Investors had some high expectations heading into Levi Strauss' (LEVI -3.12%) first-quarter earnings report. While the denim apparel specialist is still navigating pandemic pressures on its business, the stock surged in recent months on hopes of a looming rebound.
The company on Thursday added to that bright outlook by beating its first-quarter targets. Levi Strauss also raised its short-term outlook while warning that COVID-19 will impact the wider fiscal year's results.
Let's take a closer look.
Levi's business is severely constrained, with roughly 15% of its global store base remaining closed to customer traffic. The European geography is the hardest hit right now, operating at less than 60% capacity.
Yet the company still outperformed on all of management's major operating targets through late February. Sales fell 13%, less than expected, and profitability improved thanks to robust pricing and promotions trends. The company amplified those gains by slashing selling expenses so that operating income only dipped 1% year over year.
"We are very pleased to have exceeded our revenue, margins, and EPS expectations during the quarter," CFO Harmit Singh said in a press release. The earnings improvement was powered by a "faster-than-expected recovery in our business," CEO Chip Bergh added.
Zooming in on gross margin
Levi's 58% gross profit margin marked a record for the company. That success was powered by a shift toward higher-priced jeans and rising prices overall. Levi didn't require nearly the same level of promotions it did a year ago to keep inventory moving, either.
Its e-commerce segment was a big factor in pushing margins higher. That niche grew to 26% of total revenue compared to 16% in the year-ago quarter, which almost perfectly captures the final quarter before COVID-19 began impacting global demand trends.
Bergh and his team said the healthy demand trends convinced them to lift both their earnings and sales outlooks for the short term. While cautioning that the pandemic will pressure sales through at least the fiscal second quarter -- especially with more than 10% of its stores currently closed -- the future looks bright.
Sales will rise by between 24% and 25% for the first half of 2021, which implies a huge growth spike in the current quarter as compared to the initial lockdown phase of the pandemic in 2020. Levi's earnings prediction got a modest boost, too. Lastly, management backed up its bullish comments by raising the dividend to $0.06 per share, equating to a roughly $24 million payout compared to the prior $16 million quarterly commitment.
All these factors imply a gathering rebound and suggest that Levi Strauss might return to setting annual sales records as early as 2022. The business might be far more profitable at that time as compared to its pre-pandemic year, and it should enjoy a stronger base of direct-to-consumer sales.
Investors are right to celebrate those new assets, but they'll still likely endure volatile stock price swings as the business goes through more disruptive moves before returning to a normal demand cadence in a year or so.