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7 Apr

Levi Strauss Shares Hit by Gross Margin Declines, Wholesale Weakness

As Wall Street anxious over signs of somewhat fading at Levi Strauss & Co., chief executive officer Chip Bergh told WWD that the denim leader continues to be very much in its groove. 

Shares of Levi’s fell 16 percent to $15.14 after the corporate turned in first-quarter earnings that topped expectations, but were accompanied by gross margin declines, still-heavy inventories and weakness at wholesale.

“The market’s going to do what the market’s going to do,” Bergh said. “We’re going to at all times run this business for the long term.” 

Like many of the fashion industry, Levi’s loaded up on inventory early last 12 months when the patron was stronger and the provision chain was slower. 

Bergh said the concept was: “Stonewashed 501s don’t exit of fashion. Let’s be smart and proactively herald extra inventory. We did this to ourselves to some extent. We sort of outsmarted ourselves.”

But when inflation and fears of recession prompted a pullback, it left Levi’s, as Bergh described it, “too far out over our skis.”  

The result was more price promotions to maneuver goods, hurting profits even while inventories were still up 33 percent at the tip of the primary quarter on Feb. 26. 

First-quarter net income slid to $114.7 million, or 29 cents a share, from $195.8 million, or 48 cents a 12 months earlier. Adjusted earnings, nonetheless, tallied 34 cents a share and got here in 2 cents higher than the 32 cents analysts anticipated.

“Despite the actual fact we beat on EPS, [Wall Street is] freaked concerning the gross margin — it fundamentally traces to a more promotional environment and that we proactively took some steps to eliminate inventory.” 

Adjusted gross margins got here in at 55.8 percent for the quarter, down 360 basis points from the record level hit a 12 months earlier. 

But Bergh — who has steered the corporate through much worse as he turned the corporate around and prepares to pass the CEO reins to Michelle Gass — said there have been also many “very positive and really strong” elements to the quarter, pointing to the direct-to-consumer business, women’s denim bottoms and the 501 jeans business, which is celebrating its a hundred and fiftieth anniversary. 

The Levi’s red tag.


Revenues for the three months ended Feb. 26 rose 6 percent to $1.7 billion, with the rise coming from a $100 million profit from a planning shift that moved wholesale shipments into the primary quarter from the second. Wholesale revenues increased 2 percent.

In constant currencies, revenues gained 9 percent on top of a 26 percent gain a 12 months earlier, when the period of strong consumer spending was just ending with Russia’s invasion of Ukraine and worries over inflation. 

The d-to-c channel saw a 16 percent boost in constant currencies as revenues within the Americas increased 7 percent, Europe inched up 2 percent and Asia gained 22 percent.

A latest global marketing campaign — dubbed “The Biggest Story Ever Worn” — has helped push Levi’s 501 to the fore and the corporate is expecting the style to post nearly $800 million in sales this 12 months, a virtually 70 percent increase from before the pandemic. 

“I at all times say, when your most iconic item is cranking — and the 501 is cranking straight away — it’s a extremely good sign for the strength of the brand,” Bergh said. 

Harmit Singh, chief financial and growth officer, added that the corporate is growing in the suitable ways. 

“As we take into consideration where this company is headed, it’s going to be more [d-to-c] driven and [d-to-c] driven signifies that we will hook up with the patron directly, sell more lifestyle offerings directly, and it’s high gross margin,” Singh said. 

The d-to-c business accounts for 42 percent of the corporate’s revenues. 

Likewise, the CFO noted that 75 percent of the apparel market is outside of the U.S., while Levi’s international business accounted for 56 percent of total revenues and saw an 11 percent increase in constant currencies throughout the quarter. 

“Structurally, we’re headed the suitable way,” Singh said. “It’s just an issue of, is ‘23 a reset 12 months and, if there may be a recession, does it occur within the second half?”

Ike Boruchow, an analyst at Wells Fargo, said the Levi’s “stock is reasonable,” but that the near-term setup is “tough” and lowered his annual EPS estimate to $1.30 from $1.32.

“While Levi Strauss has managed the business well over the past 12-18 months, today’s print was the fourth straight quarter with holes,” Boruchow said. “Big picture, wholesale headwinds are persisting  — with share questions now arising — while heavy inventory will proceed to pressure full price selling.”

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