By Neil Saunders
In its inaugural set of results since the latest IPO, Levi’s has struck a positive note with both the top and bottom lines, expanding comfortably. Indeed, the overall growth rate of 6.8% doesn’t reflect the true performance because of the negative impact of exchange rates; when this is removed, revenue grew by a much more robust 11%.
While the pace of growth has slowed over the past year, this is primarily because Levi’s is starting to lap tougher prior-year comparatives. In the same period last year, total revenue grew by around 22%, while sales in Europe were up by a very strong 46%. Against these challenging numbers, today’s results are encouraging, as they signal Levi’s is building on the momentum it has already created.
One area we are particularly pleased with is the continued expansion of the brand’s direct-to-consumer business, where sales were up 10% this quarter. Over the past year, the addition of 70 more company-operated stores as well as the expansion of e-commerce has allowed Levi’s to reach more customers directly rather than going through third parties. Taking control over distribution in this way is a critical component of future success, especially given the issues with third parties such as department stores. These more traditional routes to market simply cannot be relied upon to sustain wholesale revenue growth over the medium to longer term.
Developing a distribution network closer to the customer also lets Levi’s showcase its brand more effectively and promote new products. This includes assortments such as the denim Performance Collection, which features stretch and temperature-control technologies. Levi’s does a better job of explaining and merchandising such innovations than most other stores that stock and sell its brand, which allows it to push more volume and maintain higher premium price points.
As Levi’s further develops in areas outside of denim, it needs the luxury of having its own spaces to present the offer in a coherent, holistic way. There is significant scope for development here, as Levi’s is now seen by increasing numbers of younger consumers as a lifestyle rather than a denim brand. This is something that the company can tap into with a more varied range of items. This counterbalance to denim, which is already well underway, is an important insurance policy against the vagaries of the fashion market where denim could, at some point in the future, fall out of favor.
For the bottom line, a clear margin gain from the push to direct-to-consumer has been somewhat offset by unfavorable exchange rates. But a much lower income tax expense helped push net profit firmly into the black, compared to a loss in the same period last year.
One area of financial concern is Levi’s debt load, with long-term debt still topping a billion dollars. This resulted in an interest expense of over $200 million this quarter—a level that, while manageable, is uncomfortable. However, we are satisfied with the progress made in paying down these liabilities, and in the cash the company is generating. We believe that Levi’s performance will allow it to make further progress on debt as it moves to capital repayment in 2025 and 2027.
Overall, this is a good set of numbers underpinned by a sound strategy and growing brand affinity. We believe Levi’s has a good year ahead.
Neil Saunders is managing director of research firm GlobalData Retail.