Despite macroeconomic challenges — from a shift in consumer shopping behavior to the ongoing impact of a strong U.S. dollar — Levi Strauss & Co. delivered strong growth in net income on a small increase in revenues.
Lower losses related to the impact of foreign exchange translations as well as higher international and direct-to-consumer sales buoyed results.
Net revenues rose slightly to $1.057 billion for the period ended Feb. 28 from $1.055 billion in the prior year, while net income jumped 71 percent to $66 million from $38 million. Excluding the impact of “unfavorable currency” translations, the top line gained 5 percent.
Chip Bergh, president and chief executive officer, told WWD that the company’s men’s, women’s, tops and bottoms were all up, globally. “Currency is still having an impact, but the sales growth was fairly broad-based,” he said. “We are off to a good start for the year.”
Still, Bergh acknowledged soft spots in the company’s business: notably wholesale in the U.S. and Dockers. With the latter, Bergh said, “We have a plan in place and will be resetting Dockers this summer, which also includes simplifying the shopping experience for the consumer.” On a call with investors, the ceo added that the “Dockers turnaround is well under way.” He said the repositioning includes rolling out “a Dockers Signature Khaki in stretch.”
Adjusted earnings before interest and taxes rose 4 percent in the quarter to $124 million from $120 million last year. The company said the gross profit margin jumped to 53 percent in the quarter from 50.9 percent in the prior year. Higher gross margins were “primarily due to lower negotiated product costs and streamlined supply chain operations,” the company said, adding that international and “direct-to-consumer sales growth benefited gross margin.” On the top line, the company said there was “$46 million in unfavorable currency translation effects.”
Levi’s noted that the net income gain primarily “reflected lower foreign currency transaction losses as well as higher adjusted EBIT and lower interest expense.”
“Adjusted EBIT grew 4 percent on a reported basis and 12 percent on a constant-currency basis, primarily reflecting an improvement in gross margin and higher constant-currency revenues, partially offset by increased investment in the company’s direct-to-consumer channel and advertising,” the company said.
“Our direct-to-consumer and international businesses continued to fuel our growth, and our Levi’s women’s business grew again this quarter on a global basis,” Bergh said in the quarterly statement. “Looking forward, we anticipate the second quarter will be a difficult comparison to the prior year, given our planned retail and advertising investments, and as the U.S. wholesale channel continues to face traffic challenges and ongoing softness in consumer spending at retail.”
By region, net revenues dropped 1 percent to $571 million in the Americas while Europe was flat at $276 million and Asia was up 3 percent to $209 million. Operating income in the Americas declined 20 percent to $82 million while rising in Europe 6 percent to $62 million. In Asia, operating income was flat at $47 million.
The Dockers reset includes re-examining the product assortment, which Bergh said has grown and become complex over time. He also said that in the casual market, “stretch is a more important focus for consumers.”
Areas of strength have been the company’s women’s business, which — for a third quarter in a row since the relaunch last year — delivered double-digit growth.
Despite the solid first quarter, Bergh said headwinds remain, which include currency issues. “And it’s tough out there, globally, as traffic is down across the board,” he said, also noting a difficult tourism market. In the U.S., the ceo expects the wholesale business to decline in the current quarter.
Also impacting the overall retail market is a seemingly permanent shift in consumer behavior. “Millennial consumers in particular are spending and shopping differently,” the ceo noted. “And Baby Boomers as well. They are spending more on dining out and having experiences, and on nesting instead of buying apparel.”
The shrinking share of apparel from a consumer’s wallet coupled with the currency issues are likely to continue, Bergh said. But he remains optimistic. “It’s important to note that at the moment there aren’t any tailwinds,” Bergh said. “Even so, we were able to post solid results.”