Denim jeans maker, Levi Strauss & Co. reported third quarter results which beat forecasts on the top and bottom lines. Work-from-homers have opted for comfort and a casualization of attire. This trend, which was also seen in Nike’s most recent results, has benefitted denim due to business-wear not being required when working remotely over Zoom.
Levis saw revenue fall 27% to $1.06 billion from a year earlier. This was mainly due to impacts from the Covid-19 pandemic, including reduced foot traffic and ongoing closures of company-operated and third-party retail operators.
Wholesale revenues fell more than direct-to-consumer channels due to e-Commerce which grew revenue 52% to partially offset the declines. Total Digital sales (including wholesale and partner websites like Amazon) comprised 24% of Levi’s total sales for the quarter, double what it was a year ago. It says online demand has remained strong even though physical stores have reopened.
Levis gained market share in the Women’s apparel category by selling more items like crop tops and tattered denim shorts in the quarter. Women’s apparel makes up 37% of total sales.
Geographically net sales fell across the board, with the Americas down 29%, Europe 16%, and Asia 42%. The fall in Asia was due to a significant impact from India where several states remained in government mandated lockdown throughout the third quarter. Excluding India, sales in Asia declined by only 24%.
Gross profits fell 24.7% to $577 million. Gross margins improved by 130 basis points to 54.3% due to price increases, a higher proportion of sales in the higher-margin direct-to-consumer channel, and a reduction in estimated Covid-19 related inventory charges for adverse fabric purchase commitments. The adjusted gross margin excluding the Covid-19 related charges was 53.6%.
Selling, general and administrative (SG&A) expenses declined 19% to $484 million due to cost savings. In July, the company announced it was slashing about 15% of its global corporate workforce, affecting about 700 jobs.
Adjusted EBIT was $84 million with the margin at 8%. Adjusted net income fell 78% to $31 million, or 8 cents per share. Analysts were expecting a loss of 22 cents.
The company returned to positive adjusted free cash flow generation in the third quarter of $183 million whilst inventories rose by 1%, with the company calling it a healthy position ahead of the holiday period. Cash totaled $1.4 billion at the end of the quarter.
Net Debt at the end of the period totaled $142 million. However the leverage ratio worsened to 4.5x from 1.5x due to the impact on adjusted EBIT. The company will not pay dividends for Q3 and Q4 but will reassess as operating conditions evolve.
Levis expects sales to be down 14% to 15% year-on-year during this holiday quarter, with profitability being flat, to slightly up, compared to the prior year. The company has a market cap of $6.2 billion and shares are down 23% this year.