Levi's CFO: We're a stronger company after COVID-19

Levi Strauss & Co EVP & CFO Harmit Singh joins Yahoo Finance's Brian Sozzi and Julie Hyman to discuss the latest trends in jeans, the rising costs of Levi's due to inflation, and the benefits of Levi’s latest acquisition of Beyond Yoga.

Video Transcript

BRIAN SOZZI: Levi Strauss is out with better than expected quarterly sales and profits, as people rebuild their closets for a post-pandemic life. The company took the wraps off a new $200 million stock buyback plan and told analysts on a call last night, they have the spike in cotton prices under control.

Harmit Singh is the CFO at Levi Strauss and joins us now. Harmit, always nice to see you. I want to start off the beaten path here. Earlier in the show, I caught a lot of flak from my team here saying that when I said that bell bottoms are back in style, high waist jeans back in style, wide leg jeans back in style. My question to you is, what are the top trending styles? What are people really buying this fall?

HARMIT SINGH: Brian, thanks for having me. Good morning. You know, casualization is here to stay. The denim cycle is gathering momentum. In fact, the denim category has grown faster than the apparel category over the last two quarters. We set the trend by launching baggy, a looser fit. 50% of our bottoms now are baggy, looser. Men are buying it. Women are buying it.

High rises are really in, and anything that people look good in is relevant. And we, as a brand, can offer that. And the brand is really hot. We have pricing power. We've taken pricing actions. We believe we can take actions to offset inflation, which is a buzzword today.

So we are clearly emerging from the pandemic a stronger company. That's something we had said. Financially, we are stronger. Structurally, our business is more diverse and digital, and operationally, very agile, because we are facing the headwinds on supply chain and demonstrating that it's a competitive advantage for us.

JULIE HYMAN: Harmit, it's Julie here. Definitely people are feeling comfy in baggy clothing, whether it be jeans or whatever else these days. So I can understand why these things are popular. Give me a little more detail, if you could, around the price, possible price increases here. I mean, how much are your classic Levi's 501s going to set people back now and then six months or a year from now?

HARMIT SINGH: Yeah, Julie, it varies across geographies. It varies across channels. And brands like ours, which are market leaders and offer relevant products that resonate with all of you, with the consumers of all demographics, actually enable us to price where relevant.

The way we think about pricing, we basically break it up into three buckets. You price for inflation. And we have the pricing power they talked about. You price for innovation and great products, baggier products that are in style, et cetera, and then you reduce markdowns. But having said all that, our products today offer great value to the consumer.

And if you benchmark our price points versus the competitive products, we still stand out as true value, value defined as the price at which we sell plus the quality of the product we offer. And so our view of the world is we can lead those trends, and we can continue to offer products that really resonate, especially as people gear up for what we think is a strong holiday season around the corner.

BRIAN SOZZI: Harmit, I was thinking back this morning to when your CEO Chip Bergh started at Levi. That was in 2011. He came in at a time of a cotton price bubble. We are now seeing another cotton price bubble. How is Levi different today compared to that other cotton price bubble?

HARMIT SINGH: Yeah at that time, Jim Collins said to us, we probably needed a prior meeting to decide whether we want to take pricing. The brand was not hard. Direct to consumer was not as strong. And we didn't have a head to toe look. Today if you go into a Levi store, you can come out with a shirt, with a pair of denim, with trucker jackets, which you love, Brian, et cetera.

And we just closed the acquisition of Beyond Yoga. So we're entering the actiivewear segment. So it's clearly very, very different, financially, a much stronger company. Our balance sheet is very strong. You talked about the share repurchase program, et cetera. So I think we're in a very different spot. We're now market leaders by a mile and can set trends. And folks across all demographics, across all ages, love the brand.

We are resonating with the millennials. We are resonating with the younger consumer, which is something we hadn't done in 2011 and years prior to that. So we are a very different spark. And we believe we have a competitive edge in a lot of areas. And that's what is making our performance really strong. And we are emerging out of the pandemic a much stronger company.

JULIE HYMAN: I know that Sozz is over there in his Lotus position getting ready to ask you more about Beyond Yoga. But I did want to ask you one more question about supply chain, because this is something that really stuck out to me this morning in analyst commentary, that you guys manufacture across 24 countries, and no one of those countries accounts for more than 20% of your product. Is that accurate? And if so, sort of what drives that, and is that a strategy that you expect to continue or even expand that diversification?

HARMIT SINGH: Yeah you know when we set up a global supply chain, the strategy was that it is important not to put all our eggs in one basket. And that's why our supply chain is fairly diversified. You're right. We sourced from 24 countries, not any country makes up more than 20%. And Vietnam, which was in the news as an example, is less than 4%.

When the tariff issue started with China, we were sourcing into the US about 8% of our needs from China. It's down to 1%. So agility and being able to maneuver through headwinds is important. And Brian, to your previous question on cotton pricing, cotton is a key commodity for us. But we've been able to lock in the price of cotton for the first half of next year at very, very low single digit inflation, about a point higher than 21 for the first half.

And we're negotiating for the second half. And as I said, we have pricing power. We think we can offset inflationary pressures. Julie, to your question about agility, everybody's familiar with the West Coast concession. We were getting in about 35%, 40% of our needs into the US to the West Coast about 12 to 18 months ago. We've been able to divert that into the East Coast. And we now get in about 20% through the West Coast.

So agility is working and in action. And if you take quarter three, I think we probably didn't service about $10 million of demand. And for a company that generated $1.5, that's really, really small so that's where we feel we're in a real strong position as we step into a strong holiday season. There will be a Levi's product under the Christmas tree if you want to buy it.

BRIAN SOZZI: Let the record show I did Yahoo search that Lotus Pose. And I don't think I bend like that. I'm sorry, Julie. I just don't think I could do that. But Harmit, on the topic of yoga, you just closed on a $400 million acquisition. How will that brand be integrated? Will I be able to walk into a Levi's, one of your new Next Gen stores, and I will see things from this brand?

HARMIT SINGH: Yeah, so our view is first, they're a wonderful brand. It's a company that's been around for a little over 15 years. It really started with consumer insight about offering activewear to women and driving inclusivity, body positivity, and diversity is really important. So our view is it's a company that's been around. They've done a phenomenal job.

Where we can add value is build a brand, scale the brand around the world, and do it in a way that the brand is independent, so we're not, at this point, thinking that you could get Beyond Yoga in a Levi's store. Beyond Yoga will have their own stores. And as you think about growing the brand, I think the areas of growth are they can build their own stores. They can scale internationally. They can get into men's and the like, so long runway for growth.

And we're really excited about the combination of the two businesses and especially the people. It's very rare in an acquisition that the entire team comes over. But in this case, 100% of the team came across. And we are excited to be working with them and you meeting their aspirations and dreams.

BRIAN SOZZI: Now hopefully by the time that mensline launches, I will be able to do that Lotus Pose, because clearly, I'm just too rigid here. Harmit Singh, the CFO Levi Strauss, always good to see you. Have a great week.