Levi Strauss (LEVI 3.49%) saw its revenue decline substantially in fiscal 2020's third quarter (which ended Aug. 23) due to reduced traffic and store closures during the coronavirus pandemic. However, Levi's e-commerce revenue growth accelerated meaningfully, and management is investing in certain areas to build out a more robust direct-to-consumer business, which could have a big impact on growth once the pandemic has passed.
Here are three reasons why Levi's online business is kicking into a higher gear.
1. Expanding the customer base
One of Levi's top growth initiatives is building a more robust omnichannel experience. Levi's is currently experiencing tremendous momentum with online sales, as company-operated e-commerce sales surged 52% last quarter and made up 8% of the business. The acceleration was helped by recent store closures, but the market share Levi's is gaining with women could help the brand grow online sales faster in a post-COVID environment than last year's e-commerce growth of just 10%.
New demand from women played a big role in Levi's e-commerce growth. In the fiscal third quarter, strong sales of women's shorts generated half of Levi.com's growth. This is significant because women's sales only comprised 37% of total revenue last quarter, but that percentage is trending up. Management expects women's sales to eventually make up half of the business, which could be beneficial for Levi's online business.
2. Investments in technology
Levi's credited part of its success in e-commerce to an upgraded website in Canada, Europe, and the U.S., with improved navigation and search to provide faster browsing.
Moreover, two-thirds of the company's capital expenditures this year will go toward the company's digital transformation, including artificial intelligence and data analytics. Also, Levi's has previously disclosed plans to improve its distribution centers to prepare for future growth.
In Europe, the company recently expanded the use of artificial intelligence (AI) for its e-commerce promotions, which contributed to an increase in revenue, profits, and units sold, while helping Levi's gain market share in women's products.
3. Expanding its product offering
During last week's conference call on the earnings report, Levi's announced a new secondhand buyback program. This will allow customers to sell their used denim to Levi's for credit toward a future purchase. This could be a massive opportunity for Levi's e-commerce growth.
As CEO Chip Bergh said during the call, "More than half of Gen Z shops in the secondary market, and they're looking for the real thing." A recent fall 2020 survey of teen brand preferences published by Piper Sandler found that secondhand items totaled 8% of teens' shopping time, which is taking share from off-price, specialty, and department stores.
The demand for vintage Levi's is particularly strong. For instance, the upstart fashion brand Re/Done has had success sourcing old Levi's jeans and resizing them for a modern fit. It's worth noting that customers are willing to pay luxury prices for these "redone" Levi's jeans.
Levi's knows vintage clothing is popular, which is why it sells older product styles under the Levi's Vintage label. With its new secondhand buyback program, Levi's is further penetrating the demand for vintage jeans, which could boost its e-commerce business.
Higher profits are in store
Further growth in e-commerce should benefit Levi's profitability. Gross margins from online sales are more than 20 points above wholesale. The e-commerce business has been in investment mode, which has limited its profit contribution so far, but management expects e-commerce to finally turn a profit this year.
Levi's expects to reach an adjusted operating profit margin of 12% once revenue reaches pre-COVID levels, which management expects will happen in the second half of 2021. For perspective, Levi's adjusted operating margin was 10.6% in 2019.
Beyond 2021, management expects more than half of the business to come from direct-to-consumer, including e-commerce sales through wholesale-partner channels.
After underperforming other retail stocks year to date, shares of Levi Strauss have jumped nearly 20% within the last month. Investors sense that the strong momentum in e-commerce could be a turning point for Levi's business.