Levi Strauss & Co
Levi Strauss & Co., the iconic denim brand, posted fiscal third quarter results which beat estimates on the top and bottom lines. Consumer demand for its products was boosted by back-to-school buying as well as the curtailment of stay-at-home restrictions, thanks to vaccinations. This meant fewer zoom meetings in shorts or pyjama bottoms, and more purchasing of pants, as folks headed back to offices or about town for socialising in the period.
Levi’s revenue rose 41% to $1.5 billion in Q3. This is 3% higher than in Q3 2019, before the lockdown, and is despite a $10 million revenue loss due to supply chain issues. The company has fared rather well in avoiding major supply chain bottlenecks thus far thanks to its diversified manufacturing operations. Less than 4% of Levi’s global volumes comes from Vietnam. The country has imposed harsh lockdown restrictions to protect factory workers from the spread of Covid-19 which has impacted production for companies like Nike. Levi also said 10% of its company-operated stores worldwide were closed in Q3, mostly in Asia - and around 4% still remain shut.
Digital sales were only up 10% year-over-year. However, on a two-year basis digital were up 76%. Digital transactions now account for approximately 20% of Levi’s total sales. Direct-to-consumer sales jumped in the period by 34% from last year and are up 3% on a two-year basis, highlighting the change in trend from online to brick-and-mortar shopping. Wholesale revenue soared 45% y-o-y, boosted by robust demand from Europe and the US.
With its supply chain and strong brand as a competitive advantage, it was able to sell more merchandise in its own-branded stores at fuller price points, enabling the company to protect its margins. The gross margin was up 390 basis points to 57.6% in the period, and is up 450 basis points from Q3 in 2019, before the pandemic. The Operating margin was up 7.9% y-o-y to 14.4%, and was up 12.2% when compared to Q3 2019.
Net income for the fiscal third quarter increased 615% to $193 million, or 47 cents per share, from a year earlier. Adjusted Free cash flows improved in the first 9 months of fiscal 2021 to $220 million, a $251 million rise from the first nine months of the prior year. This allowed Levi Strauss to end the period with war chest of cash and cash equivalents of $1.4 billion. The board also approved share buybacks to the tune of $200 million.
The 168-year-old business showed in this recent quarter that it has the brand strength and pricing power to push through cost increases to customers. Levi should continue to benefit from an opening up of economies, as people leave their homes to socialize and work. This is reflected in its guidance where it expects year-over-year fourth-quarter revenue growth of 20% to 21%, and earnings ranging between 38 and 40 cents per share. This guidance is closer to the lower bound of what analysts were expecting and is based on the health crisis not worsening. Full-year forecasts however, are better than what analysts were expecting and should bring sales in line with 2019 levels. We do however prefer shares of Nike in the sector even in spite of its production issues and a less attractive valuation.