SAN FRANCISCO--(BUSINESS WIRE)-- Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the second quarter ended May 30, 2021. Due to the significant impact of COVID-19 on prior year figures, this release also includes certain comparisons to the same period in 2019 for additional context.
Financial Highlights for the Second Quarter
Company raises fiscal year 2021 outlook for both net revenues and EPS. Third quarter net revenues now expected above fiscal 2019 levels.
Reported net revenues of $1.3 billion were up 156% versus second quarter of fiscal 2020; net revenues in the U.S. and China exceeded second quarter of fiscal 2019. Europe exited the quarter growing versus May 2019.
E-com growth rates accelerated sequentially from Q1 reaching 42% versus second quarter of fiscal 2020; Net revenues through all digital channels grew 75% versus second quarter of fiscal 2020 driven by strong performance across all regions; digital penetration as a percentage of total sales was approximately 23%.
Record Gross margin of 58.8% and record Adjusted Gross margin of 58.2% driven by higher Direct-to-Consumer net revenues, price increases, sourcing savings, lower promotions and more full-price selling.
Operating margin was 8.3%; Adjusted EBIT margin expanded to a second quarter record of 9%.
Net income was $65 million; Adjusted net income was $93 million.
Diluted EPS was 16 cents; Adjusted diluted EPS was 23 cents.
Dividend increases from $0.06 to $0.08 per share for the third quarter.
“We generated strong momentum in the second quarter with the accelerated recovery of our revenues and delivered growth across all regions and channels. This was underscored by the strength of our brands and our ability to capitalize on evolving denim trends and a continued shift to casualization" said Chip Bergh, president and chief executive officer of Levi Strauss & Co. "As we move into the second half of 2021, we are focused on emerging stronger with our strategic priorities of leading with our enduring brand, accelerating our direct-to-consumer connections, and diversifying across categories, channels and geographies."
“We significantly exceeded our expectations on revenue, adjusted gross margin and adjusted EBIT. Revenues in most markets are recovering faster than anticipated, and we are emerging from the pandemic with sustainable and improved structural economics." said Harmit Singh, chief financial officer of Levi Strauss & Co. "As we look forward, we’re raising our expectations for revenues and profits. Our balance sheet remains strong and we continue to return cash to shareholders, with dividends now back to pre-pandemic levels.”
During the quarter, the company experienced temporary door closures in geographies affected by lockdowns associated with COVID-19 cases; approximately a third of the full store footprint in Europe and 17 percent of doors globally were closed during the quarter. Currently 92 percent of doors are open.
Second-Quarter Total Company Overview
Net revenues of $1,276 million increased 156 percent on a reported basis, and 148 percent on a constant-currency basis.
Wholesale net revenues increased 167 percent reflecting strong demand above the second quarter of fiscal 2020.
Direct-to-Consumer ("DTC") net revenues increased 141 percent due to increased revenues from our company-operated stores. E-commerce momentum continued despite store re-openings with growth of 42 percent reflecting the benefit of accelerating omni channel initiatives. DTC stores and e-commerce comprised 29 percent and eight percent, respectively, of total company net revenues in the second quarter.
The company’s global digital net revenues, which include net revenues attributable to the company's e-commerce sites as well as the online businesses of its pure-play and traditional wholesale customers, grew approximately 75 percent compared to the same period in the prior year, and comprised approximately 23 percent of second quarter fiscal 2021 net revenues.
Compared to the second quarter of fiscal 2019, total company net revenues decreased 3 percent on a reported basis and 4 percent on a constant-currency basis.
Gross profit was $750 million, as compared to $170 million in the same quarter in the prior year. Gross margin was 58.8 percent of net revenues, up from 34.1 percent in the same quarter of the prior year, primarily reflecting $87 million in charges taken in the second quarter of fiscal 2020 related to COVID-19.
Adjusted gross margin, which excludes the COVID-19 related charges, was 58.2 percent, an increase of 670 basis points compared to prior year. The increase in adjusted gross margin was primarily due to a higher proportion of sales in our DTC channel, which has higher gross margins, price increases, sourcing savings, lower promotions, and a higher share of full price sales reflecting the acceleration in consumer demand. Favorable currency exchange rates benefited year-over-year comparisons by approximately 30 basis-points.
Selling, general and administrative (SG&A) expenses were $628 million compared to $551 million in the same quarter in the prior year, which included $88 million in charges taken in the second quarter of fiscal 2020 related to COVID-19.
Adjusted SG&A in the second quarter of fiscal 2021 was $628 million compared to $462 million in the same quarter in the prior year, due to the increase in incentive compensation, higher selling expenses reflecting increased sales and higher advertising and promotion expenses.
Restructuring charges of $16 million were recorded in the second quarter of fiscal 2021 in connection with the company's restructuring initiative, which is designed to reduce costs, streamline operations and support agility. These charges primarily relate to employee-related severance benefits, based on separation benefits provided by company policy or statutory benefit plans.
Operating income of $107 million compared to an operating loss of $448 million in the same quarter in the prior year. The increase was primarily due to higher net revenues and gross margin partially offset with higher SG&A expenses in the current year, as well as the $242 million in charges recognized in the second quarter of fiscal 2020 related to COVID-19.
