Levi’s DTC growth accelerates in Q2 as wholesale sales improve

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Brief description of the dive:

Levi’s second-quarter net revenue increased 7.8% year-over-year to $1.4 billion. According to the company’s press release, net revenues from direct sales increased by 8% and wholesale sales by 7%.
Gross margin increased 180 basis points to 60.5%, primarily driven by lower product costs and a favorable mix, partially offset by foreign exchange rates. Total inventories fell 7%.
The denim brand went black during the period, posting a net profit of $18 million compared to a net loss in last year’s second quarter of $2 million.

Diving Insight:

Levi’s remains a consistently recognized global denim brand among consumers of all ages, CEO Michelle Gass told analysts on Wednesday. Sales of the classic 501 remain strong and increased by 16% in the DTC channel in the second quarter, she said.

“We continue to build brand warmth and influence storytelling by appearing at the cultural center of music, art and design, fashion and sports,” she said. “We were thrilled and honored that Beyonce named a song after us on her latest album.”

However, this does not mean that the company is standing still. Gass also said the brand is seeing an increase in looser styles in women’s clothing and non-denim clothing. Sales of “loose fits” are up 21%, and this summer the company is launching women’s baggy styles and men’s relaxed fit styles to meet demand.

Above all, however, the company sees development in the transition to the DTC channel, both online and stationary. Gass noted that “this evolution will span many years,” but both she and chief financial and growth officer Harmit Singh emphasized the pivot and noted progress this quarter.

In the second quarter, the DTC business posted its ninth consecutive quarter of “robust competitive growth,” with the Levi’s brand growing 2% on an adjusted basis and the global Levi’s Women’s DTC business growing 22% in DTC in the second quarter, Gass said. The company will open a network of 70 new stores in the second half of the year, ending the year with more than 2,600 stores worldwide, Singh said.

“Not only does our DTC business continue to be our fastest-growing business, but it is also seeing real improvement in profitability, with operating margins increasing by over 300 basis points during the quarter,” Singh also said. “This includes significant improvement in e-commerce profitability, with EBIT margins now in double digits on a fully allocated basis.”

The question remains whether this can be sustained given Nike’s experience. Three years ago, executives there (and many analysts) similarly touted the potential for bigger margins and higher profits as the brand prioritized DTC over wholesale. Last year, wholesale seemed to have regained some prominence in Nike’s strategy, and this year Nike CEO John Donahoe said that while the emphasis on DTC was “driving growth and direct connections to consumers,” it was clear that we needed to introduce some important corrections. ”

For now, Levi’s DTC strategy remains valid, although there are some clouds on the horizon. For example, consumers’ shift away from denim is “creating a lack of visibility,” say Wells Fargo analysts led by Ike Boruchow. And although Levi’s remains the market leader, its global share has declined, Boruchów said, citing Euromonitor data.