Levis Strauss (NYSE:LEVI) has been experiencing better-than-expected sales at reopened stores. The stores closed temporarily amid the COVID-19 pandemic. Currently, about 90% of Levi Strauss’s company-operated stores and franchisee doors have reopened globally. However, the company told investors that it expects COVID-19 to have a significant impact on its business for the rest of 2020.
Levi Strauss reported its results for the second quarter of fiscal 2020 after the markets closed on Tuesday. The company’s results were impacted by the temporary store closures for about ten weeks in the fiscal second quarter.
COVID-19 impacts Levi Strauss’s Q2 earnings
Levi Strauss reported revenue of $497.5 million in the second quarter of fiscal 2020, which ended on May 24. The company’s sales beat analysts’ estimate of $485.5 million but declined about 62% YoY (year-over-year). COVID-19 led closures of company-operated stores, franchises, and wholesale customer retail stores caused a significant fall in the top line.
Meanwhile, the company’s e-commerce business increased 25% amid the pandemic. The company’s e-commerce sales grew 79% in May and were up by triple-digits in the US.
Levi Strauss posted an adjusted loss per share of $0.48 in the second quarter of fiscal 2020 compared to an adjusted EPS of $0.17 in the second quarter of fiscal 2019. Analysts expected an adjusted loss per share of $0.49. Weak sales and lower margins had a negative impact on the bottom line. The company’s adjusted gross margin declined by 180 basis points YoY to 51.5% in the second quarter. Lower wholesale gross margins, especially in Europe, hurt the company’s adjusted gross margin and partially offset the favorable impact of higher prices.
The company’s adjusted EBIT margin was -41.4% in the second quarter of fiscal 2020 compared to 6.2% in the second quarter of fiscal 2019. A substantial decline in revenues impacted the EBIT margins despite lower adjusted SG&A expenses.
Challenges to continue
Despite positive trends in reopened stores, the company expects COVID-19 to hurt its performance in the second half of fiscal 2020. Notably, COVID-19 cases have been rising again. An unfavorable economic environment, rising unemployment, and lower discretionary spending could hurt Levi Strauss and its peers.
Meanwhile, Levi Strauss continues to invest in its digital capabilities to address the surge in e-commerce sales. The company’s capital expenditure budget of $160 million for fiscal 2020 will essentially be directed towards omnichannel and other digital initiatives. The company intends to invest in AI and data analytics as well as upgrade its ERP. Amid reopening several stores, the company’s e-commerce business grew by about 70% in June.
Levi Strauss opened 30 new locations in fiscal 2020—mainly internationally. Now, the company expects to open around 70 company-operated locations this year.
The company didn’t provide any specific guidance for fiscal 2020. Levi Strauss won’t pay dividends in the third quarter. However, the company intends to reassess dividend payments for the fourth quarter based on the situation. Given the current crisis, the company doesn’t expect its revenue to return to pre-COVID levels until sometime next year.
Meanwhile, Levi Strauss continues to reduce costs and drive its efficiencies. Notably, the company decided to cut 700 jobs, which represents about 15% of its global non-retail and non-manufacturing workforce.
To maintain financial flexibility, Levi Strauss issued an additional $500 million of its 5.0% senior notes due in 2025. The company had a liquidity position of $2 billion at the end of the second quarter.
Levi Strauss stock was down 7.4% as of 9:50 AM ET today. Investors are concerned about apparel companies as the COVID-19 situation continues to get worse. The stock has fallen 28.3% year-to-date as of July 7.