Investors celebrated Levi Strauss‘ (NYSE:LEVI) latest earnings report for good reasons. The jeans specialist is capitalizing on the demand shift toward casual wear, and earnings are spiking as e-commerce sales expand faster than wholesale volume.
There’s plenty more room to grow for the business if you believe what management is saying. CEO Chip Bergh and his team recently explained their reasoning for issuing a brighter outlook for the rest of 2021. In that second-quarter conference call with investors, the management team implied that Levi Strauss isn’t just experiencing a typical boom period that will fade once the pandemic recovery is complete, but can reasonably target sustainably stronger growth from here on out.
Let’s look at three highlights from that presentation.
1. A global rebound led by the U.S. market
“Lapping one of the most unusual quarters in our history, all regions, channels, and categories grew significantly versus last year,” Bergh said.
Levi was held back by some persistent COVID-19 challenges that kept many stores closed, especially in parts of Europe this quarter. A full 17% of its physical store base was closed in the second quarter, or a bit more than the first.
Yet the U.S. market, where virus case rates plummeted in response to widespread vaccinations, led the global recovery as sales jumped to an all-time record. Booming demand in the e-commerce channel isn’t taking away from in-store traffic, either, as both trends are improving. “We were particularly pleased that the [digital] growth rate remains strong even as brick-and-mortar stores reopened in the second quarter,” Bergh said.
A sustainable profit spike
“The majority of the factors driving margin expansion are structural and sustainable,” CFO Harmit Singh said.
Levi Strauss is benefiting from an unusually strong selling environment, with promotions at historically low levels and prices jumping thanks to pent-up demand from the pandemic. These factors contributed a full percentage point to the increase in gross profit margin this quarter and helped the company achieve its third consecutive record on this metric.
But management thinks most of the profitability spike is tied to more-enduring changes in the business. These include the shift toward direct-to-consumer sales, lower expenses and inventory levels, and a growing sales footprint. Levi’s also believes it is winning a more premium space in the industry, which should help it raise prices over time.
Explaining the upgrade
“Given the structural and sustainable improvement in the business and the momentum heading into the second half, we expect a much stronger full year in both revenue and EPS than previously anticipated,” Singh said.
The company said sales are running up in the mid to high single-digit percentages in June compared to 2019. A full 92% of its store base was operational at the start of the period, compared to less than 85% in the second quarter. And demand looks healthy across key markets like the U.S. and China.
Those factors have executives believing sales will rise by as much as 29% in the second half of the year compared to their prior (upgraded) outlook calling for about a 24% increase. Gross profit margin should land about 3 full percentage points higher than investors saw in 2019, too.
There’s no denying that this forecast describes a faster-growing business with more earnings power than before the pandemic struck. But it’s still an open question as to how sustainable these gains will be once economic growth slows back down from its current soaring pace.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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