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Levi’s CFO on earnings, digital growth and store closures

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Levi’s CFO Harmit Singh joins Yahoo Finance Live to discuss the company’s most recent quarterly results and outlook.

Video Transcript

- Levi's is out with better than expected sales and earnings for its most recent quarter. The company also says it will be back to pre-pandemic sales levels by the end of 2021. Levi's CFO Harmit Singh is here with us now with more.

Harmit, always good to see you this morning. Let's start with the stock price. The stock is under pressure this morning, close to 7%. And from what I can decipher, just talking to my analyst friends, there is some concern on how many stores you have closed globally because of the pandemic. What's the latest on that?

HARMIT SINGH: So good morning, Brian. Thanks for having me on the show. It's difficult to predict what drives the stock on a daily basis. But let's go to the business performance. We had a real solid quarter. We beat the top line and the bottom line expectations, and we generated a lot of cash that allowed us to reinstate dividends.

And as we think about the longer term-- because we run the company for the longer term-- the sequential improvement in our business quarter over quarter, including through holiday, is really encouraging. We are confident we are going to be emerging stronger as we grow our digital business. We are really strong on the women's side. And as a company, we have talked about getting to our operating margins of 12% when we return to pre-pandemic levels, which we think begins to happen in quarter four of this year. And we are generating a lot of cash.

To your question about store closures. You know, we put our consumers and employees at the front of every action. And ensuring they're safe is important. So because of the resurgence of the virus, there is short term pressure, especially in quarter one, especially in Europe. Most of our closures are in Europe. But the good news for us is that we are recapturing about 50% of sales we are losing in brick and mortar as we grow our digital business, which is today profitable.

So I think, thinking about the business for the longer term, we feel really strong about where we are headed and the pivot we are making to meet consumer demand, which is shifting thanks to the pandemic.

- Yeah, let's talk about that shift, Harmit. Because I think that's really interesting. You know, most of us are sitting at home. We're in our sweats. We're not wearing jeans. And I wonder how-- sort of, how much that change is going to hold when people get back out into the world? I know you guys did roll out some sweats that, I believe, then sold out. But how-- you know, how much are you going to pivot in that direction without sacrificing the sort of identity of Levi's, which is synonymous with jeans.

HARMIT SINGH: Yeah, you know, the casualization really plays to our strengths. We are selling a lot of jeans, even in today's environment. And our market shift, for example, both in the men's and women's side on denim continues to be really, really strong. Relative to the casualization, I'm wearing what we just rolled out, the red tab sweats. And we have said that our intention long term is to get our non-denim bottom business to approximately 50% of our business. And, you know, the red tab sweat is a great example of it. We still have a lot of tops to sell. We still have not penetrated in that category.

And you're right, the red tab sweat launch, which was a-- a test, I would say, sold out. So we're going to come back on a global basis later in '21. But the other changes are really working to our advantage. The other piece is the digitization of the consumer experience. We are growing our digital business, which is now profitable. Are we connecting with the younger consumer? They really love brands that they can trust, brands that are sustainable, and we play really-- really well in the sustainable space.

For example, last year, we launched the cottonized hemp in our products. We have a recycle program through Levi's Second Hand. So our connection with the younger consumer is really growing and really making a big difference.

- Yeah, Harmit, I'm so used to seeing you in the Levi's jacket. You took me off guard with this casual look. But talk to us about the fourth quarter of this year. What is the world look like to Levi's and Harmit Singh in the fourth quarter of this year? Because this is the quarter, at least you told The Street that you will return to higher growth then the fourth quarter of 2019, if I have that right. How do you get there?

HARMIT SINGH: Yeah, so, you know, it's difficult to predict the future, and visibility is low. But our view of the world is, you know, as the vaccines roll out, we believe sometime in the second half we can start approaching levels of revenue that existed in 2019. With Q4 being our first quarter where we get back to those levels. And when we get back to those levels of demand, you know, our view is operating margins get to the 12% number that we talked about largely driven by a higher gross margin business. As a business, our gross margins are growing, and that's good news for us. We're taking pricing the consumer is willing to pay largely because they love the product that we are providing.

And that's really the thinking. If we go back to Europe, Brian, pre-closure, the recent round of closures, Europe, if you take September and October, was already a little higher than '19 level. So the bounce back was pretty quick. And I think that's largely because our consumers love our brand. And the moment they can access it through stores that are open all through the digital experience we are providing. I think they'll come back and come back big.

- All right, we'll leave it there. Levi's CFO, Harmit Singh. Always good to see you. Stay safe, and we'll talk to you soon.

HARMIT SINGH: Thank you, Brian. Have a good one. Bye-bye.

- You too.