Third-quarter Levi Strauss (LEVI) earnings top mark, revenue up year-over-year

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Levi Strauss & Co. LEVI posted mixed results for the third quarter of fiscal 2022, in which earnings beat Zacks’ consensus estimate and sales missed the same. LEVI’s adjusted earnings of 40 cents per share beat Zacks’ consensus estimate of 37 cents. However, quarterly profits were down 16.7% from the level of the prior year’s fiscal quarter. Net income excludes an unfavorable currency effect of 4 cents per share.

Shares of the San Francisco, Calif.-based player have fallen 3.9% in the past three months, more than the sector’s 1.3% drop.

Q3 Metrics

Net revenue of $1,517 million was below Zacks’ consensus estimate of $1,615 million. However, the metric edged up 1% and 7% in constant currency year-over-year on the strength of the Levi’s and Dockers brands. Revenue excludes $76 million of unfavorable foreign exchange impacts.

Direct-to-consumer (DTC) net revenue increased 2% year-over-year or 8% at constant currencies, supported by a 16% increase in constant currency e-commerce operated by the company. In quarterly revenue rates, DTC store and e-commerce sales accounted for 29% and 6% respectively, for a total of 35%. Additionally, net wholesale revenues increased 1% and 6% at constant currencies, supported by gains in global demand for the Levi’s brand. LEVI’s global digital net revenue grew 9% year-over-year, representing nearly 21% of revenue in the third quarter of fiscal 2022.

In terms of segment, net revenue in the Americas increased 3% year-over-year to $805 million, while in Europe the metric decreased 19% to $390 million and that in Asia it jumped 36% to $221 million. LEVI’s new Other Brands segment, comprised of Dockers and Beyond Yoga, reported revenue of $101 million, up 37% year-over-year.

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Margins and costs

Adjusted gross profit was $945.6 million, up significantly from $752.8 million in the prior year quarter. Adjusted gross margin of 56.9% contracted 60 basis points (bps) year-over-year. An unfavorable foreign exchange accounted for nearly half of the decline, while the balance shows the impact of higher product costs and reduced full-price sales. This was partially offset by higher prices and a favorable channel mix.

Adjusted general and administrative expenses increased 5.6% to $675.4 million, and as a revenue rate, adjusted general and administrative expenses increased 180 basis points to 44.5%, reflecting high investments in IT and DTC activities as well as increased distribution spending.

Adjusted EBIT was $188 million, down 15% from the prior year fiscal quarter. Additionally, adjusted EBIT margin of 12.4% fell 240 basis points year-on-year due to lower gross margin.

Other finance

Levi Strauss ended the quarter with cash and cash equivalents of $498.9 million and short-term investments in marketable securities of $100.5 million, plus total liquidity of $1.4 billion. .

As of August 28, 2022, long-term debt and total equity were $963.5 million and $1,828.9 million, respectively. Total inventory rose 43% year over year to $1,292.3 million. In the nine months of fiscal 2022, cash flow from operations was $210.3 million. Currently, Zacks Rank #4 (Sell) LEVI’s Adjusted Free Cash Flow was negative $11.9 million over the same period.

During the third fiscal quarter, Levi Strauss repurchased 26 million shares, reflecting the withdrawal of 1.5 million shares. LEVI also paid dividends of $48 million.

Outlook

Due to significant headwinds from the strength of the U.S. dollar and a cautious outlook for North America and Europe due to macroeconomic challenges and ongoing supply chain disruptions, management has adjusted its guidance for the 2022 financial year.

Levi Strauss Projects has now reported net revenue growth of 6.7-7%, indicating growth of 11.5-12% at constant exchange rates.

Management expected adjusted earnings per share of $1.44 to $1.49, including additional headwinds of $0.0 since the last report in July.

Nonetheless, management believes that LEVI remains well positioned to realize the long-term outlook. The outlook assumes no major worsening of the pandemic, inflationary pressures, supply chain disruptions or currency difficulties.

Solid Choices in Retail

Some higher ranked stocks are Ultimate beauty ULTA, Loop BKE and Designer brands DBI.

Ulta Beauty, the leading beauty retailer, currently sports a Zacks #1 (Strong Buy) rating. You can see the full list of today’s Zacks #1 Rank stocks here.

Zacks consensus estimate for Ulta Beauty sales for fiscal year 2022 suggests growth of 13.7% over the corresponding level of the previous year. ULTA has an earnings surprise for the last four quarters of 32.8% on average.

Buckle, a leading apparel, footwear and accessories retailer, currently has a Zacks rating of 2 (buy). BKE has a surprise on earnings for the last four quarters of 12.7% on average.

Zacks consensus estimate for Buckle’s fiscal year 2022 sales and earnings per share (EPS) suggests growth of 6.8% and 4.5%, respectively, over the corresponding figures for the year former.

Designer Brands, the leading footwear and accessories designer, currently has a #2 Zacks rank.

Zacks’ consensus estimate for Designer Brands’ fiscal 2022 sales and EPS suggests growth of 6.9% and 23.5%, respectively, over corresponding levels a year earlier. DBI has a surprise on earnings for the last four quarters of 55.1% on average.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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