Levi Strauss (LEVI 1.66%) chose a dramatic way to mark its first quarter of growth since the pandemic struck. The jeans and casual-wear specialist on Thursday afternoon announced record sales and profit margins through late May. Executives also raised their 2021 outlook for a second consecutive time.
Let's dive right in.
Image source: Getty Images.
Beating the targets
Wall Street's expectations had run ahead of the company's official forecast, but Levi still managed to beat those elevated targets. Sales jumped 156% to $1.3 billion while most investors had been looking for a 150% increase. Revenue surpassed the 2019 record, too, even though 17% of Levi's global store base was closed during the quarter because of COVID-19 restrictions in places like Europe.
The difference was a booming digital business, which allowed e-commerce sales to spike 75% and reach 23% of the total business. Levi, like other apparel giants such as Nike, is capitalizing on a shift in how people shop for their clothing by booking sales directly with consumers rather than through retailing partnerships.
That change is supporting faster growth and higher profit margins. "We significantly exceeded our expectations," CEO Chip Bergh said in a press release, "on revenue, adjusted gross margin, and adjusted [earnings before taxes ]."
Easing worries
The updated profit picture eased a few of investors' biggest worries heading toward the second half of 2021. Levi didn't struggle to pass along higher prices, as demonstrated by its record gross profit margin of 58% of sales. It stayed ahead of shifts in consumer tastes, too, as more people opt for casual apparel products. The company's innovation, branding, and manufacturing platforms each performed well through tough selling conditions.
Levi didn't struggle with major supply chain challenges, either. Inventory fell for the period, management said, but only because of strategic decisions to reduce that level to gain efficiency. Overall operating income surged compared to a year ago and also increased when compared with the pre-pandemic period in 2019.
Looking ahead
Investors have every reason to expect an accelerating rebound into the second half of the fiscal year. Levi now counts just 8% of its stores closed because of pandemic restrictions, compared with 17% in Q2. The recovery of demand has been strong across its geographic markets, and executives think they have a good reading on the popular fashion trends as we emerge from the pandemic threat.
Those factors all went into Levi's second big outlook upgrade in six months. Sales are now expected to rise by between 28% and 29% in the second half of 2021. That forecast stood at between 24% and 25% in early April. Profit expectations got a similar boost. "Revenues in most markets are recovering faster than anticipated," CFO Harmit Singh said, "and we are emerging from the pandemic with sustainable and improved structural economics."
Those improved economics include higher cash flow and a low debt burden, which combined to give Levi room to invest in the business while returning cash through stock buybacks and dividends. Shareholders can expect more growth in these cash return channels as long as the apparel industry stays in the high growth cycle.
