Dive Brief:
- Levi Strauss & Co. beat expectations in Q1, thanks mostly to its wholesale operation. Net revenues rose 14% year over year to $1.7 billion. Direct-to-consumer rose 16% to over $911 million and wholesale rose 12% to $831 million.
- Levi’s brand net revenues rose 14% to $1.6 billion, and the lower-priced Signature brand rose more than 16% to nearly $66 million. Beyond Yoga net revenue rose 23% to over $43 million.
- The denim giant is searching for someone to replace Chief Financial and Growth Officer Harmit Singh, who is retiring. Singh is staying on until a replacement is found and during a planned transition period.
Dive Insight:
Levi’s renewed strength in wholesale in Q1 showed up here and in Europe, a pleasant surprise to both executives and analysts after a string of declines. The results are a marker of the overall health of the business, CEO Michelle Gass told analysts Tuesday.
“Growth in wholesale reflects the momentum behind our lifestyle assortment, the strength of our partnerships and our commitment to reaching Levi's fans wherever they choose to shop,” she said.
In the U.S., wholesale grew even though the company let go of some retailer partnerships, according to Singh. UBS analysts led by Jay Sole expect U.S. wholesale to deliver top-line growth in the mid-single digits or so for the next few years.
“We believe this solid performance reflected momentum of Levi’s lifestyle assortment with wholesale partners, including in women’s and tops,” Sole said in a Wednesday client note.
The direct-to-consumer channel has been in focus for Levi’s for a while as a way to boost sales and margins, and last fall the company said it aims to double its own store count. But DTC has also emerged as a useful testing area to see what will succeed in wholesale, Singh said.
“I would say the thought is — start with DTC, prove it out, and then, you know, showcase that, so that your partners buy,” he said.
Gass noted that Levi’s is benefiting from its effort to expand into tops and non-denim categories. But the company is also getting a major boost from “a denim trend that is working in their favor,” Needham analysts led by Tom Nikic said in a Wednesday client note.
Tariffs took a bite out of margins again in Q1, as gross margin declined but beat expectations, reaching 61.9%. Import levies were largely responsible for the 20 basis point decline, though Levi’s expects its mitigation efforts to fully offset the impact of tariffs this year.
As the impact of tariffs fades, though, concerns about the health of the consumer are on the rise.
“We are very cognizant of the environment around us, but our consumer is responding to innovation, newness, and Levi's is a great value,” Gass said. “So we'll stay close, but given what we're seeing on the business and how we started this quarter, we feel very confident, and hence why we were confident enough to raise our guidance for the year.”
Levi’s now expects reported net revenues to grow 5.5% to 6.5%, up from 5% to 6%, and gross margin to be flat or up slightly year over year, up from the expectation that gross margin would only be flat.
