Levi Strauss & Co. said it expects earnings for its fiscal year ended November 30 to come in at the low end of prior guidance while citing continued weakness within the U.S. wholesale channel.  The company also absorbed an impairment charge of $90.2 million related to its 2021 acquisition of Beyond Yoga. 

Highlights of the fiscal third quarter ended August 27 include: 

  • Q3 Net Revenues in Line With Prior Year, With 14 percent Growth in Global DTC
  • Gross Margin of 55.6 percent Exceeded Q3 Outlook
  • Continued Sequential Improvement in Inventory; Up 1 percent to prior year on a comparable Basis
  • Diluted EPS of $0.02 and Adj. Diluted EPS of $0.28
  • Company Expects FY Adj. Diluted EPS at Low End of Previously Guided $1.10-$1.20 Range

“In the third quarter, we delivered double-digit growth in our direct-to-consumer business, driven by strong comp-store gains, which helped offset continued softness in the wholesale channel, primarily in the U.S.,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “We are focused on the levers within our control and the actions we took in the third quarter are beginning to drive improvements in US wholesale trends. As we look longer term, we remain confident in our ability to achieve our goals given the global strength of Levi’s brand, the momentum in our direct-to-consumer business globally, and the exceptional growth potential of our product portfolio and our international business.”

“We delivered Adjusted EBIT and Adjusted diluted EPS in line with our expectations while navigating a challenging operating environment,” said Harmit Singh, chief financial and growth officer of Levi Strauss & Co. “While we saw sequential improvement in the business across the company as we moved through Q3 with both July and August up versus prior year, given the ongoing uncertainty in the macro environment, we are taking a cautious approach to our outlook for the fourth quarter. As we accelerate our transition to a DTC-led company, we have commenced an initiative to review our operating model and cost structure that should drive agility and material cost savings beginning in 2024.”

