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Levi’s Sees Strong Earnings as People Wear Denim to the Office—Even Skinny Jeans

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Levi shares are down 36% this year as investors grow increasing worried about apparel.

Sean Gallup/Getty Images

Levi Strauss & Co
.

reported another upbeat quarter, and says it is benefiting as Casual Friday now stretches over the entire workweek at many offices.

Even though its stock is down 36% this year, the company’s ability to reaffirm its forecast despite recent headwinds in apparel may cheer shareholders.

Levi’s results come as investors have grown increasingly worried about apparel, specifically basics. last month

Walmart

(

WMT

) and

Target

(

TGT

) noted that consumers were pulling back in categories like clothing in the face of record inflation, leading to widespread discounting among companies that had stocked up amid supply-chain delays.

Late Thursday, Levi Strauss (LEVI) said it earned an adjusted 29 cents a share in its fiscal second quarter, on revenue that climbed 15% year over year, to $1.5 billion. Analysts were looking for EPS of 23 cents on revenue of $1.43 billion.

Adjusted gross margins, which exclude acquisitions and pandemic impact, were flat from the year-ago period, at 58.2%. Inventories increased 29%, which the company said was in line with expectations. It also announced a 20% dividend hike.

For the full year, Levi Strauss expects to earn between $1.50 and $1.56 a share, on an adjusted basis, on revenue growth of 11% to 13%, which equates to $6.4 billion to $6.5 billion. Consensus calls for EPS of $1.56 and revenue of $6.43 billion.

Levi Strauss shares are tracking below the broader market this year, but not far behind retail peers in the

SPDR S&P Retail ETF

(XRT). In April the company also delivered a stronger than expected quarter.

CFO Harmit Singh spoke with Barron’s about the report, saying that it was a “great quarter, where we beat all internal and external expectations.”

He touted the continuing popularity of its denim—which is “growing market share with the younger consumer in the US”—as well as the diversity of its revenue streams outside its core products, with growth in tops and its recently acquired Beyond Yoga. “Our brands have never been stronger,” he says.

As for the increase in inventory, Singh notes that about two-thirds of that is product that can carry through seasons—think its timeless 501 denim—which carries “little markdown risk.” Then there is the fact that inventory levels for the quarter include its new Beyond Yoga business and its operations in Thailand, which had previously been handled via distribution contract; stripping that out puts inventory up roughly 11%–on par with the sales growth the company expects this year.

Singh also noted gross margins hit a record in the second quarter at a time when other apparel makers are getting crunched by factors from promotions to freight costs. Despite the suspension of high-margin operations in Russia and China, due to war and lockdowns, respectively, he says the company was able to offset these pressures with price increases and its expanding direct-to-consumer business.

While dressier fashions have gotten most of the attention recently, Singh says that Levi Strauss is finding that “as people return back to the new normal, getting back to the office or social environments a lot more people are buying denim and jeans.” That is true globally he says, as “people return to the office in whatever form, they’re coming back in jeans more often. Comfort is the style people want, and we’re selling more looser, baggier fits.”

That said, he argues that for all the bad press they have garnered lately, skinny jeans still remain a staple. “We’re not seeing demand around our skinny or slim styles change dramatically; we’re still seeing growth across all fits. Growth in comfort may be off to the races…but skinny jeans are now a classic.”

Write to Teresa Rivas at [email protected]

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