Levi Strauss & Co. Reports Second-Quarter 2020 Financial Results
SAN FRANCISCO--(BUSINESS WIRE)-- Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the second quarter ended May 24, 2020.
The coincidence of the company’s fiscal quarter with the roughly ten-week duration of the temporary closure of the company’s and its customers’ stores in response to the COVID-19 pandemic resulted in a significant adverse impact to revenues, earnings and cash flows. As stores have reopened, performance has trended better than the company’s expectations.
Second-Quarter 2020 Results
Net revenues declined 62 percent on a reported basis; the decrease was due to the temporary closure of company-operated, franchise and wholesale customer retail locations as a result of the COVID-19 pandemic, partially offset by the company’s e-commerce business which grew 25 percent for the quarter, with sequential month-over-month acceleration to nearly 80 percent growth for the month of May.
Gross margin decreased 19.2 percentage points on a reported basis to 34.1 percent; the decrease in gross margin was primarily due to inventory costs of $87 million recorded in connection with COVID-19 business disruptions. Adjusted gross margin was 51.5 percent, a decline of only 180 basis points, primarily reflecting lower wholesale gross margins, due to a higher proportion of Europe’s sales in lower margin markets and channels, which was partially offset by the benefit of price increases. Global DTC and the Americas' adjusted gross margins were in-line with prior year, and Asia's rose due to China's strong gross margin.
SG&A declined 14 percent to $551 million, as the company’s cost-savings actions drove a 25 percent reduction in Adjusted SG&A, which was partially offset by $88 million of COVID-19 related charges.
The company recorded a net loss for the quarter of $364 million, reflecting $242 million, pre-tax, in restructuring charges and inventory costs and other charges recorded in connection with COVID-19 business disruptions, and an Adjusted net loss of $192 million, primarily resulting from the temporary closures of company-operated, franchise and wholesale customer third-party retail locations.
Adjusted EBIT was a loss of $206 million, as the adverse revenue impact of COVID-19 was only partially offset by the company’s cost-savings actions, which drove a $157 million decline in Adjusted SG&A.
Adjusted diluted EPS was $(0.48), reflecting the Adjusted net loss.
Total inventories at quarter end increased ten percent, net of reserves, compared to a year prior, despite the 62 percent decline in revenues, reflecting the company’s aggressive inventory actions in response to the COVID-19 business disruption and flexibility resulting from the high percentage of sales derived from core products.
The company enhanced its liquidity position by issuing an additional $500 million in aggregate principal amount of its 5.00% senior notes due 2025; total liquidity was $2 billion at quarter-end.
“We started the year with strong momentum, but the global pandemic and economic crises had a significantly negative impact on our second quarter results, as our stores and most wholesale doors were closed around the world for the majority of the quarter. I’m proud of how the team stepped up in response, accelerating our activation of key e-commerce and omni-channel capabilities, proactively cutting costs and managing cash smartly, and finding innovative ways to connect the Levi’s brand with its fans,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “As part of our response, to enable us to become a leaner and more market-responsive organization, as well as give us greater confidence in our cost structure given the uncertainties around the impact of the virus, we have made the difficult decision to reduce our non-retail, non-manufacturing workforce by about 700 positions, or roughly 15 percent, which we expect will generate annualized savings of $100 million.”
Bergh continued, “the pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of the Levi’s brand. And we are doubling down on our digital transformation, incorporating the power of AI and data science, and leveraging our iconic brands to have an even stronger focus on Gen Z and sustainability. We believe this will enable us to further grow our market leadership position and emerge from this crisis a stronger company.”
“It’s been an unprecedented quarter, and we have been swift and agile in responding to the impact of the pandemic on our business,” said Harmit Singh, executive vice president and chief financial officer of Levi Strauss & Co. “We have taken measures to improve the structural economics of our company, prudently manage inventories and further solidify liquidity. As a result of our actions, in the second quarter, we increased total liquidity to $2 billion, reduced Adjusted SG&A by $157 million and managed inventories to only a ten-percent increase over prior year. We are encouraged by early signs of recovery, as roughly 90 percent of our company-operated and franchisee doors have now reopened globally, with nearly 40 percent of our company-operated stores comping positive as we exited the month, which in combination with our cost and working capital actions resulted in positive cash flow generation in June. We are confident that the steps we are taking to sustainably reduce our costs and drive greater efficiencies in working capital will enable us to further expand Adjusted EBIT margins and drive cash flows as we emerge from the crisis.”