Loose-Fit Denim & China/US Gains Lift Levi’s

    A rugged set of results from Levi Strauss — helped by a strong performance in China — is putting a spring in the company’s step.
    A rugged set of results from Levi Strauss — helped by a strong performance in China — is putting a spring in the company’s step. Photo: Levi's Weibo
    Kevin RozarioAuthor
      Published   in Finance

    An accelerating appetite for casual clothing, the arrival of a new denim cycle, and the growth of digital have all helped Levi Strauss deliver better-than-expected growth in its fiscal second quarter. During that period, China’s performance stood out in Asia for moving ahead of its 2019 numbers.

    In the three months to May 30, the world’s best-known jeans maker generated a net profit of 65 million on the back of 1.3 billion in sales, up 156 percent over the same period in 2020. The big hike reflected the COVID-19 pandemic that swept the world last year, making for a soft comparison.

    Total company sales are now three percent behind those in Q2 2019, though sales in both the US and China were ahead. Levi’s believes this is partly down to changes in the business and trends in the market. Both countries are critical to success, with China possibly garnering more focus from Levi’s in the future, as denim consumption in the country is expected to overtake the US by 2023.

    China grew by three percent versus the second quarter of 2019. This bump "reflected double-digit growth in the D2C store network and e-commerce, which we expect to continue into the second half of the year,” said Levi’s CFO Harmit Singh in an investor call. More widely, Asia’s revenue of 196 million was down 12 percent versus Q2 2019. That’s no surprise, as the pandemic is still impacting big markets like India.

    Meanwhile, in the Americas, revenue hit 715 million, pushing the entire region ahead of the same period in 2019 by three percent. The driver was four percentage points of US growth, led by wholesale and digital. Like Asia, Europe was also down versus Q2 2019. An eight percent decline reflected DTC decreasing 21 percent due to temporary store restrictions and closures.

    Changing waist sizes#

    Commenting on the overall strong momentum by Levi’s versus last year, CEO Chip Bergh said in a statement: “This was underscored by the strength of our brands, our ability to capitalize on evolving denim trends, and a shift to casualization.”

    In the investor call, he added: “We are in the early innings of a new denim cycle. As lockdowns lift and people return to social activities and the office, this creates a new wardrobe opportunity. And in the US, 35 percent of consumers have changed waist sizes — both up and down — and that’s another reason for people to update their clothing. Looser, baggier fits are now almost half of both our men’s and women’s sales. It’s a significant change.”

    Singh then added: “Denim is resurging. Revenues in most markets are recovering faster than anticipated. We are also emerging from the pandemic with sustainable and improved structural economics.”

    Improvements instigated by the company include:

    Using AI to more accurately forecast demand, keep inventory low, and reduce markdowns

    Raising its share of common assortments and core lines around the world to two-thirds of stock as a way to cut waste and sell season-to-season

    Driving up e-commerce, as sales were up by 37 percent in Q2 and now account for eight percent of company revenue

    Building out its omnichannel and D2C options to let consumers decide how they want to shop

    The brand’s global Buy Better, Wear Longer sustainability campaign featuring six celebrities launched in April. It will be interesting to see how it resonates with consumers and impacts next quarter’s results.

    For the second half, the strategic priorities for Levi’s will be to accelerate direct-to-consumer connections while also growing its digital share of sales. With 92 percent of doors now open, the company expects revenue to jump up by 29 percent in the second half of fiscal 2020 and at least four percent over the same period from 2019.

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