Levi Strauss (LEVI 0.89%) entered fiscal 2020 on good footing, with constant-currency sales up 6% in fiscal 2019. While COVID-19 and the resulting store closures are setbacks for the classic jeans brand (which has been trying to overcome weakness in the U.S. wholesale channel), Levi's is on track to emerge from the crisis in a much stronger position thanks to stellar performance in e-commerce during the fiscal second quarter.

In earnings reported last week, Levi's said revenue declined 62% on a reported basis, and adjusted earnings per share plunged to a loss of $0.48. This was partially offset by growth in e-commerce of 25% in the quarter, with online sales accelerating each month to reach nearly 80% in May.

In a statement, CEO Chip Bergh explained, "The pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of the Levi's brand." During the conference call, management laid out a strategy to double down on its digital transformation, which involves introducing same-day delivery. It's clear that not only is Levi's going to survive this crisis, it's paving the way to deliver more growth and expand margins through growing digital sales over the long term.

A pair of Levi's jeans lying on a tailor's cutting mat.

Image source: Levi Strauss.

New digital capabilities are paying off

E-commerce sales through Levi's website and mobile represented only 5% of total revenue last year, so it wouldn't seem that Levi's would be in position to take advantage of the shift in retail sales to online, as Bergh's comment suggested. But Levi's experienced tremendous demand online during the shelter-in-place period, and Levi's physical stores played a big role.

Nearly a third of online demand last quarter was fulfilled by stores in May. "While they were closed, we turned our stores into micro-fulfillment centers, leveraging our ship-from-store capabilities to fulfill online orders and move through inventory," Bergh said during the call.

Several initiatives were introduced to enhance the online shopping experience. Levi's rolled out curbside pickup, which is now live in 80% of stores. Levi's is also now offering a new virtual concierge service, which gives customers one-on-one interactions with employees from home.

In July, Levi's will begin testing same-day delivery. Bergh said, "This program, along with others that we are exploring, will offer our consumers several forms of contactless retail shopping, expanding the way consumers can shop with us."

These strategies are paying off in spades so far. In April, Levi's e-commerce growth accelerated to double digits before reaching triple-digit growth in May. The momentum has continued even as stores began to reopen, with e-commerce sales up nearly 70% year over year through June. This could have a positive impact on Levi's profit margin.

Levi's e-commerce channel is expected to turn a profit this year

E-commerce sales as a portion of revenue reached 13% in June. That's nearly triple the level in fiscal 2019. The surge in order volume allowed the e-commerce business to turn a profit for the second quarter and year to date. During the earnings conference call, CFO Harmit Singh said, "Should trends continue, we expect our e-commerce business to be profitable for the full year ahead of expectations."

Obviously, this could have a positive impact on Levi's earnings growth beyond 2020. Singh said, "As our e-commerce business continues to accelerate, that's accretive from a gross margin perspective."

But will e-commerce continue growing at such high rates when COVID-19 is over? Here's what Bergh had to say:

So I can't promise continued growth rates in the 70-plus percent range forever as our stores continue to reopen, but we do expect that the pace of growth will be significantly higher than pre-COVID levels, especially as we continue to invest and accelerate the digitization of the consumer experience.

For perspective, Levi's full-year global e-commerce growth in fiscal 2019 was 18%.

A new digital playing field

Levi's had reopened roughly 90% of stores globally as of July 7. But Bergh expects the online shopping experience to be sticky and convert a lot of shoppers.

Levi's launched a new mobile app in December, which has helped. The download rate was more than double in the second quarter over the first quarter. Most importantly, 70% of Levi's e-commerce customers in the U.S. during the last quarter were new to shopping online, based on company estimates.

"We have invested heavily to strengthen our position as a leading world-class omnichannel retailer," Bergh said during the call.

Investors don't currently have high expectations. The stock is in the bargain bin, trading at just over 10 times last year's earnings and 15 times the consensus earnings estimate for 2021. But if Bergh is right, and the e-commerce channel continues to sustain higher levels of growth than pre-COVID-19, investor sentiment could change for this top apparel brand.