Levi Strauss & Co., parent to the Levi’s and Signature brands and owner of Beyond Yoga, put the hammer down hard on the business when releasing fiscal fourth quarter and full-year results.
In the first quarter of 2024, the company’s Board of Directors reportedly endorsed a multi-year global productivity initiative, Project Fuel, designed to accelerate the execution of the Brand Led and DTC First strategies while fueling long-term profitable growth. The company expects it to be a two-year initiative focusing on optimizing the operating model and structure, redesigning business processes and identifying opportunities to reduce costs while simplifying processes across the organization.
In fiscal 2024, Levi’s expects the initiative to generate net cost savings of $100 million.
The first phase of the global productivity initiative is expected to occur in the first half of 2024 and to include a 10 percent to 15 percent reduction of the company’s global corporate workforce. As a result, the company expects to record estimated restructuring charges of $110 million to $120 million in the fiscal first quarter. As the company progresses with the initiative, it could realize additional restructuring charges.
“We achieved a strong Q4 performance, inflecting growth along with substantial margin expansion, generation of positive free cash flow, and closing the year with record net store openings,” said Harmit Singh, chief financial and growth officer. “Looking forward, we are focused on margin execution supported by gross margin expansion and by our global productivity initiative, which gives us a clear line of sight to significant annual cost savings.”
The company reported net revenues of $1.6 billion in the fiscal fourth quarter ended November 26, 2023, a 3 percent year-over-year (YoY) increase on a reported basis and 2 percent on a constant-currency basis versus Q4 fiscal 2022.
DTC net revenues increased 11 percent on a reported basis and 10 percent on a constant-currency basis, driven by broad-based growth in company-operated mainline and outlet stores and e-commerce.
- Net revenues from e-commerce grew 19 percent on a reported basis and 17 percent on a constant-currency basis, primarily reflecting double-digit growth across regions for the Levi’s brand.
- As a percentage of fourth-quarter net revenues, DTC comprised 42 percent of total net revenues compared to 39 percent in the fourth quarter of 2022.
Wholesale net revenues declined 2 percent on a reported basis and 3 percent on a constant-currency basis, as the growth of Levi’s brands in the U.S. and Asia was offset by a decline in Europe.
The Americas segment net revenues increased 6 percent on a reported basis and 4 percent on a constant-currency basis, including 4 percent growth in the U.S.
- DTC net revenues increased 12 percent on a reported basis and 10 percent on a constant-currency basis, driven by company-operated mainline and outlet stores and e-commerce.
- Wholesale net revenues increased 3 percent on a reported basis and 1 percent on a constant-currency basis, reflecting growth in the U.S. from Levi’s and Signature.
- Operating income for the segment increased 50 percent due to higher net revenues and gross margin and lower SG&A expenses.
Europe segment net revenues increased 2 percent on a reported basis and decreased 2 percent on a constant-currency basis; excluding Russia, net revenues increased 1 percent on a constant-currency basis.
- DTC net revenues increased 12 percent on a reported basis, 7 percent on a constant-currency basis and 10 percent, excluding Russia, driven by company-operated mainline and outlet stores and e-commerce.
- Wholesale net revenues decreased 7 percent on a reported basis, 10 percent on a constant-currency basis, and 7 percent, excluding Russia, reflecting the cautious order environment among wholesale partners.
- Operating income for the segment increased 5 percent on a reported basis due to higher net revenues and gross margin, partially offset by higher SG&A expenses.
Asia segment net revenues increased 4 percent on a reported basis and 7 percent on a constant-currency basis, reflecting growth across almost all markets, including China.
- DTC net revenues increased 7 percent on a reported basis and 11 percent on a constant-currency basis, driven by strength in company-operated mainline and outlet stores and e-commerce.
- Wholesale net revenues increased 1 percent on a reported basis and 3 percent on a constant-currency basis.
- Operating income for the segment increased 7 percent due to higher net revenues and gross margin, partially offset by higher SG&A expenses.
Other Brands net revenues decreased 11 percent on a reported basis and 13 percent on a constant-currency basis.
