Levi Strauss & Co. announced financial results for the first quarter ended 28th February, 2021. Due to the company’s fiscal quarter end, the impacts of the pandemic were not material to the company’s results of operations for the first quarter of 2020.
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Net revenues declined 13 percent on a reported basis, and 16 percent on a constant-currency basis. The decrease was primarily due to the impacts of the COVID-19 pandemic, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter and in certain markets.
Wholesale net revenues declined 4 percent, a significant sequential improvement from the fourth quarter of fiscal 2020, reflecting strong performance in the company’s global digital business.
Direct-to-consumer net revenues declined 26 percent; the decline in first quarter direct to-consumer net revenues was driven by lower traffic to brick-and-mortar stores due to the pandemic, particularly in tourist locations, which comprise a substantial portion of the company’s brick and mortar network. The brick and mortar decline was partially offset by 25 percent growth in company operated e-commerce business, including the benefit of accelerating omni-channel initiatives. Direct-to-consumer stores and e-commerce comprised 26 percent and ten percent, respectively, of total company reported net revenues in the first quarter. The lack of a Black Friday in the current year adversely impacted the year-over-year direct-to-consumer net revenues growth comparison by about five percentage points, and total company net revenues comparison by three percentage points.
Gross profit was $760 million, as compared to $839 million in the same quarter in the prior year. Gross margin was 58.2 percent of net revenues, up from 55.7 percent in the same quarter of the prior year. The increase in gross margin was primarily due to favorable product mix, price increases, lower promotions and $7.2 million reduction in estimated COVID-19 related inventory charges, largely for adverse fabric purchase commitments, partially offset by a lower proportion of sales in the company’s direct-to-consumer channel, which has higher margins.
Adjusted gross margin, which excludes the COVID-19 related charges, was 57.7 percent, an increase of 200 basis points compared to prior year, primarily due to favorable product mix, price increases and lower promotions, partially offset by a lower proportion of sales in the company’s direct-to-consumer channel, which has higher margins. Favorable currency exchange rates benefited year-over-year comparisons by approximately 70 basis-points.
SG&A expenses were $583 million, a 12 percent decline compared to $661 million in the same quarter in the prior year, reflecting the company’s cost-savings actions, net of continuing to invest in its omnichannel, A.I. and digitization initiatives.
Operating income of $177 million declined 1% as compared to $179 million in the same quarter in the prior year, as lower net revenues as a result of the continued adverse impact of COVID-19 were offset by higher gross margins and lower SG&A expenses reflecting the company’s cost-reduction initiatives.
Net income was $143 million as compared to net income of $153 million in the same quarter of the prior year, due to higher interest expense.
Adjusted EBIT of $174 million declined eight percent as compared to $189 million in the same quarter of the prior year. First quarter Adjusted EBIT margin was 13 percent, despite the adverse revenue impact of COVID-19, due to the company’s higher gross margin and cost-reduction initiatives.
Adjusted net income was $140 million as compared to Adjusted net income of $162 million in the same quarter of the prior year, due to the decline in Adjusted EBIT and higher interest expense.
Adjusted diluted earnings per share declined to $0.34 compared to $0.40 for the same prior-year period in-line with the Adjusted net income decline.
In the Americas, net revenues declined 14 percent on a reported basis. The region’s direct-to-consumer net revenues declined 29 percent and wholesale net revenues declined 5 percent as a result of the continued adverse impact of COVID-19. The decrease in net revenues was partially offset by 15 percent growth in company operated e-commerce business, including the benefit of accelerating omni-channel initiatives, as well as growth of U.S. wholesale driven by strength in the Levi’s and Signature brands.
The lack of a Black Friday benefit in the current year adversely impacted the year-over year direct-toconsumer net revenues growth comparison by about eight percentage points and the total region’s net revenues growth comparison by about four percentage points.
Operating income for the Americas increased due to higher gross margins and lower SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19 partially offset by lower net revenues as the COVID-19 pandemic continued to adversely impact the region during the quarter.
In Europe, net revenues declined 16 percent on a reported basis and 22 percent on a constant-currency basis driven by COVID-19 store closures. During the quarter, approximately one-third of the region’s stores were closed, primarily concentrated in higher volume markets. Sales were strong in markets with fewer closure restrictions, reflecting consumer demand and strength of the brand. The company’s e-commerce business and broader digital footprint experienced strong growth during the quarter of 35 percent and 73 percent respectively.
The lack of a Black Friday benefit in the current year adversely impacted the year-over-year direct-to-consumer net revenues growth comparison by about three percentage points and the year-over-year total region’s net revenues growth comparison by about two percentage points.
Europe’s operating income declined primarily due to the adverse revenue impacts of COVID-19, partially offset by higher gross margins and declines in SG&A expenses driven by lower variable expenses from lower brick-and-mortar sales as well as the company’s cost reduction initiatives in response to COVID-19.
In Asia, net revenues declined five percent on a reported basis and eight percent on a constant-currency basis. The first-quarter decrease in net revenues was due to the impacts of COVID-19 across channels and markets, partially offset by e-commerce and the region’s broader digital footprint, which experienced strong growth during the quarter of 54 percent and 68 percent respectively. China grew 30 percent to prior year with growth across all channels.
Operating income for Asia declined primarily due to the adverse revenue impacts of COVID-19, partially offset by higher gross margins and declines in SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19.
Cash and cash equivalents at the end of the first quarter of 2021 of $2.0 billion and short-term investments of $94 million were complemented by $689 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $2.8 billion.
Net debt at the end of the first quarter of 2021 was $(8) million. The company’s leverage ratio was 6.8 at the end of the first quarter of 2021, as compared to 1.4 at the end of the first quarter of 2020, due to the increase in gross debt and adverse impact of COVID-19 on the company’s Adjusted EBIT during the prior twelve months. The company issued $500 million of 3.5% coupon U.S. dollar bonds in February and used the proceeds and cash on hand to repay $800 million of its 5% coupon bonds in March 2021.
Cash from operations for the first three months of 2021 decreased to $69 million compared to $198 million for the first three months of 2020. The decrease in cash provided by operating activities is primarily driven by lower sales in comparison to the same period of last year, partially offset by lower spending on inventory and employee incentives.
Adjusted free cash flow for the first three months of 2021 was $(9) million, a decline of $6 million compared to the first three months of 2020, primarily reflecting lower cash from operations, which was partially offset by lower repurchases of common stock, lower dividends and lower tax withholding on equity awards.
Total inventories were down 2 percent compared to the end of the corresponding prior-year period, despite the sales decline of 13 percent.
The company declared and paid a dividend of $0.04 per share in the first quarter totaling approximately $16 million. In April 2021, the company increased the dividend to $0.06 per share for the second quarter totaling approximately $24 million.
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“We have started the year strong, beating our internal expectations even as we are lapping a particularly good quarter in the prior year,” said Chip Bergh, chief executive officer of Levi Strauss & Co.
“Our strong results this quarter were driven by faster-than-expected recovery in our business from our relentless focus on the priorities that are driving outsized performance. We continue to lean into our strategies – leading with our brands, investing in direct-to-consumer and diversifying our business – while still operating prudently to manage the ongoing uncertainty, especially in Europe. As the vaccine rollout continues and consumer excitement returns, I am more confident than ever that we will emerge from the pandemic a stronger business and drive sustainable, profitable growth.” continued Bergh.