Levi Strauss & Co. offset continuing weakness at U.S. wholesale accounts in the second quarter with growth from its own stores and e-commerce site as well as its overseas operations.
Net income shot up 163 percent to $30.7 million from $11.7 million a year earlier, reflecting lower restructuring charges and impact moves to extinguish debt a year ago.
The denim firm’s adjusted earnings before interest and taxes were roughly flat at $62.8 million for the quarter as better gross margins and higher constant-currency revenues were offset by increased investment in the direct-to-consumer channel and advertising. Second-quarter gross margins expanded to 51.1 percent of revenues compared with 49.4 percent a year ago, due to international and direct-to-consumer sales growth.
Revenues for the three months ended May 29 stood at $1.01 billion, just a hair below year-ago results on a net basis, but up 1 percent excluding the impact of currency translation.
Net revenues in the Americas fell 5 percent to $589 million, as European revenues increased 8 percent to $241 million and Asian revenues also rose 8 percent, to $182 million.
Levi’s direct-to-consumer business revenues grew by a percentage in the low-double digits, in constant currencies, while wholesale revenues showed a decline in the low-single digits.
The mix of business left Levi’s with an increase in inventories, which were valued at $790.4 million at the end of the quarter, up from $612.9 million a year earlier.
“It’s a pretty challenging environment here,” Chip Bergh, president and chief executive officer, told WWD of the Americas business. “We’re doing fine in Mexico and Canada. We’re actually growing double digits in Mexico, which is a big market for us. The issue is fundamentally a U.S. issue, which is fundamentally a wholesale issue. The wholesale channel has been challenged for an extended period of time now, at least over a year, 18 months and it’s a big part of our business. So as big wholesale customers have been challenged, it has had a collateral impact on our business.”
Bergh said the weakness was an opportunity for Levi’s, which has a strong brand globally and drives traffic.
“We have to figure out how to grow and we have to figure out how to let our customers grow,” he said.
The company’s Dockers brand is in the process of rolling out new, more casual styles with more stretch and fewer pleats. “The new product that we’ve launched, where we launched it, is performing well,” Bergh said.
Britain’s vote to exit the European Union came after the close of the second quarter and Bergh said that, while the European unit would feel its impact, the U.K. operation itself represents only 4 percent of total company business.
The full fallout of the Brexit vote remains to be seen. “It’s way too early to speculate on what what’s going to happen with the consumer, consumer dynamics and all that stuff,” the ceo said.
For the first half, Levi’s profits rose 93 percent to $96.6 million from $50.1 million. Revenues increased modestly to $2.07 billion. Levi’s ended the half with $350 million in cash and cash equivalents and total debt of about $1.2 billion.
Bergh told analysts on a conference call: “With the first half now behind us, we are optimistic to deliver our full year constant-currency financial objectives of profitably growing revenues and gross margins. This is in spite of the inventory issues we have and the expectation that the U.S. wholesale environment will remain challenging as the year progresses.”
The company opened more than 20 stores in the first half in continues to add a total of more than 70 doors for all of 2016.