While the COVID-19 situation remains fluid, Levi Strauss (NYSE:LEVI) CEO Chip Bergh offered several reasons on the company's latest quarterly conference call as to how the denim pioneer will come out of this crisis stronger than before.
Here is what he had to say:
1. Iconic brand
It helps that Levi Strauss has one of the most recognizable brands in the world. As Bergh explained, "consumers will come back to brands that they love and trust." Levi's has been around for 167 years, which means it has survived countless wars, recessions, pandemics, and even the Great Depression in the 1930s.
Bergh said, "We're investing in strengthening our bond with our fans during these moments of isolation." Levi's is the unofficial uniform of the annual Coachella music festival in Southern California. But with all public events cancelled, Levi's has filled the void by launching a virtual music festival on Facebook's Instagram Live that will run for a month. It's great marketing for the brand, since artists like Snoop Dogg and Brett Young are performing while wearing Levi's apparel.
On the call, Bergh said, "Sentiment from this series has been so extremely positive, and we're finding more users viewing these live sessions every day."
2. Direct-to-consumer sales comprise 40% of the business
Additionally, direct-to-consumer revenue is now more than 40% of Levi's business, reducing the company's reliance on sales to struggling department stores. Furthermore, e-commerce sales have more than doubled in the last five years, making e-commerce Levi's fastest-growing channel. This is helpful now that most stores are closed. "Our strategy to diversify the business, which we've been executing now for years, makes us less vulnerable to the shocks that may be felt in some countries and channels," Bergh said.
The company recently launched a mobile app, and the early results look good. "We've seen early success with strong consumer acquisition and enrollment rates and monthly engagement with exclusive product offerings, like the recent launch of our authorized vintage collection, which has been selling through very well," Bergh said.
3. Managing costs
One of the most important things Levi Strauss can do in the short term is cut unnecessary costs and reduce inventory to match supply with demand. The main risk for any retailer when demand fades is heavy discounting to move unsold items, which puts a lot of pressure on gross margin and profit. With demand down in this environment, it's crucial for Levi's to run its operations as lean as possible.
Bergh pointed to the leadership team's experience and track record at making "tough choices to cut costs," but he also said management will be "deliberate and thoughtful" without undermining Levi's long-term growth.
CFO Harmit Singh offered some details as to what the company is doing. "We are working to extend the lifecycle of the inventory we have on hand by carrying evergreen products forward into subsequent seasons," he said, adding that Levi Strauss can do this while still offering some new products to keep the assortment fresh.
Most importantly, Singh said, "Even in a promotional environment, given the strength of our brand and inventory actions, we believe we can strike a good balance between gross margin and driving revenue."
One headwind to watch
With more consumers shopping online, Levi's wholesale partners in the U.S. have struggled to attract foot traffic. This has been Levi's weak spot lately. Last quarter, the U.S. wholesale business was down 6%, partly due to lower shipments to the off-price channel. On the bright side, the company's top 10 global wholesale accounts reported an increase in sales, although that was pre-coronavirus.
Large resellers like Walmart, Target, and Amazon.com are still shipping products, so the main problem is struggling department stores, some of which could be facing their death knell in this crisis. If department stores go out of business, that would put a dent in Levi's revenue this year.
The good news is that Levi's entered the quarter with 70% of inventory representing core product, which management will be able to carry forward and sell through once retail stores reopen. But the 15% to 20% of inventory that is seasonal may pressure Levi's margins if the company can't sell it fast enough.
Still, Levi Strauss' gross margin reached a recent high of 55.7% last quarter. That gives the company some cushion to absorb margin pressure if it needs to mark down seasonal products.
Better positioned than most
Despite Levi Strauss' growing direct-to-consumer business, cost cutting, and strong brand, the next few quarters are going to be rough for this consumer discretionary stock.
While Bergh acknowledged, "No one can control the virus or even the economic fallout," he emphasized that the company has a "strong balance sheet" with $1.8 billion of liquidity to fund its operations in the short term.
No one knows when consumer spending will rebound, but management seems to be taking the right steps to deal with the cards it has been dealt. Bergh said, "I believe we are well positioned, if not better positioned than most companies, in our industry."