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Levi’s New Stretch Is Selling Directly to Consumers (WSJ)

22 July 2023


Wall Street Journal title: Levi’s New Stretch Is Selling Directly to Consumers
WSJ subtitle: The denim-maker’s results show that the road to direct-to-consumer selling can get expensive
By: Jinjoo Lee
Date: 7 July 2023

Levi Strauss’s [] goal is to sell most of its denim through its own stores and website, capturing more margin for itself and giving up less to third-party retailers. Its latest results show that getting there won’t be painless.

Levi on Thursday said revenue declined 9% on a constant currency basis in its quarter ended May 28 compared with a year earlier—slightly worse than Wall Street expectations. More surprisingly, Levi’s swung to a net loss of $1.6 million. It was the company’s first quarter in the red since the initial shock of the 2020 pandemic. Sales trends last quarter were weak enough that Levi’s pared its full-year revenue growth guidance. Levi’s stock, already down 8.3% year to date, shed another 6% in after-hours trading following the company’s earnings call.

Note LO: see article for diagram on Share of shrinking revenue from the wholesale channel

Last quarter’s net loss was mostly due to higher-than-expected operating expenses: The brand said it spent more on advertising last quarter to support its iconic 501 jeans’ 150th anniversary campaign and to grow its direct-to-consumer channel sales. While those efforts certainly boosted direct-to-consumer sales, which were up 14% on a constant-currency basis last quarter, any gross margin benefit was offset by the cost of generating that demand.

By contrast, wholesale revenue declined 22%. A part of that was because of a pull-forward in wholesale revenue that Levi’s already telegraphed due to a change in its enterprise resource planning. Even excluding that impact, though, wholesale revenues were down by a low double-digit percentage last quarter.

Directionally, this lines up with where Levi’s wants to go: Its target is to generate 55% of sales through the direct-to-consumer channel by 2027. Today, that share is 46%. Still, last quarter’s losses show that Levi’s laser-focus on its DTC strategy could come at a cost, both because of the expenses required to grow it and because of potential distraction from wholesale, which still accounts for more than half of its current business.

Notably, some of Levi’s wholesale weakness seems to be self-inflicted: Chief Executive Chip Bergh said the price gap at Levi’s value-tier products (which are sold through wholesale channels) had “widened too far” relative to competitors. That didn’t resonate so well with low-to-middle income consumers who Levi’s executives said were feeling pressure from higher inflation and a slowing economy. The company is cutting prices on those products to move inventory.

Note LO: see article for diagram on Losing Premium w.r.t. Market capitalization

Levi’s held the number one spot in global jeans market share at about 6% as of 2022, according to Euromonitor. Kontoor Brands, which owns Lee and Wrangler, isn’t too far behind with a 4% share. To hold on to its lead, Levi’s will have to make sure it doesn’t lose relevance with the middle-to-lower income consumers that buy its jeans through retailers such as Kohl’s and JCPenney. At the same time, it has to keep its marketing push for more premium DTC consumers from pressuring its bottom line.

Much of the negativity is baked into Levi’s shares, which recently lost their longstanding premium over Kontoor Brands. The stock was trading around 0.85 times forward sales before the after-hours drop. To recover its valuation, Levi’s will have to convince shareholders that it can stretch its DTC business without poking holes in its still-important wholesale channel in the process.”



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