After the close last night, Levi Strauss (LEVI 23.41, +1.53, +6.99%) issued solid 1Q19 results, its first quarterly report since going public on March 21, and provided its initial outlook for FY19. Results came in better than those projected in its IPO prospectus back in mid-March, and its guidance indicates that it expects this positive momentum to continue.
Heading into the print last night, LEVI shares were in a slump. After hitting post-IPO highs of $24.18 on April 1, the stock rapidly dove lower over the course of the next few sessions. This Monday, LEVI slid by 12% from those highs to make new post-IPO lows just ahead of the Q1 report. This created a favorable set-up for the stock in which a strong report could act as the catalyst to reverse the stock higher, which is what we are seeing this morning with shares jumping by 8%.
As for its Q1 results, net revenue increased 7% yr/yr to $1.435 billion, at the high end of its $1.42-$1.435 billion guidance. On a constant currency basis, sales grew by 11%, reflecting its sixth straight quarter of double-digit constant currency revenue growth. This speaks to the success the company has had in diversifying its business across markets, product lines, and customer demographics.
What's especially encouraging is that the growth was broad-based across products and channels rather than being driven by a single category. Despite door closures at traditional wholesale customers (Bloomingdale's, Nordstrom), LEVI's wholesale business still grew by 5% with growth in all geographies. Further, its top five mature markets experienced 10% growth, including its largest market, the U.S., which saw growth of 9%. In an environment in which many department stores are struggling to compete as consumers' buying habits continue to shift towards digital, LEVI's performance in the wholesale channel demonstrates the resiliency of its brand name.
LEVI has been making its own push into the digital channel as it strives to become a well-rounded omni-channel retailer. In an interview just prior to its IPO, its CEO commented that e-commerce now represents about 10% of the total business, up from about 4% just several months ago. For this quarter, the e-commerce business grew by a healthy 24%, easily out-pacing growth in its wholesale and company-owned retail stores. This push into e-commerce not only has been a positive driver for the top-line, but has had a direct impact on margins and profitability.
From a product standpoint, over the past few years LEVI has broadened its portfolio, expanding into tops and women's categories. This strategy is also paying dividends for the company as its total tops business surged by 28% in Q1, driven by sweatshirts and trucker jackets. In women's, total business was up 18%, marking the 15th consecutive quarter of growth for that category.
Moving to the bottom line, adjusted net income spiked by 81% yr/yr to $151 million, ahead of its $136-$149 million projection provided in the prospectus. In addition to the top-line growth, its earnings growth was driven by solid cost management and enhanced EBIT margins.
As a percentage of sales, SG&A dipped by 130 basis points as its’ leverage offset higher direct-to-consumer investments. LEVI also pulled back on its advertising spend in Q1, which will reverse in Q2 as it ramps up for its 2019 campaign. On the latter, EBIT margin improved by 130 basis points, to 14.4%, with half of the improvement reflecting the reduced advertising expense.
Looking ahead, LEVI expects FY19 net revenue on a constant currency basis to growth by mid-single-digits and for Adj. EBIT margin to be roughly flat to slightly higher. During the earnings call last night, management admitted that this guidance might look rather conservative, based on its strong results for Q1.
However, the company continues to face some uncertainties and headwinds that are keeping it from being more aggressive in its outlook. These include more door closures at wholesale customers, unrest in Europe due to Brexit, and continued uncertainties surrounding China tariffs.
Despite these potential risks, LEVI plans to forge ahead with its growth plans this year, including the opening of 100 more company-owned retail stores. Additionally, the company is progressing in expansion efforts in China which it views as a substantial long-term growth opportunity. Specifically, it has built out its employee base and management team and has invested in its e-commerce capabilities. LEVI believes it has barely scratched the surface in China (all Asia markets are 18% of revenue) and it will continue to invest in that market this year.