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Levi Strauss (LEVI) Gains on Q3 Earnings & Revenue Beat
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Levi Strauss & Co. (LEVI - Free Report) reported better-than-expected top and bottom lines during third-quarter fiscal 2020. Impressive gains from its e-commerce business, coupled with strategic efforts, drove the quarterly performance. Markedly, management issued fourth-quarter earnings view which outpaced analysts’ expectations.
We note that shares of the global leader in jeanswear increased more than 10% in after-hours trading on Oct 6. In the past month, this Zacks Rank #3 (Hold) stock gained 15.5% and outperformed the industry’s 10% rally.
Levi Strauss Swings Back to Profit
After witnessing a loss in the second quarter, this San Francisco, California-based company posted a surprise profit. The company reported adjusted earnings of 8 cents a share against the Zacks Consensus Estimate of a loss of 27 cents. This marked the company’s third consecutive bottom-line beat in fiscal 2020. However, quarterly earnings came below 31 cents earned in the year-ago quarter.
Levi Strauss Co. Price, Consensus and EPS Surprise
Net revenues of $1,063.1 million outshone the Zacks Consensus Estimate of $767 million. However, the metric plunged 27% on a reported basis and 26% on a constant-currency basis. The downside was mainly owing to the adverse impacts of the pandemic that resulted in lower traffic and shutdown of the company-operated and third-party retail locations for parts of the quarter across some markets. Further, wholesale revenues dropped 29%.
Although trends showed a sequential improvement, management did not rule out the impact of COVID-19 on net revenues, earnings and cash flows.
Let’s Introspect
Levi Strauss remains focused on digital initiatives. The global digital revenues, which comprises of the company's e-commerce sites and the online business of its pure-play and traditional wholesale customers, surged roughly 50% year over year during the quarter under review. We note that the company has upgraded the e-commerce sites in Canada, Europe and the United States. The company is also leveraging the use of data analytics and machine learning.
Encouragingly, the company is poised well for the holiday season based on the accelerated rollout of omni-channel capabilities, including Buy Online, Pick-up In Store. It has also been reinforcing its U.S. loyalty program into its entire U.S. stores and Levi.com. Moreover, the company has been diversifying business across geographies, distribution channels and product categories. Impressively, revenues from International account for about 60% of total revenues. Management also stated that the company’s partnership with Target (TGT - Free Report) remains among the significant growth opportunities. It has announced an extension of the partnership from 140 doors to 500 doors by fall 2021.
Impressively, the company-operated e-commerce business grew 52% on gains of accelerating omni-channel efforts. Further, the company’s U.S. e-commerce business surged 61%. We note that the direct-to-consumer revenues fell 22%, which was somewhat offset by higher e-commerce revenues. Notably, direct-to-consumer locations and e-commerce accounted for 29% and 8%, respectively, of overall revenues in the reported quarter.
Moreover, adjusted gross profit came in at $569.5 million, which declined 25.7% from the year-ago quarter. Excluding the pandemic-related charges, adjusted gross margin of 53.6% expanded 60 basis points (bps) year over year, mainly on higher price and increased proportion of direct-to-consumer sales
Furthermore, adjusted SG&A fell 17.8% to $485.2 million owing to cost-reduction efforts. Notably, the metric declined at all regions, functions and categories of spend. Meanwhile, adjusted EBIT came in at $84.2 million, which tumbled 52.3% year over year. Also, adjusted EBIT margin was 7.9%, contracting 430 bps year over year.
Regional Performance
Net revenues in the Americas plunged 29% to $550 million due to lower sales at the wholesale and company-operated stores, stemming from COVID-19 impacts, which was somewhat offset by higher e-commerce revenues on increased traffic and conversions.
Net revenues in Europe decreased 16% to $390 million owing to lower sales across markets, brands, channels and categories on adverse pandemic impacts. However, the segment saw robust growth at the e-commerce business and wider digital footprint on higher traffic and conversion.
Net revenues in Asia were down 42% to $123 million due to the adverse impacts of COVID-19. In the quarter, the company witnessed a significant decline of $51 million in India, where majority of the states were in mandated lockdown throughout the quarter. Excluding India, net revenues fell 24%. However, e-commerce revenues increased on higher traffic and conversion.