- Dockers decreased 18 percent on a reported basis and 20 percent on a constant-currency basis as growth internationally and in DTC was offset by continued softness in U.S. wholesale.
- Beyond Yoga’s business increased 14 percent on reported and constant-currency bases.
Consolidated operating margin of 9.2 percent of sales was up 60 basis points from 8.6 percent in Q4 2022 due to higher net revenues and gross margin, partially offset by higher SG&A expenses.
Adjusted EBIT margin increased 320 basis points to 12.2 percent from 9.0 percent last year.
Gross margin and Adjusted gross margin expanded 200 basis points to 57.8 percent from 55.8 percent in Q4 2022. Lower product costs, favorable channel mix, and higher full-price sales primarily drove the expansion in Gross margin and Adjusted gross margin.
SG&A expenses were $799 million compared to $750 million in Q4 2022. Adjusted SG&A was $750 million compared to $745 million last year, reflecting higher planned expenses to support DTC expansion, offset mainly by lower advertising and promotion expenses and incentive compensation.
Interest and other expenses, which include foreign exchange losses, were $15 million compared to interest and other income of $3 million in Q4 2022.
The effective tax rate was 7.2 percent compared to (7.7) percent in Q4 2022.
Net income was $127 million, or 32 cents a diluted share, in Q4, compared to $151 million, or 38 cents per diluted share, in Q4 2022. Adjusted net income was $179 million, or 44 cents per diluted share, in Q4, compared to $137 million, or 34 cents per diluted share, in Q4 2022.
“I am proud of what we have accomplished over the past twelve years. By putting the Levi’s brand at the center of culture, we revitalized this iconic brand and transformed our financials, putting us in a position where we are stronger today,” said Chip Bergh, president and CEO pf Levi Strauss & Co. “While 2023 was a challenging year, we ended on a strong note, and I am optimistic about the future. I couldn’t be more confident in Michelle as my successor, and together with the rest of our team, they position the company to thrive in its next phase of growth.”
“I am honored to take the role of chief executive officer of this iconic company and thank Chip for his exceptional leadership in having built a solid foundation for future growth,” said Michelle Gass, president and incoming CEO of Levi Strauss & Co. “We have a strong pipeline of newness and innovation launching this year to fuel consumer demand. And, I am confident in the significant growth opportunities ahead for this company, including accelerating international growth, becoming a denim apparel lifestyle business, and leading with DTC. The success of these strategic initiatives drove our growth in the fourth quarter and positioned us to create outsized long-term shareholder value in the years ahead.”
For the full 2023 fiscal year:
- Reported net revenues of $6.2 billion were flat to FY 2022 and flat on a constant-currency basis;
- Gross margin was 56.9 percent; Adjusted gross margin was 56.9 percent, 70 basis points below FY 2022;
- Operating margin was 5.7 percent; Adjusted EBIT margin was 9.0 percent, compared to 11.6 percent in FY 2022;
- Net income was $250 million; Adjusted net income was $441 million, down from $604 million in FY 2022; and
- Diluted EPS was 62 cents per share; Adjusted diluted EPS was $1.10 a share, down from $1.50 in FY 2022.
The company returned $199 million in capital to shareholders in fiscal 2023. Cash and cash equivalents were $399 million at year-end, while total liquidity was approximately $1.3 billion. The company’s leverage ratio was 1.4, as compared to 1.1 at the end of Q4 2022.
Total inventories decreased 9 percent on a reported basis and 17 percent, excluding the impact of the modification of terms with the majority of its suppliers, resulting in the company taking ownership of inventory for goods being brought into the Americas closer to the point of shipment rather than destination.
For the full year, the company returned $199 million to shareholders, including:
- Dividends of $191 million, representing annual dividends of 48 cents per share, up 9 percent from the prior year, and
- Share repurchases of $8 million reflecting 0.5 million shares retired.
As of November 26, 2023, the company had $680 million remaining under its current share repurchase authorization, which has no expiration date.
The company declared a dividend of 12 cents per share totaling approximately $48 million, payable in cash on February 23, 2024, to the holders of record of Class A common stock and Class B common stock at the close of business on February 7, 2024.
Image courtesy Levis Strauss & Co.