October 9, 2019 | 1:05 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Behind The Numbers – Levi Strauss (LEVI)

Levi Strauss, the global apparel company, designs and markets jeans, casual wear and related accessories for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™, and Denizen® from Levi’s® brands.

Shares are off 5+% today after reporting Q3 earnings after the close yesterday which showed good performance in Europe and Asia but softness in its Americas segment:

-EPS of $0.31 vs $0.28 estimate – Beat
-Revenue of $1.45B vs $1.44B estimate – Beat
-Operating Margin of 12.2% vs 11.5% estimate – Beat
-Americas Revenue of $771M vs $794.5M estimate – Miss
-Europe Revenue of $463M vs $427.6M estimate – Beat
-Asia Revenue of $213M vs $208.2M estimate – Beat

Citigroup commenting that the health of the brand was supported by the company’s continued strong results in less developed categories such as tops and women’s, both of which increased double digits (and tops accelerated vs 2Q). They believe the company’s potential to grow these categories and expand internationally will drive high single to low double digit earnings growth in the coming years.

However, the elephant in the room surrounded its U.S. wholesale business. On the conference call, CEO Charles Bergh would say, “As anticipated, U.S. wholesale in the third quarter faced a tough comparison to prior year, for the reasons we’ve shared previously. Anniversarying, selling associated with the relaunch of one of Docker’s key product lines in 2018, reducing sales to the off-price channel in 2019 due to our healthier inventory, and lapping stronger sales in 2018 to a large financially distressed retailer, and the overall softness in U.S. department stores and chains primarily due to the well-publicized traffic trends there.The first three factors adversely impacted third quarter U.S. wholesale comparisons by about six points.”

Mr. Bergh would add that they are taking a segmented approach to U.S. wholesale overall, to drive the business within the broader channel, deploying various strategies to capture growth. Some examples include:

-Securing incremental distribution, including with premium customers, which is helping to premiumize the marketplace, and expand access to our better and best products to U.S. consumers.

-Expanding their pure play digital and wholesale dot.com business, while maintaining brand integrity and healthy margins.

-Growing with our partners (announced collaborations with Nike (NKE) for example) in the mass channels bringing quality products to consumers at great price points.

However, he would add that even with these strategies, “Comparison to prior year are going to be lumpy on a quarter by quarter basis, due to the timing of shipments, store closures, product launches etc. So it’s important to evaluate U.S. wholesale performance over a longer time horizon.”

In a post-earnings note, JPMorgan analyst Matt Boss added that for Q4, guidance implies constant-currency revenue decline of 1%, incorporating ~200bps headwind from a lack of Black Friday (shifting out of 4Q19 into 1Q20) and a further 300bps headwind from the combination of lower off-price sales (~130bps), lapping Dockers reset (~70bps), South America distributor buyback (~70bps), and ongoing volatility in Hong Kong (~30bps).

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