Levi Strauss & Co. reported sales for its fiscal second quarter ended May 29 were up 15 percent and gained 20 percent on a constant-currency basis. Sales and earnings topped Wall Street targets, and Levi’s reaffirmed its guidance for the year.

“Our second-quarter results demonstrate the power of our strategy, which continues to support strong revenue growth and margin expansion,” said Chip Bergh, president and CEO, Levi Strauss & Co. “Our brands are resonating with consumers across geographies, channels and product categories. By advancing our most impactful growth drivers – brand-led, direct-to-consumer first and diversifying the portfolio, we are well-positioned to continue to drive growth and create significant value for all our stakeholders.”

 Financial Highlights for the Second-Quarter

  • Reported net revenues of $1.5 billion, up 15 percent and up 20 percent on a constant-currency basis versus Q2 2021, driven by growth across all business segments.
  • Global DTC reported net revenues up 16 percent versus Q2 2021, reflecting a 23 percent increase in company-operated stores.
  • Global Wholesale reported net revenues up 15 percent versus Q2 2021.
  • Net revenues through all digital channels represented approximately 20 percent of total second-quarter net revenues, up 3 percent on top of 75 percent growth in the same quarter of the prior year.
  • Gross margin was 58.1 percent. Adjusted gross margin was 58.2 percent flat from Q2 2021.
  • Operating margin was 5.2 percent. Adjusted EBIT margin was a Q2 record 9.9 percent, up from 9.0 percent in Q2 2021.
  • Net income was $50 million. Adjusted net income was $117 million, up from $93 million in Q2 2021.
  • Russia/Ukraine charges of $60 million, $0.15 per diluted share, related to the war, primarily total impairment of store assets, PP&E and goodwill.
  • Diluted EPS was $0.12. Adjusted diluted EPS was $0.29, up from $0.23 in Q2 2021.

“We delivered another solid quarter, growing reported net revenues 15 percent and adjusted EBIT 27 percent while returning $80 million in capital to shareholders,” said Harmit Singh, CFO, Levi Strauss & Co. “Although the operating environment remains dynamic, the diversity of our business is providing the resilience and flexibility needed to drive solid financial results in fiscal year 2022 while progressing us on our path to achieve net revenues of $9 to $10 billion and adjusted EBIT margin of 15 percent by the fiscal year 2027.”

Second-Quarter 2022 Details

  • Net revenues of $1.5 billion increased 15 percent on a reported basis and 20 percent on a constant-currency basis, excluding $47 million in unfavorable currency impacts.
  •  DTC net revenues increased 16 percent, driven by company-operated stores. As a percentage of second-quarter company net revenues, sales from DTC stores and e-commerce comprised 30 percent and 7 percent, respectively, for 37 percent.
  • Wholesale net revenues increased 15 percent, reflecting the global demand for Levi’s brand.
  • The company’s global digital net revenues grew approximately 3 percent in the prior year compared to the same period and comprised roughly 20 percent of second-quarter fiscal 2022 net revenues.
  • Gross profit was $855 million, compared to $750 million in the same quarter of the prior year. Gross margin was 58.1 percent of net revenues compared to 58.8 percent in the same quarter of the preceding year. The adjusted gross margin, which excludes COVID-19 and acquisition-related charges, was 58.2 percent, which was flat compared to the prior year’s period. Adjusted gross margin, as compared to the same prior-year period, reflects the benefit of a higher proportion of sales in the DTC channel, lower promotions, a higher percentage of full-price sales and price increases, which were offset by the impact of higher product and freight costs.
  • Selling, general and administrative (SG&A) expenses were $779 million compared to $644 million in the same quarter of the prior year. This increase primarily reflects the full impairment of certain long-lived assets in Russia. Adjusted SG&A was $711 million compared to $628 million in the same quarter of the prior year. Adjusted SG&A leverage of 90 basis points was due to strong sales and continued control of SG&A expenses.
  • Operating income of $76 million compared to $107 million in the same quarter of the prior year. The decrease reflects $60 million of charges related to the Russia-Ukraine crisis. Adjusted EBIT, excluding Russia-Ukraine, COVID and acquisition-related charges, was $145 million compared to $115 million in the same quarter of the prior year due to higher net revenues partially offset by increased investments to support growth.
  • Net income was $50 million compared to $65 million in the same quarter of the prior year, primarily due to the decreased operating income described above. Adjusted net income was $117 million compared to $93 million in the same quarter of the prior year. The increase is due to the increase in Adjusted EBIT and lower interest expense, partially offset by higher income taxes.
  • The effective income tax rate was 36.1 percent for the second quarter, compared to (16.2) percent in the same quarter of the prior year. The increase in the effective tax rate was primarily due to Russia-Ukraine charges, which had no tax benefit, unfavorably impacting our effective income tax rate by approximately 16 percentage points.
  • Diluted earnings per share decreased to $0.12 compared to $0.16 in the same quarter of the prior year due to the $0.15 unfavorable impact of the Russia-Ukraine charges. Adjusted diluted earnings per share increased to $0.29 compared to $0.23 in the same quarter of the prior year. The increase is primarily due to increased adjusted net income offset by a $0.02 impact from currency translation.

