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Levi Disappoints Investors with Lower Second-Quarter Earnings

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Lower second-quarter earnings

Denim maker Levi Strauss (LEVI) reported its results for the second quarter of fiscal 2019 after the financial markets closed on July 9. The second quarter ended on May 26. Levi’s second-quarter adjusted EPS of $0.17 exceeded analysts’ forecast of $0.13. However, investors were disappointed, as the company’s adjusted EPS fell 21% on a year-over-year basis.

Despite higher revenue, Levi’s adjusted EPS declined due to currency headwinds and increased advertising spending. Levi’s second-quarter EPS was also negatively impacted by a higher share count resulting from shares issued in connection with its IPO in March. Levi’s EPS declined 63% to $0.07 on a reported basis due to the impact of costs of $29 million associated with its public listing.

Levi’s second-quarter revenue grew 5.4% to $1.31 billion and surpassed analysts’ estimate of $1.30 billion. The company’s efforts to expand its direct-to-consumer business boosted its top-line growth. As of July 9, Levi stock had risen 5.6% since its IPO in March. However, the drop in Levi’s second-quarter earnings and a slower revenue outlook for the second half of fiscal 2019 dragged down its stock 7.6% in after-market trading hours on July 9. The stock was down 10.0% as of 9:41 AM today.

What drove Q2 revenue?

Levi’s second-quarter revenue growth was driven by a 3.3% rise in its wholesale channel revenue to $811.7 million with growth observed across all regions. Direct-to-consumer revenue grew 9% to $501.3 million due to the expansion of the company-operated retail network and e-commerce revenue growth.

Excluding the adverse impact of currency fluctuations, Levi’s second-quarter revenue grew 9% with wholesale revenue growing 6% on a constant currency basis and direct-to-consumer revenue rising 14%.  The company’s direct-to-consumer revenue benefitted from 78 additional stores compared to fiscal 2018’s second quarter and a 25% growth in e-commerce revenue.

Levi’s revenue from its men’s business grew 6% and women’s business rose 16% on a constant currency basis.  The men’s business experienced strength in the bottoms category, while the women’s business saw increased sales of high-rise fits and tops.

Segment performance

Levi’s revenue from its Americas segment (the company’s largest segment) rose 3.4% to $692.7 million driven by growth across wholesale as well as the direct-to-consumer businesses. However, it is notable that the company’s wholesale business in the US generated lower sales due to the impact of retail bankruptcies, store closures, and reduced discounted sales to the off-price channel. The operating income of the Americas segment grew 4.5% to $101.6 million driven by revenue growth and improved gross margin, partially offset by investments to support the expansion of store network and higher advertising expenses.

Despite geopolitical tensions, revenue from Levi’s Europe segment surged 8.6% to $398.4 million driven by strength in wholesale and direct-to-consumer channels. The segment’s operating income rose 10.4% to $58.7 million due to strong top-line growth and an enhanced gross margin resulting from a shift towards the direct-to-consumer business. However, currency headwinds, a rise in advertising, and promotion expenses and increased investments associated with the expansion of the direct-to-consumer business had a negative impact on the segment’s second-quarter operating income.

Revenue of the Asia segment grew 6.1% to $221.9 million. The segment’s operating income increased about 4.0% to $17.1 million as higher revenue was partially offset by increased expenses to support retail expansion.

Updated guidance

Levi now expects its fiscal 2019 net revenue growth at the high end of its previously issued revenue growth guidance in the mid-single digit range on a constant currency basis. The company now expects its fiscal 2019 adjusted EBIT margin on a constant currency basis to be up in the range of ten basis points compared to the previous outlook of flat to slight improvement.

Levi’s updated revenue guidance for the full year implies a slowdown in the second half given that the company’s revenue grew 10% on a constant-currency basis in the first half of fiscal 2019. The company’s current fiscal year will end before Black Friday. The absence of Black Friday in the current fiscal year is expected to impact Levi’s revenue growth by 100 basis points in the second half.

Also, Levi expects continued pressure in the wholesale channel to hit its top-line growth by about 200 basis points in fiscal 2019’s second half. The wholesale channel is getting impacted by a challenging retail environment, which has led to several bankruptcies, store closures, and a tough situation for department stores like JCPenney (JCP) and Macy’s (M).

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