8-K: Levi Strauss & Co. Exceeds Q1 Expectations Despite Revenue Dip, Raises Full-Year EPS Guidance

Levi Strauss & Co. reported first-quarter results that surpassed expectations, driven by strong gross margin expansion and growth in its direct-to-consumer business, despite a decrease in overall revenue.

Summary

• Levi Strauss & Co. announced its first-quarter 2024 financial results, showing a net revenue of $1.6 billion, which is 8% lower than the same period last year.
• This decrease is primarily due to a shift in wholesale shipments from Q2 to Q1 in 2023, related to a U.S. ERP implementation, which negatively impacted revenue by approximately $100 million or 6%.
• Excluding the impact of the Denizen business exit and Russia, net revenues would have been flat year-over-year.
• The company's gross margin increased by 240 basis points to 58.2%, driven by lower product costs and a favorable mix shift.
• Direct-to-consumer (DTC) net revenues grew by 7%, with a 10% increase in the U.S., and now represent a record 48% of total net revenues.
• E-commerce revenues increased by 13%, reflecting double-digit growth across the Levi's and Beyond Yoga brands.
• The company reported a diluted loss per share of $(0.03) due to restructuring charges, but an adjusted diluted EPS of $0.26.
• Levi Strauss & Co. has affirmed its full-year revenue growth guidance of 1-3% and raised its adjusted diluted EPS range to $1.17-$1.27.

Sentiment

Score: 7

Explanation: The sentiment is positive due to better-than-expected earnings, strong DTC growth, and raised EPS guidance, despite a revenue decline and restructuring costs. The company's strategic initiatives and improved margins are encouraging.

Positives

• The company's gross margin improved significantly, driven by lower product costs and a favorable mix shift.
• The direct-to-consumer business showed strong growth, particularly in the U.S.
• E-commerce sales experienced double-digit growth.
• The company has reaffirmed its revenue growth outlook for the year and increased its EPS guidance.
• The company returned approximately $73 million to shareholders in the first quarter through dividends and share repurchases.
• The company's global productivity initiative, Project Fuel, is progressing well and improving profitability.
• Total inventories decreased 14% on a dollar basis and 21% excluding the impact of the modification of terms with the majority of our suppliers.

Negatives

• Net revenues decreased by 8% compared to the first quarter of 2023.
• The company reported a net loss of $11 million, compared to a net income of $115 million in the same period last year.
• Wholesale net revenues declined by 18% due to a shift in shipments related to a U.S. ERP implementation.
• Operating margin decreased from 9.3% to (0.03)% due to restructuring charges.
• Adjusted EBIT margin declined 200 basis points to 9.0% from 11.0% last year on a reported basis due to lower net revenues.
• Restructuring charges were $116 million related to Project Fuel.

Risks

• The company's performance is subject to macroeconomic pressures, inflationary pressures, supply chain disruptions, and currency impacts.
• The shift in wholesale shipments due to the U.S. ERP implementation negatively impacted Q1 2024 revenues.
• The restructuring initiative, while aimed at cost savings, resulted in significant charges in the current quarter.
• The company's wholesale business is experiencing a decline.
• The company's operating margin was negatively impacted by restructuring charges.

Future Outlook

The company expects full-year net revenues to be up 1% to 3% year-over-year and adjusted diluted EPS to be between $1.17 to $1.27. They are confident in returning to mid-single-digit topline growth in the second half of the year.

Management Comments

• Michelle Gass, President and CEO, stated that the company started the year strong, delivering results above expectations, underscoring the power of the Levi's brand and the progress on strategic priorities.
• Michelle Gass also noted that newness and strength in core offerings are fueling consumer demand and driving market share gains.
• Harmit Singh, Chief Financial and Growth Officer, mentioned that the structural economics of the business improved in Q1 due to gross margin expansion, expense controls, and efficient working capital management.
• Harmit Singh also stated that Project Fuel is progressing well and improving the company's profitability.

Industry Context

The results reflect a mixed picture in the apparel industry, with strong DTC performance and margin expansion being offset by wholesale challenges and restructuring costs. The company's focus on DTC aligns with a broader industry trend of brands seeking more direct relationships with consumers.

Comparison to Industry Standards

• Levi's gross margin of 58.2% is strong compared to many apparel companies, indicating effective cost management and pricing strategies.
• The 7% growth in DTC is a positive sign, as many apparel brands are focusing on direct sales channels to improve profitability and customer engagement.
• The company's adjusted EPS of $0.26 is below the prior year, but the raised guidance suggests confidence in future performance.
• Competitors like Gap and Abercrombie & Fitch have also been focusing on DTC and cost optimization, making Levi's strategy consistent with industry trends.
• The restructuring charges are a common occurrence in the industry as companies adapt to changing market conditions, but the magnitude of $116 million is significant.

Stakeholder Impact

• Shareholders will benefit from the increased EPS guidance and continued dividend payments and share repurchases.
• Employees may be impacted by the restructuring initiative, which includes severance and post-employment benefit charges.
• Customers will likely see continued investment in new products and improved direct-to-consumer experiences.
• Suppliers may be affected by the modification of terms related to inventory ownership.

Next Steps

• The company will provide more details during the earnings conference call.
• The company will continue to execute its strategic priorities, including Project Fuel.
• The company will focus on returning the topline to mid-single-digit growth in the second half of the year.

Key Dates

Keywords

Levi Strauss & Co., Financial Results, Direct-to-Consumer, Gross Margin, Restructuring, E-commerce, Apparel, Retail, EPS, Revenue