Levi Strauss & Co. (LEVI) reported its third-quarter results after market hours yesterday. Levi’s numbers for the third quarter of fiscal 2019 (ended August 25) surpassed analyst expectations. The iconic jeans maker’s profit dropped 4.1% YoY (year-over-year) to $124.5 million.
However, Levi’s third-quarter revenue climbed 4% YoY to $1.45 billion. Its EPS came in at $0.31. Wall Street had expected Levi’s Q3 revenue to reach $1.43 billion, and its earnings per share were estimated to be $0.27.
Europe and Asia led Levi’s Q3 revenue
Levi’s 14% sales growth in Europe, coupled with a 9% increase in Asian sales, pushed the company’s revenue higher. On a constant-currency basis, its European revenue grew 18%, while its revenue in Asia climbed 12%. Both regions posted strong performance from the company’s direct-to-consumer and wholesale channels.
The company’s revenue slipped 3% in the Americas, both on a reported basis and a constant-currency basis, due to softness in the wholesale segment. CEO Chip Bergh noted during an interview with Reuters, “U.S. wholesale was challenged… particularly the legacy department stores and chain stores, where (the) much publicized traffic declines have negatively impacted our business.”
The weakness in the company’s Americas business reflects the dismal state of brick-and-mortar retail stores in the US. Lower sales to the off-price channels and the bankruptcies of retailers like Forever 21, JCPenney (JCP), and Macy’s (M) weighed on Levi’s performance.
Levi’s operating income from the Americas also declined by 7%. This decline resulted from lower net revenue from the region, as well as increased expenses related to the expansion of the retail and distribution network. The company opened 45 stores at the end of the third quarter.
Brand strength boosts direct-to-consumer segment
On a reported basis, Levi’s direct-to-consumer segment rose 10%. Its segmental revenue grew on the back of e-commerce as well as the expansion and upbeat performance of the retail network. On a constant-currency basis, its revenue edged 12% higher.
In the Americas, the 9% surge in the direct-to-consumer net revenues mirrored the strength of the Levi’s brand in the region. Its women’s apparel and signature products also drove sales. The women’s segment posted 10% growth in revenue, while the tops segment saw a 14% increase.
Bergh stated that Levi is more focused on selling directly to customers through online channels and the company’s stores. He also referred to the company’s reduced dependence on off-price retailers. Levi partnered with Chanel Iman Shepard and Sterling Shepard to create exclusive merchandise for sales on Amazon’s (AMZN) e-commerce platform.
Levi’s wholesale business rose 1% on a reported basis, while it reported constant-currency growth of 2%. Europe and Asia contributed to an increase in the wholesale segment. The decline in wholesale revenue in the Americas mostly resulted from the relaunch of the company’s Docker’s Signature Khaki brand in H2 2018.
The company stated that the delay in the acquisition of The Jeans Company also impacted the Americas’ wholesale revenue negatively. The Jeans Company is Levi’s distributor in Chile, Peru, and Bolivia. Levi Strauss expects the transaction to close in the first quarter of 2020.
Outlook for the fourth quarter and fiscal year
Bergh was upbeat about the fourth quarter. During the company’s Q3 earnings report, he said, “We again expect strong performance in international, direct-to-consumer, women’s and tops, and improved comparisons for U.S. wholesale.”
For fiscal 2019, Levi Strauss expects constant-currency net revenue growth of 5%–6%. The company estimates capital expenditures of approximately $190 million–$200 million. It also aims at opening about 100 new company-operated stores in 2019.
The company noted that due to the closing of the fiscal year on the last Sunday of November, the numbers would exclude the impact of Black Friday.
Management is confident about Levi’s profitability
Levi’s stock plunged more than 10% in August. This occurred soon after Trump indicated that he would impose tariffs on an additional $300 billion of Chinese imports. This list of items included apparel. In July, Goldman Sachs downgraded the stock to “sell” from “neutral.”
However, the stock gradually recovered after that and rallied 13% in September. Bergh revealed that the company has been “deliberate and diligent” in shifting its production away from China. He added that only 1%–2% of the company’s products sold in the US are produced in China. This is a sharp drop from 16% of its products sourced in China two years ago. Levi’s minimal dependence on China indicates reduced risk from a trade war.
The company also offers increased shareholder value. Levi & Co. raised its semiannual dividend payable in Q4 of fiscal 2019 by 7%, with results in its dividend per share of $0.15. The increase results in the total dividend for fiscal 2019 reaching $114 million, for 27% growth from 2018. The increased payout indicates the management’s belief in Levi’s profitability.
Levi Strauss is taking measures to boost its direct-to-customer sales as well as its online presence. The company is set to benefit from the rebound in denim as a fashion trend.
However, declining revenue from the wholesale segment remains a matter of concern. The company earns more than 65% of its revenue from the wholesale channel. We expect investors to keenly observe how Levi navigates this issue.
Levi’s shares moved higher even after a decline in earnings, as its Q3 results exceeded analyst estimates. During market hours, LEVI stock fell 4%. In the pre-market session, the stock traded in the green.