Blue jeans icon Levi Strauss (LEVI -0.06%) is a play on artificial intelligence. Wait, don't laugh! Digging deeper into the company's operations reveals that it's serious about pursuing this technology -- and its efforts in AI could help boost returns for investors.
The company's push to incorporate AI begins with the revamping of its loyalty app, which delivers content based on user browsing and purchases. This personalization means less searching and more compelling promotions. In Levi Strauss's third quarter, its app downloads increased by 20% compared to the first quarter, and Levi also saw increases in average order values and contribution rates for e-commerce revenues.
Levi Strauss is also using AI for its recommendation engine in Europe. Its algorithms forecast what types of products users are interested in, then suggest complementary offerings. It can even let users know about sales on products they've searched for in the past. According to a blog from the company, the recommendation engine "contributed to the LS&Co.'s healthy Q3 and Q4 2020 financial margins."
Levi plans to move beyond these early steps by incorporating computer vision and sophisticated neural networks for product searches, slated for a November release in the U.S. Using photos for the AI should provide even more insights than text-based data, which may not capture all the colors, textures, and shapes of Levi's products. The AI often finds patterns and insights that are not obvious -- and it can do so on a large scale, whenever and wherever shoppers need help finding garments that look good together.
But perhaps most importantly, Levi's using AI to manage its supply chain -- which has been beset with spikes in transportation costs and cotton prices – with sophisticated predictions. According to Levi Strauss, its cost of goods sold is only expected to increase by 1% year over year for the first half of 2022, thanks in part to AI efficiencies.
Success starts at the top
Back in February 2019, Levi Strauss hired its first Chief Strategy and Artificial Intelligence Officer, Katia Walsh, who reported directly to the CEO. Before this, she worked in leadership positions for data science at companies like Vodafone, Prudential Financial and Fidelity Investments.
The role of the Chief AI Officer is fairly new even for tech companies, and quite rare for mainstream retailers. But for Levi Strauss, this buy-in has spurred innovation and highlighted the strategic importance of AI for the global workforce.
Another critical advantage for Levi Strauss – especially when compared to smaller retailers – is the company's scale, which gives it huge troves of data that help its algorithms work better.
This rapid transition toward direct-to-consumer transactions helps drive even more of that data toward Levi's waiting AIs. In the latest quarter, direct-to-consumer revenues jumped by 34% year over year, and direct sales grew to represent 20% of Levi's $1.5 billion. The company also plans to spend two-thirds of its capital budget on digital efforts.
Fighting for talent
One of the biggest challenges with AI is recruiting talented data scientists and engineers. But Levi Straus is not just relying on hiring from the outside. It has created its own AI bootcamp, an eight-week, full-time, fully paid program that includes courses on coding, statistics and data science. The program is unique among major retailers and has already led to new employees for the AI division.
Yet Levi Strauss still faces challenges. AI doesn't always yield correct answers, and more governments are crafting regulations on the use of data, especially for personally identifiable information. And even if Levi gets AI right, other major retailers have the resources to invest in artificial intelligence and its benefits as well.
But as an early adopter, Levi benefits from more effective models and data, and more of a head start to build AI systems that comply with emerging regulations. And while rtificial intelligence's complexity can be intimidating for employees, Levi's in-house training can help them better understand how to apply the technology to their own job, whether they're improving the design of baggy jeans or lowering the costs for a manufacturing process.
What to watch for
Artificial intelligence stocks are generally fetching stratospheric valuations, as seen with companies like C3.ai, Lemonade, and Palantir. However, investors can find a more creative approach to this sector by looking for companies that are poised to benefit from the technology.
Consider Domino's Pizza (DPZ -0.81%), whose shares have grown a whopping 15-fold since 2011. Domino's massive investments in making online ordering faster and easier-including AI features like voice recognition -- helped drive the company's turnaround. Today, more than 75% of Domino's sales come though digital channels.
Levi Strauss looks like it's using a similar playbook; the company is still in the early stages, but there are already signs that the technology is making a difference. In its latest quarterly report, sales jumped 41% and earnings soared 570%. This stemmed partly from the company's recovery from the COVID-19 pandemic, but management also credited AI and machine learning, calling it "a huge opportunity for us long-term." There's no standard index for artificial intelligence success, but investors can follow Levi's blog, which has frequent updates on innovations and look for improvement in margins and revenues.
For investors looking for a unique way to play AI, scooping up shares in Levi Straus may not be laughable at all.