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Levi’s Bounces Back in Third Quarter Despite Pandemic Woes

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Running a fashion company is always something of a high wire act — and more so than ever now, with supply chain disruptions, soaring cotton prices, a rush to the web and the coronavirus pandemic still playing out.

But Chip Bergh has managed to keep his balance at Levi Strauss & Co.

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The chief executive officer turned in big top and bottom line gains for the third quarter on Wednesday, closed on the $400 million Beyond Yoga acquisition and said that, despite it all, the brand is thriving. 

“Over the last couple quarters, there’s mounting evidence — and this quarter maybe with a little bit of an exclamation mark — that we are emerging from the pandemic a much stronger company,” Bergh told WWD. “For the first time, we are now lapping pre-pandemic 2019 levels.”

“We are structurally a better company,” he said. “We are more diverse. We are navigating through all these external headwinds, whether it’s the pandemic or supply chain constraints, cotton prices, we’re navigating through this and still delivering great results.”

Third-quarter net profits shot up to $193.3 million from $27 million a year earlier. And revenues for the three months ended Aug. 29 increased 40.9 percent to $1.5 billion from $1.1 billion. 

Among the quarter’s highlights: 

• Direct-to-consumer revenues rose 34 percent from a year ago and were up 4 percent from the same quarter in 2019. 

• Wholesale sales increased 45 percent from a year ago and 3 percent from two years ago.

• And overall digital sales increased 10 percent from a year ago and 76 percent from the same period in 2019. 

Digital now represents about 20 percent of the top line at Levi’s, which is in step with broader industry trends that have seen consumers pivot hard to the web during the pandemic and stay there as they grow more comfortable shopping online. 

The company boosted its outlook for the full year and is now looking for adjusted earnings per share of $1.43 to $1.45, up from the $1.29 to $1.33 projected in July. 

In the face of big questions about the supply chain ahead of the holiday season, that looks like a win. And after a down day in the market, investors reacted to the results by pushing shares of Levi’s up 2.3 percent to $24.80 in after-market trading.

Bergh said the company has been building a broader supply base and years ago decided to not source more than 20 percent of its volume from any one of the 24 countries where Levi’s products are made. About half of the company’s bottoms business is also cross sourced, meaning the same product can be made in multiple countries, allowing the brand to switch production to another market if a problem crops up. 

“The impact to revenues from all of the different supply chain constraints that we faced was a ‘whopping’ $10 million,” he joked, stressing that hit came off a sales base of $1.5 billion. 

Harmit Singh, chief financial officer, added that while cotton prices have been rising, the company doesn’t buy cotton directly and locks in prices ahead of time. So increased cotton prices are only adding 1 percent to costs in the first half of next year. 

“In the second half [of 2022] — we’re in the process of finalizing the costs of that — we think that will be in the midsingle-digit inflation range,” Singh said. 

But Levi’s has seen higher prices before and is in a strong position to deal with them now.  

“The brand’s never been this hot,” the CFO said. “It’s very different to what the situation was in 2011 when cotton [price inflation] raised its ugly head.”

Bergh — who was early to declare a start to a new denim cycle after the lockdown lounge look started to fade — expects the brand’s bread and butter to keep driving the business forward. 

“About half of our denim volume this past quarter was in those loose fits, both on the men’s business and the women’s business,” he said. “The denim business is growing faster than total apparel.” 

And if history is any guide, the trend could stick around for a while.

“The last denim cycle, which was really driven by skinny jeans, that lasted over 10 years,” said Bergh, adding that a new bottoms silhouette is “good for the industry overall” and drives sales in tops and footwear as well as customers adjust their look. 

Levi’s has been evolving in fast forward during the pandemic. 

The company trimmed its workforce and streamlined while at the same time becoming more digital and taking new steps toward sustainability. 

Now it’s branching out with Beyond Yoga, its first acquisition of an outside brand in over a decade. 

Beyond Yoga brings in a new kind of casual, launching Levi’s into athleisure with the very inclusive brand carrying sizes from XXS to 4X. 

Beyond Yoga is expected to add more than $100 million to Levi’s sales and be accretive to gross margins right away. 

Bergh said the 16-year-old brand was based on body positivity, inclusivity and diversity — the principles that are very much front of mind in fashion today. 

“The brand shows up as a very authentic and sincere brand and that’s what’s important in today’s world,” the CEO said. “This brand has a really long runway for success and even though it’s relatively small today, we think it has substantially more upside for the long term.”

 

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