Other Financials
Levi Strauss ended the quarter with cash and cash equivalents of $1,353 million and short-term investments of $72 million. These were complemented by $608 million available under its revolving-credit facility. This resulted in a total liquidity position of roughly $2 billion. As of Aug 23, long-term debt and total shareholders’ equity were $1,543.3 million and $1,191.3 million, respectively. Further, the company’s leverage ratio was 4.5 at the end of the quarter, up from 1.4 at the end of the same quarter a year ago. Total inventories edged up 1% to $944.3 million year over year.
During the first nine months of fiscal 2020, cash from operations was $241 million. Further, adjusted free cash flow was negative $31 million during the same period, mainly reflecting increased share repurchases. Notably, cash from operations increased $156 million in fiscal third quarter. Also, the company reverted to positive adjusted free cash flow generation in the reported quarter, which grew $195 million versus the year-ago period.
Outlook
Given the company’s strength in business and growth strategies, management remains optimistic about the fourth quarter of fiscal 2020. The impending quarter started out well, with improved trends in revenues, gross margin, EBIT and inventory for September. Accordingly, the company projects fourth-quarter revenues to decline in 14-15% range year over year. This shows a sharp deceleration in the rate of decline on a sequential basis.
Adjusted gross margin is likely to remain flat to slightly up compared to 54.3% reported in the year-ago quarter. In fact, adjusted gross margin for fiscal 2020 is likely to exceed 53.8% recorded in the year-earlier period. It expects CapEx of $160 million for fiscal.
Management envisions fourth-quarter fiscal 2020 adjusted earnings in the bracket of 14-16 cents a share. We note that the Zacks Consensus Estimate for the quarter is pegged at 10 cents, which is likely to witness upward revisions in the coming days.
Earnings projection for fiscal fourth quarter includes lower adjusted SG&A of $80-$100 million versus the prior-year period, in spite of an acceleration of advertising to roughly 8% of fourth-quarter revenues and higher costs from the fiscal 53rd week in the quarter. These projections assume no significant foreign-currency translation during the quarter.
As uncertainty remains, management will not pay a dividend in the fiscal fourth quarter. However, if positive business trends continue, the company expects a return to paying quarterly dividends in fiscal 2021.
Sprouts Farmers Market (SFM - Free Report) has a long-term earnings-growth rate of 9.2% and a Zacks Rank #2 (Buy).
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Levi Strauss (LEVI) Gains on Q3 Earnings & Revenue Beat
Levi Strauss & Co. (LEVI - Free Report) reported better-than-expected top and bottom lines during third-quarter fiscal 2020. Impressive gains from its e-commerce business, coupled with strategic efforts, drove the quarterly performance. Markedly, management issued fourth-quarter earnings view which outpaced analysts’ expectations.
We note that shares of the global leader in jeanswear increased more than 10% in after-hours trading on Oct 6. In the past month, this Zacks Rank #3 (Hold) stock gained 15.5% and outperformed the industry’s 10% rally.
Levi Strauss Swings Back to Profit
After witnessing a loss in the second quarter, this San Francisco, California-based company posted a surprise profit. The company reported adjusted earnings of 8 cents a share against the Zacks Consensus Estimate of a loss of 27 cents. This marked the company’s third consecutive bottom-line beat in fiscal 2020. However, quarterly earnings came below 31 cents earned in the year-ago quarter.
Levi Strauss Co. Price, Consensus and EPS Surprise
Levi Strauss Co. price-consensus-eps-surprise-chart | Levi Strauss Co. Quote
Net revenues of $1,063.1 million outshone the Zacks Consensus Estimate of $767 million. However, the metric plunged 27% on a reported basis and 26% on a constant-currency basis. The downside was mainly owing to the adverse impacts of the pandemic that resulted in lower traffic and shutdown of the company-operated and third-party retail locations for parts of the quarter across some markets. Further, wholesale revenues dropped 29%.
Although trends showed a sequential improvement, management did not rule out the impact of COVID-19 on net revenues, earnings and cash flows.
Let’s Introspect
Levi Strauss remains focused on digital initiatives. The global digital revenues, which comprises of the company's e-commerce sites and the online business of its pure-play and traditional wholesale customers, surged roughly 50% year over year during the quarter under review. We note that the company has upgraded the e-commerce sites in Canada, Europe and the United States. The company is also leveraging the use of data analytics and machine learning.
Encouragingly, the company is poised well for the holiday season based on the accelerated rollout of omni-channel capabilities, including Buy Online, Pick-up In Store. It has also been reinforcing its U.S. loyalty program into its entire U.S. stores and Levi.com. Moreover, the company has been diversifying business across geographies, distribution channels and product categories. Impressively, revenues from International account for about 60% of total revenues. Management also stated that the company’s partnership with Target (TGT - Free Report) remains among the significant growth opportunities. It has announced an extension of the partnership from 140 doors to 500 doors by fall 2021.
