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Levi’s CEO Chip Bergh Sees Challenges and Opportunities in Weak Market

Chip Bergh has battened down the hatches at Levi Strauss & Co., but said the denim brand is ready for what comes next — even with a big currency hit to the company’s outlook.

“There’s no question that the environment has gotten more challenging in the last quarter,” the chief executive officer told WWD in an interview. “The combination of inflation, fears of recession, the actual impact of inflation on consumers — we definitely saw demand begin to soften… Foreign exchange has definitely had an impact.”

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Revenues for the third quarter ended Aug. 28 inched up 1 percent to $1.5 billion and while that was up 7 percent on a constant currency basis, the result came in shy of the $1.6 billion analysts projected. Supply chain disruptions, mostly in the U.S., caused the firm to miss about $30 million to $40 million in sales.

Net income fell 11 percent to $173 million, or 40 cents a share, from $193 million, or 47 cents a year earlier.

But adjusted earnings of 40 cents a share came in 3 cents ahead of Wall Street’s projections — and that was not an accident.

“We took some pretty quick action to protect our profitability and still delivered our EPS target,” Bergh said.

Adjusted gross margins stood at 56.9 percent of sales, 60 basis points below the year-ago result.

“The market started to get more promotional during this past quarter and we made the decision that we were going to be competitive, we’re not going to lead promotions,” Bergh said. “About half the gross margin decline versus a year ago was because we were more promotional than we expected to be.”

Like most other brands, Levi’s started raising prices last year when consumers were more ready to spend and is holding on to the prices. Bergh said the companies’ average unit retail prices are up 6 percent from a year ago. That’s below the overall 8.3 percent rate of inflation logged across the economy in August, but still better than the 5.1 percent gain seen in apparel, according to the Labor Department’s Consumer Price Index.

But price was just part of the equation for the quarter.

“We really tightened the screws on costs during the quarter and made every effort to deliver on the EPS goal,” he said.

The earnings beat, even when sales were weaker than expected, amounted to a message to Wall Street — and the market in general — that Levi’s can win even if it’s battered by broader forces in the market.

Investors didn’t seem quite ready to hear that message and remained on the cautious side, sending shares down 4.9 percent to $15.15 in afterhours trading.

Stock market investors are future-focused and might well have had an eye on the revenue outlook for the year, which fell from a projected increase of 11 percent to 13 percent down to 6.7 percent to 7 percent growth on a net basis. Factoring out currency fluctuations, revenues are set to rise 11.5 percent to 12 percent.

Earnings are projected to hold up better, falling from a range of $1.50 to $1.56 to $1.44 to $1.49.

Bergh has reworked Levi’s over the past 11 years, giving it a stronger base both geographically and by distribution through its own stores and website operating alongside wholesale accounts.

The changes paid off during the worst of the pandemic and are paying off again. While the Signature by Levi Strauss & Co. brand at Walmart and Denizen at Target were both down in the quarter and Bergh said larger wholesale partners were pulling back orders, the company’s direct-to-consumer business is gaining.

“We still feel pretty good about the overall strength of our brand,” Bergh said. “The big question is what happens to the macro environment. There’s a lot of uncertainty and prudence or cautiousness on the part of our larger [wholesale] customers.

“Our September here in the U.S. in our direct-to-consumer business was up 10 percent, so we’re continuing to see strength in our brands,” the CEO said.

But is Levi’s ready for the next crisis?

Core product that can be sold across multiple seasons represented about two-thirds of total inventories.

“Crisis does create an opportunity,” Bergh said. “I’m not sure I’m ready to declare that the current macro environment is a crisis at this point, but there’s clearly opportunity for us to begin putting more distance between us and our competitors. We’re going to continue to bring excitement, freshness, we’re going to continue to support the brand with marketing and advertising.”

Bergh pointed to the company’s latest ad campaign, “Buy Better, Wear Longer,” which speaks to the company’s sustainability initiatives, but also has a subtle value message that emphasizes the longevity of that pair of Levi’s.

“Our mojo is, when times get tough, it creates an opportunity for brands that are strong…that have capacity, that have a strong balance sheet to make smart investments that allow us to separate from weak competitors,” he said. “That’s going to be the way we roll.”

In the meantime, Levi’s is also rolling with a lot more inventory, as is the case for other companies that have already reported results, including Nike Inc.

Levi’s inventories at the end of the quarter were up 43 percent from a year earlier. Harmit Singh, chief financial officer, put that down to unusually low inventories last year, early receipts to skirt supply chain risk and an increase in the amount of goods in transit.

red tab on levi's denim jeans jacket
A Levi’s denim jacket.

Singh added that, according to the NPD Group market research firm, the jeans market declined last quarter while Levi’s brand grew 6 percent in constant currencies.

“We’re clearly growing share with new styles,” Singh said, pointing to the “baggy dad” style.

So the baggy dad wins — for now — but the on-trend style and all the other steps Levi’s is taking to keep its brand front and center are just going to have to keep winning, overcoming inflation, wage pressure, pandemic, war, doubts on Wall Street and more.