Levi's on Thursday reported that fourth quarter net revenue fell 2% to $1.6 billion and full year net revenue grew 3%. Gross margins in the quarter expanded by 110 basis points, reflecting lower sales to the off-price channel and the benefit of price increases, and were flat for the year, according to a company press release.
Net income in the quarter fell 2% as adjusted net income fell 9%, "both reflecting lower non-operating income." For the year, net income grew 39%, as adjusted net income grew 9%, the company also said.
The company's hopes for growth in Asia were challenged by unrest in Hong Kong and the outbreak of the coronavirus in Mainland China, the company said. To protect workers, the company temporarily closed about half its fleet in China, which presumably includes a newly opened store in Wuhan, the epicenter of the disease, and stopped employee travel in and out of the country, CEO Chip Bergh told analysts Thursday.
Since going public last year, Levi's is making good on a brand pivot that leverages its status as an American icon while meeting demands for personalization and customization and boosting direct sales through e-commerce.
A key to its effort to fight U.S. consumers' preference for lower-priced denim, the company has pulled away from selling through off-price stores. That helped boost margins in the fourth quarter, when inventory was also stabilized.
The company sees high potential in both Europe and Asia, with plans to accelerate growth in mainland China in 2020. Asia delivered 1% net revenue growth in the fourth quarter, and Bergh noted that Mainland China represents 3% of the company's business. The Wuhan store, opened in October, is Levi's largest in China, at just over 7,500 square feet on three levels, and features the brand's signature tailor shop and local Wuhan art.
Levi's joins several other U.S. and global retailers in shuttering stores in China and banning travel, including Ikea, LVMH, Starbucks, McDonald's and Uniqlo, and airlines are cutting flights, according to a report from Coresight Research emailed to Retail Dive. Fortunately, the disease has a lower mortality rate than even the flu in the U.S., but it's unclear when the outbreak will be contained, according to the report.
In any case, Levi's growth ambitions in the country are still on track, Bergh told analysts, though the company listed the effects of the outbreak as uncertain in its 10K filing to the Securities and Exchange Commission. Bergh said the company expects to report on that more fully when it releases its first quarter results.
"[T]his will put a damper on our growth in China in the near term," he said. He added that, "December was a very strong month, and then the virus had a significant impact to our business in January. It's really unfortunate how the outbreak of the recent virus has been impacting people's lives, especially during the Chinese New Year. We're taking this seriously and responsibly, with our top priority being our people and our business partners."