Levi’s CEO Chip Bergh has a simple message to investors who were left a little lighter in the jeans pocket following the company’s second quarter earnings in mid-July.
Bergh’s message you ask? Levi’s is doing better than fine, even if key department store clients continue to close underperforming stores and threats of further tariffs on China sourced apparel from the Trump administration lurk around the bend.
“We are super optimistic on Levi’s underlying business,” Bergh, decked out in stylish camo Levi’s jeans and a blue long-sleeved denim shirt, said in an interview at Yahoo Finance’s headquarters. Bergh acknowledged that Levi’s needs to do a better job articulating certain trends in its business to Wall Street.
Both call outs are on the mark.
Levi’s had a July, so to speak
One can’t blame investors for perhaps misunderstanding Levi’s second quarter as a public company.
Levi’s reported second quarter sales of $1.31 billion in mid-July, beating analyst forecasts for $1.29 billion. Earnings crossed the newswires at $0.07 a share, falling short of estimates of $0.12 a share. But Levi’s said excluding some $29 million in costs related to its late March IPO — which are one-time in nature — actual earnings tallied $0.17 a share.
That’s obviously better than Wall Street expected. And considering how challenged retail is right now, an earnings beat from an apparel brand deserves to be rewarded.
Alas, that didn’t happen. Levi’s stock was hammered by 12.3% the day after earnings were released in the evening. The stock has continued to tread water since.
Investors have latched onto are Levi’s trends at U.S. wholesalers, a sector of retail that Bergh readily admits continues to be pressured.
Levi’s second quarter sales trends at U.S. wholesale accounts — mostly department stores such as Macy’s and Sears — dropped 2%. That shouldn’t be a shocker to anyone investing in the retail space and in fact, it’s stronger than most rivals, according to industry sources. Even still, that result — and more cautious commentary on the outlook for wholesale by Bergh on the analyst conference call — likely spooked some investors.
To combat the wholesale weakness, Bergh says Levi’s will continue to open its own retail stores (now at 3,000-plus) and ask important vendors to carry more of its products as opposed to struggling brands.
Goldman Sachs analyst Alexandra Walvis still took a hammer to her rating on Levi’s in the days following the quarterly report.
“Solid brand momentum is driving healthy growth in DTC channels and international regions. However, recent results were evidence that the company is not immune from headwinds in the U.S. wholesale channel,” Walvis wrote in a note to clients.
The analyst downgraded her rating on Levi’s to Sell from Hold.
The positives are certainly there on Levi’s
Despite the quarterly scorecard blemishes, Levi’s checked a bunch of boxes as a brand well-positioned to win in an ultra-competitive apparel space.
Operating income growth for Levi’s Americas, European and Asia segments excluding volatile currency swings outpaced sales growth in the second quarter. Always a positive sign for a retailer. Sales of men’s products rose 6%, women’s surged 16%, bottoms gained 8% and tops spiked 14%.
Sales of cut-off shorts alone exploded 50% due to Levi’s positioning at the popular Coachella music festival. Levi’s reported that inventory levels continue to be healthy.
“The company delivered another quarter of solid top-line growth despite a challenging backdrop,” wrote veteran retail analyst Robert Drbul at Guggenheim Securities. “We believe the Levi’s brand commands a modest premium given its increasing strength and several growth opportunities, globally, with several brand equity management efforts ongoing (Coachella and “Stranger Things” partnerships, to name a few).”
Collaborations with other brands
More recently, Levi’s has rolled out collaborations with Netflix’s “Stranger Things” and Hello Kitty. For Bergh, these tie-ups are yet another sign of Levi’s ability to stay culturally relevant during a time where there is so much choice in apparel. And by being able to stay relevant, it raises the prospects of keeping the brand’s sales momentum intact.
Bergh is also quick to tout new leadership in China, which is now executing on a plan to take the brand more upscale and to open better performing stores. Excess inventory in China has been cleaned up, Bergh says, and now the brand could push toward a goal of having more than 1,000 stores open in the country (about 500 currently).
Bring on that next earnings call — Bergh & Co. will be ready.