Direct-to-Consumer Boost for Levi's, Despite Hitting Margins
Denim manufacturer Levi's adjusts its forecasts due to increasing cost sensitivity among lower-income shoppers
In the recent second quarter, Levi's saw an uptick in direct-to-consumer (DTC) sales, albeit at the cost of margins. Revenue plummeted a staggering 9% year-over-year, with DTC sales skyrocketing 13% and wholesale sales plummeting 22%.
The company's gross margin expanded by 60 basis points to 58.7%, partly offset by increased marketing and DTC expenses. This financial quarter, Levi's reported a shift to a $1.6 million loss, compared to net income of $49.7 million in the same quarter last year.
Levi's anticipates an improvement in its inventory situation throughout the year, aiming to end below 2022 levels by year-end. The total inventories rose by 18% on a dollar basis and 8% on a unit basis year-over-year.
Demand Remains Strong, But...
CEO Chip Bergh confirmed that demand for denim remains robust, with the U.S. denim market seeing a 12% increase over the past 12 months compared to 2019. However, deteriorating sales in the U.S. market, particularly in wholesale and among lower-income consumers, have led to a downgraded revenue forecast for the year. The company now expects revenue growth of between 1.5% and 2.5%, down from 1.5% to 3% previously.
"Unfortunately, the lower- or moderate-income consumer is being squeezed, and that's driving some big category dynamics," Bergh acknowledged, noting increased price sensitivity. Sales of Levi's value brands, typically sold through wholesale channels, declined double digits, he said. The company plans to implement price cuts in its wholesale channel, contributing to the lowered revenue guidance.
Tough Times Ahead for Consumers
Some consumers are grappling with the trade-off between necessities and luxury items like jeans, Bergh stated. This is expected to intensify in the coming months following the Supreme Court's decision to dismantle President Biden's student debt forgiveness program, which could further impact discretionary spending.
GlobalData's Perspective
Despite the Americas showing a "deterioration" in its performance, GlobalData Managing Director Neil Saunders sees a partial explanation in a shift in wholesale shipments. In essence, the shift may have skewed the results more towards the previous quarter compared to the prior year. According to Saunders, the majority of the Americas' decline is due to lower orders from third-party retailers responding to weaker consumer demand.
The Emphasis on DTC
Levi's has focused on expanding its direct-to-consumer sales, comprising both e-commerce and company-run stores. This strategy generally seems sensible, according to Saunders. However, this growth comes with costs attached, including capital needed for expansion and additional marketing expenses. These expenses, stacked against lower revenue, have affected the company's bottom line.
Mixed Results Beyond Denim
Away from the signature denim line, Levi's brands delivered mixed results. Net revenue from the Dockers workwear brand fell 9%, while its Beyond Yoga brand, bolstered by DTC strength, soared 28%.
A Savvy Acquisition, Indeed
Welcoming the 2021 acquisition of Beyond Yoga, Wells Fargo analysts have hailed it as a "savvy" move. Beyond Yoga has seen sales double over the past three years and gains ever-growing consumer brand affinity and loyalty. This acquisition has positioned Levi's as a player in the high-growth athleisure segment, a sector enabling the company to remain competitive in the ever-changing consumer landscape.
- In light of the shifting retail landscape, Levi's has made a strategic move towards expanding its direct-to-consumer (DTC) sales, with analysts like Wells Fargo labeling the 2021 acquisition of Beyond Yoga, a high-growth player in the athleisure segment, as a "savvy" decision.
- The focus on DTC sales has resulted in a boost for Levi's, as DTC revenues skyrocketed 13% in the recent quarter, while wholesale sales plummeted 22%. However, this growth has come at a cost, with increased marketing and DTC expenses affecting the company's bottom line.
- Amidst tough economic times, with consumers grappling with the trade-off between necessities and luxury items, the demand for Levi's denim remains robust, with the U.S. market seeing a 12% increase over the past 12 months compared to 2019. However, deteriorating sales in the U.S. market, particularly in wholesale and among lower-income consumers, have led to a downgraded revenue forecast for the year.
