Investors had modest expectations heading into Levi Strauss's (LEVI -2.04%) first-quarter earnings report, which the company just beat by a solid margin. Sales trends remained strong into early 2022, management revealed, despite new supply chain and inflation challenges impacting the apparel industry.
That solid demand environment convinced CEO Chip Bergh and his team to affirm Levi's bullish outlook for the full 2022 year. Let's take a closer look.
Image source: Getty Images.
Sales are up
Demand didn't show any sign of slowing down. Sales were up 26% after accounting for currency exchange swings, in fact, compared to a 22% increase in the prior quarter. On a two-year basis, which smooths out volatility associated with the pandemic, revenue grew 13% compared to a 7% boost in the previous quarter.
Management highlighted the broad-based growth across markets and selling channels as consumers continue to shop for jeanswear in stores and online. "We started the year with strong consumer demand and solid momentum across geographies, channels, and categories," CEO Chip Bergh said in a press release. Levi posted especially strong demand in its direct-to-consumer segment, which grew 35% year over year.
Margin pressures
That quickly expanding sales footprint helped the company easily offset the impact from higher costs. It also helped that consumers were willing to pay more for apparel and continue to favor more premium products in the catalog.
Gross profit margin rose by 1.7 percentage points due to these positive factors, reaching 59% of sales. Adjusted operating margin rose too, landing at 14.9% of sales, compared to 13.3% a year ago. Overall, adjusted net income spiked 35% to $189 million. "We achieved excellent financial results," CFO Harmit Singh said, "driving strong double-digit revenue growth and record gross margin."
LEVI Operating Margin (TTM) data by YCharts
Looking ahead
It wasn't all good news in this report. Levi dealt with higher input and distribution costs along with spiking labor expenses in recent months. Parts of the European and Asian markets were pressured by geopolitical strife and localized COVID-19 containment initiatives.
However, the company is still on track to meet the 2022 outlook that management issued back in early January. Specifically, sales should land between $6.4 billion and $6.5 billion, translating into between 11% and 13% growth this year after a 29% spike in 2021. Profitability is still likely to stay above 12% of sales, or even with the prior year, despite those higher costs.
These financial wins suggest further rising cash returns from higher dividend payments and stock buybacks. But the even better news for shareholders is that Levi is in a great position to invest in its business during this growth phase. Consumers appear eager to try its new premium product releases, both in stores and online, and the brand is finding traction across a wide range of markets.
Sure, persistent inflation and an economic slowdown would threaten those gains, given Levi's position as a consumer discretionary apparel retailer. But, to date, investors have every reason to celebrate the company's ability to boost sales at a double-digit rate this year following soaring results in 2021.
