Levi Strauss Q4 Revenues Climb 22 Percent

Levi Strauss & Co. reported sales in the fourth quarter ended November 28 grew 22 percent versus Q4 2020 and gained 7 percent versus Q4 2019. Earnings and sales were slightly ahead of Wall Street targets.

“We had a strong finish to 2021 and I can confidently say that we are a stronger company than ever before. Today’s results reflect robust financial performance, marked by sequential improvement through the year, despite navigating ongoing business disruption from the pandemic. Through it all, we have stayed focused on our future and our momentum continues to accelerate into 2022,” said Chip Bergh, president and chief executive officer, Levi Strauss & Co. “We are well-positioned for long-term, sustainable growth—our strong brand equity is driving pricing power, we’re boldly diversifying our business and continuing to expand our high margin direct-to-consumer (DTC) business. As good as this past year has been, I am confident the future will be even better.”

Financial Highlights for the Fourth-Quarter:

• Reported net revenues of $1.7 billion up 22 percent versus Q4 2020 and up 7 percent versus Q4 2019;
• DTC net revenues up 25 percent versus Q4 2020 and up 20 percent versus Q4 2019;
• Company-operated store net revenues up 28 percent versus Q4 2020, and up 14 percent versus Q4 2019;
• DTC e-commerce net revenues up 22 percent versus Q4 2020, and up 69 percent versus Q4 2019;
• Global Wholesale net revenues up 20 percent versus Q4 2020, and up one percent versus Q4 2019;
• The approximate 3 percent net revenues benefit from Black Friday, and the acquisition of Beyond Yoga was offset by the impact of supply chain constraints, which was approximately $50 million;
• Gross margin was 57.8 percent. Adjusted gross margin was 58.1 percent, up 350 basis points from Q4 2020, and 380 basis points from Q4 2019;
• Operating margin was 11.1 percent. Adjusted EBIT margin expanded to 12.0 percent, up from 8.2 percent in Q4 2020 and 9.3 percent in Q4 2019;
• Net income was $153 million. Adjusted net income was $170 million, up from $81 million in Q4 2020 and $108 million in Q4 2019; and
• Diluted EPS was $0.37. Adjusted diluted EPS was $0.41, up 105 percent from $0.20 in Q4 2020 and 58 percent from $0.26 in Q4 2019.

Adjusted earnings of 41 cents per share topped Wall Street’s consensus estimate of 40 cents. Sales of $1.7 billion were above Wall Street’s consensus target of $1.68 billion.

Financial Highlights For The Full Year

• Reported net revenues of $5.8 billion up 29 percent versus FY 2020 and flat to FY 2019;
• Gross margin was 58.1 percent. Adjusted gross margin was 57.9 percent, up 350 basis points from FY 2020 and 410 basis points from FY 2019;
• Operating margin was 11.9 percent. Adjusted EBIT margin expanded to 12.4 percent, up from 4.1 percent in FY 2020 and 10.6 percent in FY 2019;
• Net income was $554 million. Adjusted net income was $601 million, up from $84 million in FY 2020 and $456 million in FY 2019;
• Diluted EPS was $1.35. Adjusted diluted EPS was $1.47, up 600 percent from $0.21 in FY 2020 and 31 percent from $1.12 in FY 2019;
• Adjusted free cash flow was $230 million, up $88 million versus FY 2020 and up $114 million versus FY 2019;
• The company repurchased 3.4 million shares for $88.4 million; and
• A total of $104.4 million in dividends were paid during the year.

“We achieved strong results, including multi-decade record revenues and profitability, delivering an adjusted EBIT margin for the full year of 12.4 percent despite heightened supply chain challenges and product costs,” said Harmit Singh, chief financial officer, Levi Strauss & Co. “This was the result of the unique strength of our brands and our ability to leverage our pricing power to more than offset inflationary pressures while also reinvesting in our growth. Looking ahead, with the foundational work we have done to advance our growth strategies and improve our structural economics, we are highly confident in our 2022 outlook and our ability to generate even stronger results for our shareholders.”