Sales of $1.5 billion beat Wall Street’s consensus estimate of $1.43 billion. Adjusted EPS of 29 cents a share topped Wall Street’s consensus estimate of 23 cents.

Second-Quarter Segment Overview

  • In the Americas, net revenues grew 17 percent on a reported basis and 17 percent on a constant-currency basis, driven by growth across wholesale and DTC channels. DTC net revenues increased 13 percent due to strength in company-operated mainline and outlet stores. Wholesale net revenues grew 19 percent, driven by Levi’s brand, particularly in the U.S. Net revenues through all digital channels rose 17 percent and represented 18 percent of the segment’s sales in the quarter. Operating income for the segment increased due to higher net revenues, partially offset by higher SG&A expenses as a percentage of net revenues.
  • In Europe, net revenues grew 3 percent on a reported basis and 15 percent on a constant-currency basis. DTC net revenues increased 23 percent, driven by strength in the company-operated outlet and mainline stores. Wholesale net revenues decreased 10 percent on a reported basis and were flat on a constant-currency basis. Net revenues through all digital channels declined 30 percent following over 100 percent growth in the same period last year and represented 23 percent of the segment’s sales in the quarter. Operating income for the segment increased due to higher net revenues and gross margins, partially offset by higher SG&A expenses as a percentage of net revenues.
  • In Asia, net revenues increased 16 percent on a reported basis and 21 percent on a constant-currency basis. The increase in net revenues was driven by both our wholesale and DTC channels and most markets outside of China. DTC net revenues increased 2 percent, driven by strength in company-operated mainline stores. Wholesale net revenues increased 35 percent, driven by growth across most markets. Net revenues through all digital channels grew 17 percent, representing 15 percent of the segment’s sales in the quarter. Operating income for the segment increased due to higher net revenues 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, which was up 23 percent, and the acquisition of Beyond Yoga, which had net revenues of approximately $23 million.

Balance Sheet Review as of May 29, 2022

  • Cash and cash equivalents were $602 million, short-term investments were $96 million, and total liquidity was approximately $1.5 billion.
  • The company’s leverage ratio was 1.1 compared to 2.0 at the end of the second quarter of fiscal 2021.
  • Total inventories increased 29 percent compared to the end of the prior year, in line with the company’s expectations and the ongoing strategy to build core inventory to mitigate supply chain risk and capture consumer demand. In addition, inventory levels were lower than usual at the end of the second quarter last year due to global supply chain disruption.

Shareholder Returns
In the second quarter, the company returned approximately $80 million to shareholders, including:

  • Dividends of $40 million, representing a dividend of $0.10 per share, up 64 percent from the prior year; and
  • Share repurchases of $40 million, reflecting two million shares retired.

In June 2022, the Board of Directors approved a $750 million share repurchase program with no expiration date. The company declared a dividend of $0.12 per share totaling approximately $48 million, payable in Cash on August 17, 2022 to the holders of record of Class A common stock and Class B common stock at the close of business on August 1, 2022.

Guidance
The company reaffirms expectations for fiscal 2022 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