Levi Strauss & Co. boosted both sales and profits in the third quarter despite continued weakness in its U.S. wholesale business.
The firm’s third-quarter net profits increased 69 percent to $98.3 million from $58.2 million a year earlier as the company posted better sales and cycled past charges related to its productivity initiatives.
Gross profit margin slipped to 50 percent of revenues from 50.2 percent a year earlier as the international business and lower negotiated product costs were offset by currency fluctuations and lower margins in the U.S. wholesale business.
Revenues for the three months ended Aug. 28 increased 3.8 percent to $1.19 billion from $1.14 billion, but were up about 5 percent excluding currency fluctuations. Adjusted earnings before interest and taxes grew 14.5 percent to $146.3 due to higher direct-to-consumer sales and lower advertising costs.
Sales in the Americas rose 1.5 percent to $724 million, as turnover in Europe jumped 9.3 percent to $283 and revenues in Asia increased 5.3 percent to $179 million.
“It was a good third quarter, balanced growth in all three regions, including the Americas, which includes, obviously, the U.S., which is still today our biggest market,” said Chip Bergh, president and chief executive officer, in an interview Tuesday. “We did all of this despite U.S. wholesale, which is still the largest part of our overall business.”
Levi’s U.S. wholesale business — including the Dockers brand — relies on midmarket American retailers that have struggled with traffic declines and the increasing gains seen in the e-commerce channel.
“Wholesale is still our biggest challenge,” Bergh said.
“If there’s any company that should be winning disproportionately in today’s environment, it should be Levi Strauss,” he said, pointing to the strength of the company’s brands. “We’re very committed to wholesale. It is a very big part of our business and we believe we can grow it even in this challenging environment if we take the right steps. We’re not writing it off.”
Bergh said Levi’s wholesale partners have been facing a “confluence of issues,” including the strong U.S. dollar and weaker tourist traffic.
Sales at the company’s own stores and its e-commerce business grew a collective 14 percent in the third quarter.
“It is fundamentally that middle market department stores are all being challenged,” he said. “There are wholesale customers or retailers who are still doing OK. The bottom end of the market — T.J. Maxx, Ross, Costco — those businesses seem to be doing OK. And the really high end of the market — Nordstrom, Saks, Neiman’s — in general are doing a little bit better than the middle market.”
Later on a conference call with analysts, Bergh said the challenges at middle market department stores were also opportunities.
“If you walk the floor of any of our big — any of the big department store, customers of ours you will see that we’re basically a classification business, we’re a bottom’s business for them,” he said. “By contrast if you walk through any of our own retail stores we show up it’s a lifestyle brand. And I think we’ve got enormous opportunities to partner with our biggest customers to change the shape of our business in their stores and change the trajectory of our business and their business by leveraging the strength of our brands.”
Beyond that, Bergh told WWD that the company is focusing on what it can control. But there are plenty of things outside of the control of Levi Strauss or any other company — including the election; big storms, such as Hurricane Matthew, and other unexpected events, such as the fallout of the Brexit vote.
Bergh said there is a lot of uncertainty around the U.S. presidential election, but that ultimately Hurricane Matthew would be a bigger hit to sales, although even that impact would not be significant in the context of a global company.
The group’s storm-related store closures added up a total of 33 lost days of business. Levi Strauss has about 662 doors globally.
While the weaker pound has helped drive business in the U.K., Bergh said the company saw a negative impact of $5 million as those pounds were converted back into dollars.
“That’s pretty significant,” the ceo said. “Over time, this is going to catch up with us and with everybody else because at the end of the day, if the pound keeps going south, we’re going to have to do things structurally” to adjust.