Dive Brief:
- Levi Strauss & Co. said Q3 net revenue was flat to last year at $1.5 billion, with Levi’s up 5% globally, Dockers down 15% and Beyond Yoga up 19%. Direct-to-consumer net revenues grew 10% year over year, and were 44% of total net revenues. Wholesale net revenues fell 6%.
- Inventory was down 7%. Gross margin expanded by 440 basis points to 60%, thanks mostly to lower product costs plus favorable channel and brand mix. Net income soared 115.6% year over year to $21 million.
- The company has begun to seek strategic alternatives for the Dockers brand and may put it up for sale, per its press release. Speaking to analysts Wednesday, CEO Michelle Gass said the brand “has underperformed for some time.”
Dive Insight:
Levi’s garnered mixed reactions from analysts, with some expressing disappointment and others confidence.
The company posted strong margins and profits, but its sales have been a letdown considering the current strength in the denim category, according to Wells Fargo analysts led by Ike Boruchow.
“All in, more bad than good” this quarter, Boruchow said, citing what was a second straight revenue miss and lowered guidance.
Challenges in the quarter that added to the pressure, including “headwinds in China, Dockers and Mexico wholesale,” led the company to cut its guidance, Chief Financial and Growth Officer Harmit Singh told analysts. The company expects Q4 revenue to grow in the mid-single digits and full-year revenue to grow 1%, the low end of its previous guidance for between 1% and 3% this year, he said.
But UBS analysts led by Jay Sole see potential in the company’s new DTC emphasis, bolstered by the strength of its signature denim brand, which they see as enduring.
“We believe the market doesn't fully appreciate Levi’s ability to evolve into a global, multi-channel, lifestyle business for both men and women from what traditionally was a North America, wholesale, men’s, denim brand,” Sole said.
Those analysts anticipate that over five years the pivot will drive an 18% compound annual growth rate in earnings per share, saying in a Wednesday research note that “the core Levi’s brand continues to perform very well.”
A similar shift to DTC at Nike now seems ill-advised. But the strategy at Levi’s “is working,” as seen in this Q3 report, UBS said.
The company expects to end the year with the wholesale business contributing less than 20% of revenue, down from 30% in 2015, Singh said. Gass said the growth in DTC in the U.S. was “driven by strong performance in brick-and-mortar retail” including both positive store comps and new store expansion.
“We believe these data points show the strategy is working and the company is still in the early stages of its transformation,” Sole said. “We note few Softline brands are currently delivering this type of DTC sales and profit growth.”
After helping create a buzz around the Levi’s brand earlier this year with the release of her “Cowboy Carter” album, Beyoncé has been enlisted for a marketing campaign that will further fuel excitement in the holiday quarter, executives told analysts.
“Earlier this week, we took another significant step in reaffirming Levi’s place at the center of culture through an unprecedented partnership with global icon Beyoncé,” Gass said.
