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5 Things Levi Strauss Management Wants You to Know

By Steve Symington – Apr 10, 2019 at 9:20PM

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The recently IPO'd clothing company just buttoned up its first quarter since going public. Here's what management wants investors to know.

Less than three weeks removed from its initial public offering, Levi Strauss (LEVI 0.34%) just announced strong first-quarter 2019 results, and the market was rightly impressed. Shares climbed as much as 9.2% early Tuesday, then settled to close up 4%.

To be fair, there were no formal analyst estimates or financial guidance to compare. But the iconic clothing brand's quarterly revenue climbed 7% year over year -- or 11% at constant currency, marking its sixth consecutive quarter of double-digit growth -- to $1.435 billion. On the bottom line, Levi's adjusted (non-GAAP) net income soared an even more impressive 81% to $151 million.

Now that the dust has settled, it's a good idea for investors to take a closer look at the underlying drivers of Levi's business. Lucky for us, management offered invaluable insight to that end during their subsequent conference call with analysts. 

Here are five important points they brought up during this quarter's call:

Blue jeans attached to clothes hangers on a store rack


1. Levi's strength is broad-based

Momentum continued across nearly every part of the business. The way we diversified our portfolio across geographies, customers, brands, genders, and products has become a major growth driver and differentiator for us. [...] Each of our three geographic regions grew revenues and profits double-digits, and within each region, every channel and nearly every market grew. All four of our brands grew. Our men's business grew 8%. Our women's business grew 18%. Bottoms were up 8%. Tops were up 28%. And global wholesale was up 8% while our global direct-to-consumer channel was up 14%.

-- Levi Strauss CEO Chip Bergh  

To be clear, while Levi's overall business is propped up by its core namesake men's bottoms, we should remember it also fosters the Dockers, Signature by Levi Strauss, and Denizen brands. Furthermore, shareholders should be pleased that its diversification efforts are proving fruitful for driving growth across distribution channels and geographies.

2. On focusing on the long term

We're entering this new chapter with a business that is stronger and more diversified than it's been in decades, as a result of our iconic brands, our people, great execution, and commitment to our long-standing approach to profits through principles. The strong results we delivered this quarter demonstrate that the strategic choices that we put in place seven years ago to drive the profitable core, expand for more, become a world-class omni-channel retailer, and achieve operational excellence continue to pay off with broad-based growth balanced across a more diversified portfolio.

-- Bergh

At the same time, we're also talking about driving growth for a business that, by many accounts, is relatively mature. To consistently accomplish that feat, it's crucial that Levi Strauss doesn't simply chase low-quality, near-term growth opportunities that will fade in time. Thankfully, that seems to be a lesson Levi's management has taken to heart.

3. On lumpy near-term advertising costs

[A]dvertising spend was low in the first quarter, because [the] 2018 advertising campaign came earlier. This will reverse in the second quarter as we ramp up for our 2019 campaign. Net-net, we expect advertising as a percentage of revenue for the first half of 2019 to be in line with prior year.

-- Levi's CFO Harmit Singh

Of course, driving top-line growth from mature brands requires a concerted marketing effort. And this shift in timing likely helped spur Levi's outsized earnings growth to start 2019. We shouldn't be shocked, then, if Levi's earnings growth rates wane as the company's marketing spend returns to more normal levels in the coming quarters.

4. China is a "huge" deal

China continues to be a huge long-term opportunity for us. In fact, it was the first market I visited after the IPO. And having just returned, I'm very encouraged that we're headed in the right direction. [...] We're making good progress building the broader team after hiring Managing Director, Amy Yang, late last year. In the first quarter of 2019, revenues grew 5% in China, helped by growth in our company-operated e-commerce in mainline stores. But there's still more work to do on the franchise business and this will take some time. We feel we barely scratched the surface in China, and we'll continue to focus on strengthening and growing our brands and business in this important market. -- Chip Bergh

Later in the call, Singh added that the company had only recently "reset the foundation of [its] strategy" in China. This helps explain why revenue growth in the Middle Kingdom lagged the increases in both Levi's overall sales and the 8% growth (or 13.8% at constant currencies) from Asia as a whole. 

As an aside -- and more on this topic below -- Levi's investors should remain mindful of the threat of Chinese tariffs going forward.

5. On Levi's light forward guidance

The underlying health of our business remains strong, but as a reminder, we're still facing some headwinds, including anticipated door closures at traditional wholesale customers, unrest in Europe, as well as Brexit, continued uncertainty around China tariffs, and declines in U.S. retail traffic as we exited the quarter, but we run this company for the long-term and we're focused on controlling what's within our control. -- Chip Bergh

More specifically for full fiscal year 2019, Levi's expects constant currency revenue growth in the mid-single-digit percent range. Later in the call, Singh elaboarted that they realize "this may sound conservative." But the company also likely realizes it's better to under-promise and over-deliver than the other way around. Considering the market opted instead to focus on their relative outperformance in the first quarter, I would argue they made the right move in walking that fine line.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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