Impressively, the company-operated e-commerce business grew 52% on gains of accelerating omni-channel efforts. Further, the company’s U.S. e-commerce business surged 61%. We note that the direct-to-consumer revenues fell 22%, which was somewhat offset by higher e-commerce revenues. Notably, direct-to-consumer locations and e-commerce accounted for 29% and 8%, respectively, of overall revenues in the reported quarter.
Moreover, adjusted gross profit came in at $569.5 million, which declined 25.7% from the year-ago quarter. Excluding the pandemic-related charges, adjusted gross margin of 53.6% expanded 60 basis points (bps) year over year, mainly on higher price and increased proportion of direct-to-consumer sales
Furthermore, adjusted SG&A fell 17.8% to $485.2 million owing to cost-reduction efforts. Notably, the metric declined at all regions, functions and categories of spend. Meanwhile, adjusted EBIT came in at $84.2 million, which tumbled 52.3% year over year. Also, adjusted EBIT margin was 7.9%, contracting 430 bps year over year.
Regional Performance
Net revenues in the Americas plunged 29% to $550 million due to lower sales at the wholesale and company-operated stores, stemming from COVID-19 impacts, which was somewhat offset by higher e-commerce revenues on increased traffic and conversions.
Net revenues in Europe decreased 16% to $390 million owing to lower sales across markets, brands, channels and categories on adverse pandemic impacts. However, the segment saw robust growth at the e-commerce business and wider digital footprint on higher traffic and conversion.
Net revenues in Asia were down 42% to $123 million due to the adverse impacts of COVID-19. In the quarter, the company witnessed a significant decline of $51 million in India, where majority of the states were in mandated lockdown throughout the quarter. Excluding India, net revenues fell 24%. However, e-commerce revenues increased on higher traffic and conversion.
Other Financials
Levi Strauss ended the quarter with cash and cash equivalents of $1,353 million and short-term investments of $72 million. These were complemented by $608 million available under its revolving-credit facility. This resulted in a total liquidity position of roughly $2 billion. As of Aug 23, long-term debt and total shareholders’ equity were $1,543.3 million and $1,191.3 million, respectively. Further, the company’s leverage ratio was 4.5 at the end of the quarter, up from 1.4 at the end of the same quarter a year ago. Total inventories edged up 1% to $944.3 million year over year.
During the first nine months of fiscal 2020, cash from operations was $241 million. Further, adjusted free cash flow was negative $31 million during the same period, mainly reflecting increased share repurchases. Notably, cash from operations increased $156 million in fiscal third quarter. Also, the company reverted to positive adjusted free cash flow generation in the reported quarter, which grew $195 million versus the year-ago period.
Outlook
Given the company’s strength in business and growth strategies, management remains optimistic about the fourth quarter of fiscal 2020. The impending quarter started out well, with improved trends in revenues, gross margin, EBIT and inventory for September. Accordingly, the company projects fourth-quarter revenues to decline in 14-15% range year over year. This shows a sharp deceleration in the rate of decline on a sequential basis.
Adjusted gross margin is likely to remain flat to slightly up compared to 54.3% reported in the year-ago quarter. In fact, adjusted gross margin for fiscal 2020 is likely to exceed 53.8% recorded in the year-earlier period. It expects CapEx of $160 million for fiscal.
Management envisions fourth-quarter fiscal 2020 adjusted earnings in the bracket of 14-16 cents a share. We note that the Zacks Consensus Estimate for the quarter is pegged at 10 cents, which is likely to witness upward revisions in the coming days.
Earnings projection for fiscal fourth quarter includes lower adjusted SG&A of $80-$100 million versus the prior-year period, in spite of an acceleration of advertising to roughly 8% of fourth-quarter revenues and higher costs from the fiscal 53rd week in the quarter. These projections assume no significant foreign-currency translation during the quarter.
As uncertainty remains, management will not pay a dividend in the fiscal fourth quarter. However, if positive business trends continue, the company expects a return to paying quarterly dividends in fiscal 2021.
Key Picks in Retail
Tapestry (TPR - Free Report) has a long-term earnings-growth rate of 9.3% and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sprouts Farmers Market (SFM - Free Report) has a long-term earnings-growth rate of 9.2% and a Zacks Rank #2 (Buy).
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>