Levi Strauss Needs To Prove Recession Won't Push Jeans Out Of Style

On April 6th, Levi Strauss & Co (NYSE: LEVI) reported its first quarter financial results with direct-to-consumer and international sales being a bright spot as total revenue slowed down. Due to a warning of a further margin crunch, sending shares tumbling after the report. 

Financial Highlights

For the quarter that ended on February 26th, net revenue topped estimates as it amounted to $1.69 billion translating to an increase of 6% and 9% on a constant-currency basis compared to 2022’s comparable quarter. The result reflects strong growth in DTC channel which rose 12%. 

However, that rise was eaten up by costs such as selling, general and administrative expenses that also rose 10% and amounted to $785 million, rising from 2022’s first quarter when they amounted to $709 million. The resulting adjusted profit amounted to 34 cents, also beating estimates. Net income amounted to $115 million, dropping significantly from 2022’s first quarter when it amounted $196 million, primarily due to the decrease in operating income which was $157 million compared to last year’s $234 million. When adjusted, net income adds up to $135 million, compared to 2022’s first quarter of $189 million. Diluted EPS amounted to $0.29, but when adjusted they add up to $0.34, with the  adverse currency impact of $0.01.

The Inventory Struggles

Like its peers, Levi’s struggled with bloated inventories which made it pursue discounts and promotions which crunched margins. On a dollar basis, total inventories increased 33% compared to last year. Adjusted gross margin slid as many as 360 basis points to 55.8% as operating margin was 9.3% and adjusted EBIT margin dropped from 14.9% to 11.0% compared to last year’s comparable quarter.

Warning Of A Margin Crunch In 2023

While facing higher costs, Levi’s warned that it will be offering higher promotions than previously anticipated. Despite several hikes, Levi has failed to protect its margins from inflated costs of freight, labor and cotton as well as ongoing supply chain disruptions that have been plaguing the industry since COVID enter the arena back in 2020.

Key Points

As Levi gets to celebrate the cemented consumer loyalty to its iconic 501® jean that is celebrating its 150th birthday, CEO Chip Bergh focused on the progress that has been made such as the strong growth in the international segment, along with record-breaking revenue performance in its DTC channel.  During the first quarter, Levi led the US market share when it comes to consumers who are 18 to 30 years old consumers, while continuously growing its share in the segment of women’s denim pants.  

Outlook

Although Levi’s maintained its annual revenue and profit forecast, it warned of a full-year gross margin drop of 50 basis points from last year’s 57.5%, which is quite a contrast from its prior expectation of 20 to 30 basis points expansion. Despite higher promotions, Levi has struggled to attract cost-conscious shoppers, with its Signature and Denizen brands especially feeling the pain from the macroeconomic climate as the lower end consumers are either trading down or not buying denim altogether. Even the unbeatable lipstick index was powerless against COVID-19, so only time will tell if jeans will truly never go out of style as fears of recession materialize with each passing day. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.