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Levi Strauss (LEVI) Q1 Earnings Beat, Digital Sales Robust

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In spite of the pandemic-induced challenges, Levi Strauss & Co. (LEVI - Free Report) delivered stronger-than-anticipated results in first-quarter fiscal 2021. The company’s online business was robust. Also, the company saw higher margins and improved SG&A on cost-control actions. Management raised outlook following the solid first-quarter performance and stronger trends as the company entered the second quarter.

Impressively, shares of this global leader in jeans wear rallied 4.6% during after-hour trading on Apr 8. Markedly, this Zacks Rank #3 (Hold) stock has gained 32.1% in the past six months compared with the industry’s rally of 30%.

Here's How Q1 Earnings Scorecard Looks

Levi Strauss posted adjusted quarterly earnings of 34 cents a share that comfortably exceeded the Zacks Consensus Estimate of 24 cents. Notably, this marked the company’s fifth successive earnings beat. The company had reported earnings of 40 cents in the year-ago quarter. This year-over-year decline reflects adverse revenue impact of the pandemic and higher interest expenses.

We note that net revenues of $1,305.6 million surpassed the Zacks Consensus Estimate of $1,250 million. However, the metric fell 13% year over year on a reported and 16% on a constant-currency basis owing to the impact of the pandemic such as lower traffic as well as closures of the company-operated and third-party retail locations for some point in the quarter in some markets. Also, the reported quarter does not incorporate the benefit of a Black Friday as was the case in the year-earlier quarter. This negatively affected revenues by about 3 percentage point year over year.

Let’s Delve Deeper

Levi Strauss is focused on digital initiatives. The global digital net revenues, which comprise e-commerce sites, and the online business of pure-play and traditional wholesale customers, surged roughly 41% year over year during the quarter under review, representing roughly 26% of total revenues. Within digital, revenues from e-commerce sites were 10% of overall revenues, higher than 7% in the year-ago period.

During the first quarter, wholesale revenues dropped 4% but showed a significant improvement from the fourth-quarter decline of 15% on solid performance by the company’s global digital business. Again, direct-to-consumer revenues plunged 26% on lower traffic at brick-and-mortar stores induced by the pandemic, especially in tourist locations. The tourist locations comprise a major portion of the company’s brick and mortar network. We note that lack of a Black Friday in the current fiscal year hurt direct-to-consumer net revenues growth by nearly 5 percentage points year over year.

Nonetheless, the brick-and-mortar decline was partly offset by a 25% increase in the company operated e-commerce business on gains from the accelerated omni-channel initiatives. Notably, direct-to-consumer locations and e-commerce accounted for 26% and 10%, respectively, of overall revenues in the reported quarter. Moreover, the company is on track with the rolling out of its NextGen store globally. Levi Strauss’ loyalty program membership bodes well.

How Margins Fare?

Adjusted gross profit amounted to $752.8 million, which declined 10.3% from the year-ago quarter. Adjusted gross margin — excluding the pandemic-related charges — expanded 200 basis points (bps) to 57.7% on account of price increases, positive product mix and lower promotions, somewhat offset by a lower proportion of sales in the higher-margin direct-to-consumer channel. Also, currency exchange rates favorably impacted the metric by nearly 70 bps year over year.

Furthermore, adjusted SG&A expenses contracted nearly 11% to $578.8 million owing to cost-reduction efforts. Meanwhile, adjusted EBIT came in at $174 million, down 8% year over year. However, adjusted EBIT margin increased 70 bps to 13.3% on higher gross margin and cost-reduction efforts. At constant currency, adjusted EBIT margin improved 30 bps.

Regional Performance

Net revenues in the Americas tumbled 14% to $641.3 million. While direct-to-consumer net revenues fell 29%, wholesale net revenues decreased 5%, due to COVID-19. This was partly offset by a 15% rise in the company-operated e-commerce business and growth at the U.S. wholesale unit on strength in the Levi’s and Signature brands.

Net revenues in Europe decreased 16% to $429 million and 22% at constant currency on store closures led by the pandemic. During the reported quarter, about one-third of the region’s stores were shut, mainly in higher-volume markets. However, the company’s e-commerce business and broader digital footprint were robust, growing 35% and 73%, respectively.

Net revenues in Asia dropped 5% to $235.3 million and 8% at constant currency due to the adverse impacts of COVID-19 across channels and markets. This was partly offset with e-commerce and the region's broader digital footprint, which increased 54% and 68%, respectively. Revenues surged 30% in China with growth in all channels.

A Sneak Peek Into Other Metrics

Levi Strauss ended the quarter with cash and cash equivalents of $1,973.6 million and short-term investments of $94.3 million. These were complemented by $689 million available under its revolving-credit facility. This resulted in a total liquidity position of roughly $2.8 billion.

As of Feb 28, 2021, long-term debt and total shareholders’ equity were $1,262.7 million and $1,407 million, respectively. Further, the company’s leverage ratio was 6.8 at the end of the quarter, up from 1.4 at the end of the year-ago quarter. Total inventories, net of reserves, were down 2% year over year at the end of the quarter.

We note that interest expense is expected to decline in the upcoming quarters as management issued $500 million of 3.5% coupon U.S. dollar bonds, utilizing the proceeds with cash on hand to repay $800 million of 5% coupon bonds during March 2021.

In March, the company paid majority of its 5% notes. The lower coupon and debt reduction is likely to save about $20 million annually in interest expense. Management expects paying down the remaining $200 million of 5% notes in the second half of fiscal 2021.

For the three-month period ended Feb 28, 2021, net cash provided by operating activities was $69.5 million. The company generated negative adjusted free cash flow of $9.2 million during the said period.

Furthermore, Levi Strauss paid dividends of 4 cents per share worth $16 million in the fiscal first quarter. In April 2021, management hiked dividend to 6 cents a share. This will be payable on or after May 25, 2021, to shareholders of record of Class A common stock and Class B common stock as on May 7.

COVID-19 Updates

During the reported quarter, the company witnessed temporary door closures across geographies owing to COVID-19 lockdowns. About a third of the total store footprint in Europe and 15% of doors globally were shut in the fiscal first quarter. Currently, above 40% of the full store footprint in Europe is shut while others are operating on limited hours.

Although Levi Strauss is navigating the pandemic impact, it has been elevating brands, investing in digital tools and capabilities, and pacing up efforts to diversify across geographies, product categories and distribution channels. The channels also include the company’s direct-to-consumer and digital businesses. Encouragingly, the quarterly trends have been improving sequentially.

However, the ultimate impact of the pandemic is uncertain. Consequently, management expects the results of operations, including revenues, earnings and cash flow, to continue to have a significant adverse impact, at least through the fiscal second quarter. Also, the possibility of more pandemic-related inventory and other charges might stay.

Outlook

Management raised outlook following the solid first-quarter performance and stronger trends as the company entered the second quarter. It now projects a year-over-year growth of 24-25% in revenues for the first half of fiscal 2021. This is higher than revenue growth of 18-20% guided earlier.

This upbeat first-half outlook reflects revenue growth of around 140% for the second quarter, up from 120% predicted earlier. Management envisions adjusted earnings per share of 7-8 cents in the same quarter, bringing first-half adjusted earnings to 41-42 cents a share. Further, currency is likely to again drive revenues and adjusted earnings per share in comparison to the prior year. However, the company assumes that the store closures in Europe will persist through mid-May.

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