Wholesale net revenues decreased 19 percent on a reported basis and 8 percent on a constant-currency basis, reflecting the ongoing macroeconomic challenges in the region. Net revenues through all digital channels declined 15 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 by one percent on a reported basis and 17 percent on a constant-currency basis. The increase in net revenues was driven by both wholesale and DTC channels and in most markets outside of China, where net revenues declined 22 percent on a reported basis and 14 percent on a constant-currency basis. DTC net revenues increased 1 percent on a reported basis and 17 percent on a constant-currency basis, driven by strength in company-operated mainline and outlet stores. Wholesale net revenues increased 2 percent on a reported basis and 16 percent on a constant-currency basis, driven by strength in India, among other markets. Net revenues through all digital channels declined 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, combined net revenues for Dockers and Beyond Yoga increased 28 percent on a reported basis and 33 percent on a constant-currency basis. The Dockers brand was up 20 percent on a reported basis and 25 percent on a constant-currency basis reflecting growth across channels, while Beyond Yoga contributed net revenues of approximately $27 million. Other Brands operating income decreased due to lower full-price sales, higher air freight and investments to expand Beyond Yoga.

Balance Sheet 

  • Cash and cash equivalents were $430 million and short-term investments were $71 million, while total liquidity was approximately $1.5 billion.
  • Leverage ratio was 1.1, down from 1.2 at the end of the fourth quarter of fiscal 2021.
  • Total inventories increased 58 percent on a dollar basis over the prior year. The increase relative to Q3 was in-line with our expectations and primarily attributable to the U.S. ERP implementation which takes place in Q2 2023. Excluding the ERP build and goods in transit, the increase is approximately 35 percent over the prior year. Core product represents more than two-thirds of total inventories. We believe that Q4 inventory growth will be the high point and expect to bring inventory back to normal levels by the end of Q2.

Shareholder Returns
In the fourth quarter, the company returned $82 million to shareholders, including dividends of $47 million, representing a dividend of $0.12 per share, up 47 percent from the prior year, and share repurchases of $35 million, reflecting 2.2 million shares retired.

For the full year, the company returned $350 million to shareholders, up 84 percent year-over-year, including dividends of $174 million, representing annual dividends of $0.44 per share, up 67 percent from the prior year and share repurchases of $176 million reflecting 8.7 million shares retired.

As of November 27, 2022, the company had $689 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 $47 million, payable in cash on February 23, 2023 to the holders of record of Class A common stock and Class B common stock at the close of business February 8, 2023.

Guidance
The company’s expectations for fiscal 2023 are as follows:

  • Net revenues between $6.3 billion and $6.4 billion, reflecting reported revenue growth of 1.5 percent to 3 percent year-over-year, inclusive of 200 basis points of headwinds split evenly from foreign exchange and the suspension of its business operations in Russia; and
  • Adjusted diluted EPS of $1.30 to $1.40.