Change In Reportable Segments
In the fourth quarter of 2021, Levi’s separated its Dockers business to provide focus and reinvigorate the brand’s growth. The company i is also leveraging a similar, separate structure for the newly acquired Beyond Yoga business. The Levi’s business includes Levi’s, Signature by Levi Strauss & Co. and Denizen brands, and is defined geographically within the Americas, Europe and Asia. Dockers and Beyond Yoga are presented under the caption of ‘Other Brands.’ While this reporting change did not impact consolidated results, the segment data has been recast to be consistent for all periods presented throughout the financial statements and accompanying footnotes.

Fourth-Quarter 2021 Details 
Net revenues of $1.7 billion increased 22 percent on a reported and constant-currency basis compared to the same period in the prior year.

• Wholesale net revenues increased 20 percent primarily reflecting strong demand for Levi’s brand globally;
• DTC net revenues increased 25 percent, driven by company-operated stores and e-commerce which grew 28 percent and 22 percent, respectively. As a percentage of fourth-quarter company net revenues, sales from DTC stores and e-commerce comprised 30 percent and 8 percent, respectively, for a total of 38 percent;
• The company’s global digital net revenues were up 2 percent compared to the same period in the prior year and comprised 21 percent of fourth-quarter fiscal 2021 net revenues; and
• Compared to the fourth quarter of fiscal 2019, total company net revenues increased 7 percent on a reported and constant-currency basis. On a reported basis, net revenues were led by growth in DTC of 20 percent and wholesale growth of 1 percent. DTC stores and e-commerce were up 11 percent and 69 percent, respectively.

Gross profit increased 27 percent to $974 million, as compared to $767 million in the same quarter in the prior year. Gross margin was 57.8 percent of net revenues, up from 55.3 percent in the same quarter of the prior year. Adjusted gross margin, which excludes COVID-19 and acquisition-related charges, was 58.1 percent, an increase of 350 basis points compared to the same period in the prior year. The increase in gross margin reflects a higher proportion of sales in the DTC channel, price increases, lower promotions, and a higher share of full-price sales.

Selling, general and administrative (SG&A) expenses were $791 million compared to $653 million in the same quarter in the prior year. Adjusted SG&A in the fourth quarter of fiscal 2021 was $776 million compared to $644 million in the same quarter in the prior year, reflecting higher investments in advertising and promotion, higher selling expenses due to increased sales and continued investments in omnichannel, A.I. and digitization initiatives. As a percentage of net revenues, adjusted SG&A was 46 percent, 50 basis points lower than the prior-year period despite the significantly higher investments in the quarter.

Operating income was $186 million compared to $92 million in the same quarter in the prior year and Adjusted EBIT was $203 million compared to $113 million in the same quarter of the prior year. The increases were primarily due to higher net revenues and gross margin, partially offset with higher SG&A expenses in the current year.

Net income was $153 million compared to $57 million in the same quarter of the prior year and Adjusted net income was $170 million compared to $81 million in the same quarter of the prior year. The increases were primarily due to the increase in operating income and Adjusted EBIT, respectively, as described above.

Adjusted diluted earnings per share increased to $0.41 as compared to $0.20 for the same prior-year period.

Fourth-Quarter Segment Overview
In the Americas, net revenues and operating income increased versus fiscal 2020, reflecting the impact of the pandemic on prior-year results. Compared to the fourth quarter of fiscal 2019, America’s net revenues grew 11 percent on a reported basis and 12 percent on a constant-currency basis, driven by growth across all channels. The segment’s DTC net revenues increased 21 percent due to strength in company-operated stores, including mainline and outlets, and e-commerce, which saw net revenues up 55 percent. The segment’s wholesale net revenues grew 8 percent, driven by the strong performance of Levi’s and signature brands. Net revenues through all digital channels increased 20 percent and represented 19 percent of the segment’s sales in the quarter. Operating income for the segment increased as compared to the fourth quarter of fiscal 2019 due to higher net revenues and gross margins, partially offset by higher SG&A expenses as a percentage of net revenues.

