Levi Strausswhich has long relied on wholesalers such as Messi And Cole To drive its business, it now makes nearly half of its sales through its website and stores, the company said Wednesday when announcing fiscal first-quarter earnings.
In the three months ended Feb. 25, direct-to-consumer sales accounted for a record 48% of total sales at Levi's, up from 42% in the same period last year and up 25% on a two-year basis, the retailer said. He said
The shift is a boon to Levi's earnings. But it raises questions about the company's relationships with its wholesale partners and whether it will hurt those retailers as they grapple with their existential challenges.
Levi's also beat Wall Street earnings and revenue estimates and raised its full-year guidance. Shares rose as much as 10% in extended trading.
Here's what the blue jeans maker did in its fiscal first quarter compared to what Wall Street expected, based on a survey of analysts conducted by LSEG, formerly known as Refinitiv:
Earnings per share: 26 cents adjusted vs. 21 cents expected Revenue: $1.56 billion vs. $1.55 billion expected
The company incurred a net loss of $10.6 million, or 3 cents per share, during the quarter, compared to net income of $114.7 million, or 29 cents per share, in the same period last year. Excluding one-time costs related to Levy's restructuring, the company reported earnings per share of 26 cents, ahead of Wall Street estimates.
Sales fell to $1.56 billion, down about 8% from $1.69 billion the previous year. The sales decline was primarily attributable to a shift in Levi's wholesale orders, which resulted in an approximately $100 million increase in earnings in the same period last year.
Levi's still expects full-year sales to rise between 1% and 3% as it faces a slowdown in discretionary spending and an uncertain economy. But it expects profits to be higher than previously thought. The retailer now expects adjusted EPS to be between $1.17 and $1.27, up from the previous range of $1.15 to $1.25.
Analysts had expected sales to grow 2.4% on a full-year basis and earnings per share to be $1.21, according to LSEG.
Over the past two years, Levi's has moved away from wholesalers and done more of its sales through its own stores and website. Selling directly to consumers boosts Levi's profits and gives it better data about its customers and their shopping patterns
Perhaps more importantly, moving away from wholesalers gives Levi greater control over its destiny and reduces its exposure to department stores, which continue to shrink and face an uncertain future in the United States.
In late February, Macy's — a major wholesale partner of Levi's — announced it would close 150 stores as activist investors Arkhouse Management looked to buy the department store and take it private. The company invests primarily in real estate and is seen as more interested in generating income from Macy's sprawling department store footprint rather than running a retail business.
In an interview with CNBC, CEO Michelle Gass, who took the helm at Levi's about two months ago, said wholesale remains an important part of the company's strategy. If Macy's store closures or other challenges facing department stores impact Levi's business, she expects direct-to-consumer sales to offset those losses.
“We work very closely with our key customers because we are important to them, they are important to us, and strategically, wholesale is critical for us to expand consumer reach,” Gass said. “Although there are pressures, these wholesale customers serve millions of consumers, so there is still a lot of opportunity to increase market share within that channel.”
Levi's previously said it was working to make direct-to-consumer sales account for 55% of total sales, but if that number can go higher, the company is “all for it,” CFO Harmeet Singh said.
Meanwhile, Gass said Levi's is working “closely” with its key wholesale customers to ensure the brand looks “in the best way possible.”
During the quarter, global wholesale revenues decreased 9% compared to the prior year when adjusted for the shift in wholesale orders that occurred in the same period last year.
This weakness was driven by Europe, which Gass said had a “difficult” quarter.
“As we look ahead, we are optimistic. Our forward books for the second half in Europe wholesale are positive based on the innovation and fashion we bring,” Gass said.
Levi's was also in the process of transforming itself into a retailer that did more than just sell jeans. It's working on offering more skirts, dresses and tops, and wants to be seen as a denim lifestyle company, not just a blue jeans company.
As part of these efforts, the company said it was essential to remain at the “center of culture.” And on Friday, she got a handy boost when Beyoncé named a song after the brand on her new album, “Cowboy Carter,” called “Levii's Jeans.”
The song, a collaboration with Post Malone, celebrates Levi's with lyrics like “I love it when you tease me in jeans” and “I don't need a designer.”
In a call with analysts, Jas was asked about the song and whether it contributed to the rise in sales. While she stopped short of saying it had any impact on revenue, she called the honor an “honor.”
“Denim is having a big moment, and the Levi's brand is having a strong moment around the world,” Gass said. “We're very focused and invested in making sure the Levi's brand stays at the center of the culture, and I don't think there's any better proof or proof point than having someone like Beyoncé, who is shaping the culture, actually name a song after us so we're very proud of that.”
During the quarter, sales of items such as denim skirts, dresses and T-shirts rose 19% in Levi's direct-to-consumer channel, Gass said. The products also performed well in wholesale, she said
Levi's efforts come at a time when consumer spending on discretionary products like apparel and accessories is under pressure as shoppers look to use their extra dollars on things like dining out, travel or paying off debt.
In late January, Levi's said it would cut 10% to 15% of the company's global workforce, which is expected to save the company about $100 million during the fiscal year.