Financial Highlights

  • Net Revenues of $1.5 billion were consistent with the prior year on a reported basis and 2 percent lower on a constant-currency basis versus Q3 2022.
  • DTC (Direct to Consumer) net revenues increased 14 percent on a reported basis and 13 percent on a constant-currency basis, driven by broad-based growth in both company-operated mainline and outlet stores and e-commerce. Revenues from e-commerce grew 19 percent on a reported basis and 18 percent on a constant-currency basis reflecting double-digit growth across all brands. As a percentage of third-quarter net revenues, DTC comprised 40 percent of total net revenues.
  • Wholesale net revenues declined 8 percent on a reported basis and 10 percent on a constant-currency basis as growth in Asia and Latin America was offset by declines in North America and Europe.
  • In the Americas, net revenues decreased 5 percent on a reported basis and 7 percent on a constant-currency basis. DTC net revenues increased 12 percent on a reported basis and 11 percent on a constant-currency basis driven by company-operated mainline and outlet stores and e-commerce. Wholesale net revenues decreased 12 percent on a reported basis and 14 percent on a constant-currency basis as softness in North America was partially offset by growth in Latin America.
  • In Europe, net revenues decreased 2 percent on a reported basis and 6 percent on a constant-currency basis; excluding Russia, net revenues decreased 3 percent on a constant-currency basis. DTC net revenues increased 10 percent on a reported basis and 6 percent on a constant-currency basis, and 11 percent excluding Russia, driven by company-operated mainline and outlet stores and e-commerce. Wholesale net revenues decreased 10 percent on a reported basis and 14 percent on a constant-currency basis, reflecting the cautious order environment among wholesale partners.
  • Asia net revenues increased 12 percent on a reported basis and 18 percent on a constant-currency basis, reflecting growth across almost all markets, including strong growth in China. DTC net revenues rose 15 percent on a reported basis and 23 percent on a constant-currency basis, driven by strength in company-operated mainline and outlet stores and e-commerce. Wholesale net revenues increased 8 percent on a reported basis and 13 percent on a constant-currency basis.
  • Other Brands net revenues increased 12 percent on a reported basis and 9 percent on a constant-currency basis. Dockers increased 9 percent on a reported basis and 5 percent on a constant-currency basis as strong growth internationally and in DTC was partially offset by U.S. wholesale. Beyond Yoga® rose 25 percent on reported and constant-currency bases.
  • Operating margin of 2.3 percent was down from 13.1 percent in Q3 2022 as a result of higher SG&A expenses and an impairment charge of $90.2 million related to the Beyond Yoga acquisition, and lower net revenues and gross margin. Adjusted EBIT margin declined 330 basis points to 9.1 percent from 12.4 percent last year due to gross margin contraction and SG&A deleverage due to higher DTC expenses.
  • Gross margin was down 130 basis points to 55.6 percent from 56.9 percent in Q3 2022. Adjusted gross margin was down 130 basis points to 55.6 percent from 56.9 percent last year. The decline in Gross margin and Adjusted gross margin was driven by lower full-price sales, strategic pricing actions and higher product costs. These impacts were partially offset by favorable channel and geographic mix, as well as lower air freight expenses and favorable currency exchange.
  • Selling, general and administrative (SG&A) expenses were $715 million compared to $664 million in Q3 2022. Adjusted SG&A was $702 million compared to $675 million last year, reflecting higher planned expenses to support DTC expansion.
  • Interest and other expenses, which include foreign exchange losses, were $38 million compared to $13 million in Q3 2022. The increase in expenses was primarily driven by a $19 million pension settlement loss and foreign currency transaction losses reflecting the impact of rate fluctuations on foreign-denominated balances.
  • The effective tax rate was 386.6 percent compared to 7.2 percent in Q3 2022. The increase in the effective tax rate is primarily driven by the foreign-derived intangible income deduction on a proportion to losses before income taxes. Additionally, the non-cash impairment charge related to the Beyond Yoga acquisition resulted in an income tax benefit of $22 million. Excluding the impact of the impairment, the tax rate would be 10 percent for Q3 2023.
  • Net income was $10 million compared to net income of $173 million in Q3 2022. Adjusted net income was $112 million compared to $161 million in Q3 2022.
  • Diluted earnings per share was $0.02 compared to diluted earnings per share of $0.43 in Q3 2022. The recognition of the Beyond Yoga impairment unfavorably impacted diluted earnings per share by $0.17, net of tax. Adjusted diluted earnings per share was $0.28 compared to $0.40 in Q3 2022.

Balance Sheet Review as of August 27, 2023

  • Cash and cash equivalents were $295 million, while total liquidity was approximately $1.1 billion.
  • The company’s leverage ratio was 1.6 as compared to 1.1 at the end of Q3 2022.
  • Total inventories increased 6 percent on a dollar basis. Approximately 5 percent of the year-over-year increase is due to the modification of terms with the majority of our suppliers that results in the company taking ownership of inventory for goods being brought into the Americas closer to the point of shipment rather than destination. This is consistent with existing terms for goods sent to Europe and Asia. The remaining 1 percent increase represents a 17-point improvement from last quarter and reflects U.S. inventory levels below prior year’s level. We continue to expect sequential progress, achieving total company inventory levels below prior year levels by year-end.

Shareholder Returns

  • The company returned approximately $48 million to shareholders in the third quarter, in dividends representing $0.12 per share, in line with Q3 2022.
  • The company did not repurchase any shares in the quarter. At quarter end, the company had $680 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 $48 million. The dividend is payable in cash on November 9, 2023 to the holders of record of Class A common stock and Class B common stock at the close of business October 26, 2023.

Fiscal 2023 Guidance

  • Reported net revenues are expected flat to up 1 percent year-over-year.
  • Adjusted diluted EPS is expected to be on the low end of the previously guided range of $1.10 to $1.20.
  • The outlook also assumes no significant worsening of macroeconomic pressures on the consumer, inflationary pressures, supply chain disruptions, or currency impacts.

Photo courtesy Levi’s