Dive Brief:
- Levi Strauss & Co. is still evaluating the implications of tariffs, and executives compared the challenge to the pandemic. On a call with analysts this week, they emphasized a diverse supply chain, with about 1% sourcing from China, about 5% from Mexico and mid- to high-single-digits from Vietnam.
- The levies are hitting the denim brand at a time of strength, with Q1 net revenues up 3.1% year over year to $1.5 billion. DTC rose 9% and delivered 52% of total net revenues, and wholesale fell 3%. The Levi’s brands (which include Levi’s, Levi Strauss Signature and Denizens) rose 3% and were the bulk of total net revenues, as Beyond Yoga rose 9.8% to $35.2 million. Dockers, likely to be sold, was considered “discontinued operations.”
- Gross margin expanded 330 basis points to 62.1%, and the company swung into the black with $135 million in net income, from its $10.6 million loss a year ago. Inventory was up 7%, and most inventory needed for Q2 U.S. orders has been secured.
Dive Insight:
Levi’s has been cutting back on promotions lately, but pricing is one of the levers, along with managing costs and working with vendors, that could help the brand blunt the effect of tariffs on the economy and its business, Chief Executive Officer Michelle Gass and Chief Financial and Growth Officer Harmit Singh told analysts. They emphasized that the situation is “fluid” and “dynamic,” which makes it uncertain.
Because of the unknowns, the company is not embedding any impact from tariffs in its full year or Q2 guidance, Singh said. For the full fiscal year, Levi’s expects net revenues to decline 1% to 2%, the company previously said.
“It’s all being planned right now,” he said. “I think the best proxy, unfortunately, but the best proxy recently is 2020 and ’21, which was COVID.”
The Levi’s brand enjoys pricing power, and in Q1 average retail prices rose again. After pulling back on promotions, the company enjoyed more full-price selling. If price changes seem necessary to blunt the effect of tariffs, they “will be very surgical,” Gass said.
The international business is so strong that it could mitigate any weakness in U.S. sales, Singh said. Nearly 60% of the company’s revenue comes from outside the U.S., according to Gass.
The company beat expectations in the quarter, Wells Fargo analysts led by Ike Boruchow said in a research note following the brand’s report. “No slowdown here,” Boruchow said. Levi’s “delivered a strong beat in 1Q, while speaking to consistent/accelerating demand over the past few months. While the tariff question was not fully answered (not embedding in guidance), this was a much better than feared print.”
Gass credited much of the brand’s momentum to tie-ups with superstars including Beyoncé and Bob Dylan. The Reiimagine campaign with Beyoncé, which debuted in September, has generated more than 4.3 billion impressions and more than $65 million in earned media value, she said. And last year’s Dylan biopic “A Complete Unknown” featured the singer-songwriter, played by Timothée Chalamet, in classic Levi’s jeans and the brand launched a related limited-edition collection.