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After the close yesterday, Levi Strauss (LEVI) reported better-than-expected Q1 results driven by strength in its Direct-to-Consumer (DTC) segment and its highest gross margin in recent history.

• For the quarter, LEVI generated EPS of $0.40 vs. the $0.35 consensus estimate and revenue (+5%) of $1.51 bln vs. the $1.46 bln expectation.
  • Sales in the company's DTC business grew by 13% and accounted for about 40% of its total business, compared to less than 30% five years ago.
    • One of LEVI's core strategies over the past few years has been to diversify away from the wholesale channel (-6% in Americas), which is facing fierce pressure from online competition.
  • LEVI's Q1 results benefitted from a later Black Friday which helped drive a 22% increase in its America's DTC segment.
    • LEVI estimates the later Black Friday favorably impacted this segment's growth by 12%.
• In addition to price increases and solid inventory management, LEVI's lessening dependence on the wholesale channel is also boosting its margins.
  • In Q1, gross margin improved by 110 bps yr/yr to 55.7%.
• Since LEVI's quarter ended on February 23, its results include negative effects from the coronavirus in China.
  • LEVI believes that store closures in China during the last six weeks of the quarter reduced sales by $20 mln.
  • However, with all of Asia accounting for ~15% of total revenue, LEVI wasn't hit too hard.
  • The Asia region (-2% in Q1) is poised for stronger results in Q2 as nearly all of LEVI's company-owned and franchised stores in China have reopened.
    • During the earnings conference call, CEO Chip Bergh stated that weekly sales performance is sequentially improving at its stores in China.
• The news isn't nearly as positive in the Americas and Europe markets.
  • Since mid-March, all of Levi's doors in these markets have been closed.
  • Consequently, LEVI expects its Q2 revenue, earnings, and cash flow to be materially lower.
  • Due to the lack of visibility regarding when the pandemic will pass, the company withdrew its guidance.
• Due to its solid financial position, strong brand name, momentum in the digital channel (+12%), and its cost-cutting actions, LEVI believes it is in a good position to weather this crisis.
  • The company ended the quarter with nearly $1 bln in cash and another $820 mln available under its credit facility.
  • For now, LEVI plans to keep paying its quarterly dividend of $0.08/share.
  • LEVI is targeting a 30% reduction in CapEx spending this year and is pulling back substantially on advertising spending.
  • Effective April 13, LEVI will be furloughing all U.S. hourly retail employees and its wholesale merchandise coordinators.