Adjusted EBIT of $115 million compared to a loss of $206 million in the same quarter of the prior year due to higher net revenues and Adjusted gross margin partially offset with higher Adjusted SG&A. Second quarter Adjusted EBIT margin was a record 9 percent, despite higher advertising as a percentage of net revenues, reflecting the record gross margin.
Net income of $65 million compared to a net loss of $364 million in the same quarter of the prior year, primarily due to the charges recognized in the second quarter of fiscal 2020 related to COVID-19 as well as the increase in operating income described above; these were partially offset with incremental costs related to the early extinguishment of debt and a lower income tax benefit.
Adjusted net income of $93 million compared to an Adjusted net loss of $192 million in the same quarter of the prior year, due to higher net revenues and adjusted gross margin partially offset with higher Adjusted SG&A.
Adjusted diluted earnings per share increased to $0.23 compared to a loss of $0.48 for the same prior-year period, in-line with the Adjusted net income increase.
Additional information regarding Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, Adjusted net loss and Adjusted diluted earnings per share, as well as amounts presented on a constant-currency basis, all of which are non-GAAP financial measures, is provided at the end of this press release.
Second-Quarter Regional Overview
Reported regional net revenues and operating income for the quarter are set forth in the table below:
In the Americas, net revenues and operating income increased, reflecting the impact of the pandemic on prior year results. Notably, company e-commerce net revenues grew 18 percent while lapping strong growth in the prior year. Compared to the second quarter of fiscal 2019, Americas net revenues grew three percent driven by growth in the U.S. market which was also up four percent. The region's wholesale net revenues grew four percent driven by strong performance by the Levi’s brand and Signature. Net revenues through all digital channels grew 61 percent and represented 19 percent of the region’s sales in the quarter.
In Europe, net revenues and operating income increased, reflecting the impact of the pandemic on prior year results. Notably, company e-commerce net revenues grew 75 percent while lapping strong growth in the prior year. Compared to the second quarter of fiscal 2019, Europe net revenues declined eight percent driven by DTC, which decreased 21 percent, reflecting temporary store capacity restrictions and closures during a third of the quarter. The region’s sales decline was partially offset by four percent revenue growth in wholesale net revenues and over 100 percent growth through all digital channels; digital net revenues represented a third of the region’s sales in the quarter. Notably, as markets began to fully open in May, the region’s net revenues for that month inflected to growth compared to the same month of 2019.
In Asia, net revenues and operating income increased, reflecting the impact of the pandemic on prior year results. Notably, company e-commerce net revenues grew 75 percent while lapping strong growth in the prior year. Compared to the second quarter of fiscal 2019, Asia net revenues declined 12 percent, as the COVID-19 pandemic continued to negatively impact several of the region’s large markets, including India, which accounted for roughly half the Asia region’s sales decline. China marked an inflection to growth for the first time since the beginning of the pandemic. The Asia region’s sales decline was partially offset by revenue growth through all digital channels of 83 percent; digital net revenues represented 15 percent of the region’s sales in the quarter.
Year-to-date 2021 Results are included in the company's Quarterly Report on Form 10-Q for the quarter ended May 30, 2021.
Cash Flow and Balance Sheet
Cash and cash equivalents at the end of the second quarter of fiscal 2021 of $1.2 billion and short-term investments of $95 million were complemented by $694 million available under the company's revolving credit facility, resulting in a total liquidity position of approximately $2.0 billion.
Net debt at the end of the second quarter of fiscal 2021 was negative $46 million. The company’s leverage ratio was 2.0 at the end of the second quarter of fiscal 2021, as compared to 4.1 at the end of the second quarter of fiscal 2020.
Cash from operations for the first six months of fiscal 2021 increased to $248 million compared to $41 million for the first six months of fiscal 2020. The increase in cash provided by operating activities is primarily driven by lower spending on inventory reflecting our ongoing focus on inventory management as well as higher collections in trade receivables, reflective of the increase in sales in comparison to the period in prior year.
Adjusted free cash flow for the first six months of fiscal 2021 was $60 million, an increase of $274 million compared to the first six months of fiscal 2020, primarily reflecting higher cash from operations in the current year period partially offset by proceeds from settling hedging contracts in the prior year period.
Total inventories were down 12 percent compared to the end of the corresponding prior-year period.
The company declared and paid a dividend of $0.06 per share in the second fiscal quarter totaling approximately $24 million. The company has increased the dividend to $0.08 per share for the third fiscal quarter totaling approximately $32 million. The dividend will be payable in cash on or after August 18, 2021, to the holders of record of Class A common stock and Class B common stock at the close of business on August 2, 2021. The company will reassess dividend payments for future quarters as circumstances evolve.
Additional information regarding net debt, leverage ratio, and Adjusted free cash flow, all of which are non-GAAP financial measures, is provided at the end of this press release.
The company's expectations for the second half of fiscal 2021 are now higher than 2019. Details are as follows:
Reported net revenues growth of 28-to-29 percent compared to the second half of fiscal 2020, which represents reported net revenues growth of four-to-five percent compared to the second half of fiscal 2019; and
Adjusted diluted EPS of 72-to-76 cents, bringing the full-year Adjusted diluted EPS outlook to $1.29-to-$1.33.
The company plans to share additional details during its investor conference call. The company's outlook assumes no significant worsening of the COVID-19 pandemic or dramatic incremental closure of global economies.
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