In Europe, net revenues and operating income increased versus fiscal 2020, reflecting the impact of the pandemic on prior-year results.

Compared to the fourth quarter of fiscal 2019, Europe net revenues grew 6 percent on a reported basis and 3 percent on a constant-currency basis. Excluding the impact of a change in ownership of our footwear distributor to a licensee partner, Europe would have been up 6 percent on a constant-currency basis. DTC’s net revenues increased 16 percent, driven by strength in company-operated stores and e-commerce, which saw net revenues up 65 percent. Wholesale net revenues declined 2 percent, as strength in digital pure-play was offset by the business model change noted above. Net revenues through all digital channels grew 56 percent and represented 23 percent of the segment’s sales in the quarter. Operating income for the segment increased as compared to the fourth quarter of fiscal 2019 due to higher net revenues and gross margins, partially offset by higher SG&A expenses as a percentage of net revenues.

In Asia, net revenues and operating income increased versus fiscal 2020, reflecting the impact of the pandemic on prior-year results.

Compared to the fourth quarter of fiscal 2019, Asia net revenues were approximately flat on a reported basis and declined 2 percent on a constant-currency basis, a sequential improvement from the third quarter of fiscal 2021 reported decline of 23 percent. DTC net revenues increased 13 percent driven by strength in company-operated e-commerce across all markets, the impact of which on total net revenues was offset by a decline in wholesale net revenues. Net revenues through all digital channels grew 62 percent and represented 20 percent of the segment’s sales in the quarter. Operating income for the segment increased as compared to the fourth quarter of fiscal 2019 due to higher gross margins, partially offset by higher SG&A expenses as a percentage of net revenues.

For Other Brands, Dockers and Beyond Yoga combined, net revenues and operating income increased versus 2020 reflecting the impact of the pandemic on the Dockers brand’s prior year results, and the inclusion of the acquisition-to-date results of Beyond Yoga, which saw net revenues of approximately $15 million.

Cash Flow and Balance Sheet

• Cash and cash equivalents of $810 million and short-term investments of $92 million at November 28, 2021 were complemented by $794 million available under the company’s revolving credit facility resulting in a total liquidity position of approximately $1.7 billion.
• Net debt at the end of the fourth quarter of 2021 was $125 million. The company’s leverage ratio decreased to 1.2 at the end of the fourth quarter of 2021 as compared to 4.9 at the end of the fourth quarter of 2020.
• Cash from operations for 2021 was $737 million compared to $470 million in 2020. The increase in cash provided by operating activities is primarily due to higher net income.
• Adjusted free cash flow for 2021 was $230 million, an increase of $88 million compared to 2020.
• Total inventories increased 10 percent compared to the end of the corresponding prior-year period. The composition of inventory was healthy heading into fiscal 2022.
• The company declared a dividend of $0.10 per share totaling approximately $40 million, payable in cash on February 24, 2022 to the holders of record of Class A common stock and Class B common stock at the close of business on February 9, 2022.
• During the three months ended November 28, 2021, 3.4 million shares were repurchased for $88.4 million. Approximately $110 million remained authorized for future repurchases.

Fiscal 2022 Annual Guidance
The company’s expectations for fiscal 2022 are as follows:

• Net revenues growth of 11 percent to 13 percent compared to FY 2021, between $6.4 billion and $6.5 billion.
• Adjusted diluted EPS of $1.50 to $1.56.

The company’s outlook assumes no significant worsening of the COVID-19 pandemic, inflationary pressures or dramatic incremental closure of global economies.

Photo courtesy Beyond Yoga