Levi’s ‘Rewiring’ for DTC, Takes Q1 Restructuring Hit

Michelle Gass is settling in as president and chief executive officer of Levi Strauss & Co., which is starting to bear more of her mark with a direct-to-consumer base that’s both growing and becoming more profitable. 

But the changes come with some pain. 

Gass, the former Kohl’s Corp. chief and Starbuck executive, started her tenure in the Levi’s corner office in January with a multiyear program called Project FUEL that will cut the company’s corporate workforce by 10 to 15 percent. 

That program has led to $116 million in severance and other changes so far, leading Levi’s to report a net loss of $10.6 million in the first quarter on Wednesday, down from earnings of $114.7 million a year earlier. 

On an adjusted basis, earnings per share slipped to 26 cents from 34 cents a year earlier, but were still 5 cents ahead of the 21 cents analysts projected, according to YahooFinance.

Revenues for the quarter ended Feb. 25 fell 7.8 percent to $1.6 billion from $1.7 billion. 

But adjusted sales were roughly flat, factoring out a switch in the company planning system that shifted the timing of wholesale sales a year ago and the exits of the Denizen business and Russia. 

Direct-to-consumer revenues rose 7 percent and accounted for 48 percent of Levi’s total business in the quarter. Wholesale sales were down 18 percent, or down 9 percent after adjusting for the timing shift a year ago.

While the restructuring and other changes made for a quarter with a lot of noise, Gass was crystal clear on the company’s direction and the broader retail climate.

“We’re feeling really good about the consumer, especially the consumer as it relates to our key category,” Gass said in an interview. “The denim category here in the U.S. was actually flat after a couple years of volatility. Importantly we grew market share, three points in men’s, one point in women’s, which is exciting.” 

The brand is also growing market share with the middle-income consumer, who represents 40 percent of the category, she said. 

“We’re looking at what we can control and what can we influence,” Gass said. “We feel great about the category dynamics. The brand has never been stronger.” 

Levi’s is also branching out, selling more of a head-to-toe denim look as well as more tops and non-denim styles. 

Levi's jeans red tab.

Levi’s red tab.

picture alliance via Getty Images

Behind the scenes, the company is changing how it operates, focusing on moving quicker as it pivots to much more of a direct-to-consumer footing. 

“We are undertaking an end-to-end rewiring of the entire enterprise in how we go to market,” Gass said, pointing to productivity in both the company’s own stores and its e-commerce business. 

“We want to continue to drive that revenue up, drive productivity, sales per square foot,” the CEO said. “Our DTC channel overall was up 10 percent [in the U.S.] and a big part of that was comp growth.”

She described the improvement as the “direct result of efforts we’re making in the four walls of that store” and said the company has committed to adding 100 new doors, with Asia being a big part of the push this year.

A 501 jeans display in Levi's Times Square store.

The Levi’s store in Times Square.

Courtesy Photo

Levi’s is also becoming more focused and rightsizing costs under the Project FUEL program.

“We’ve reduced our [stock keeping units] by 15 percent to start, from a Levi’s standpoint, to make sure we can be focused on the core essentials, like your 501s never out of stock, but also create space for all the new things we’re bringing in like the tops and denim dressing.”

And at least one business is going away.

“We do have a small footwear business in Europe and we are deprioritizing and ultimately exiting that business,” Gass said. “It’s a small business, it’s down-trending — not our core competency. That being said, we love doing collaborations and we’ve done many of them, Crocs recently, New Balance today.” 

Despite all the change and some lingering questions on the consumer, Levi’s is forecasting growth for 2024. 

The company affirmed its revenue guidance calling for a 1 percent to 3 percent increase. And the outlook for adjusted earnings per share inched up by 2 cents, to a range of $1.17 to $1.27, up from the $1.15 to $1.25 previously forecast. 

Analysts were forecasting EPS of $1.21 heading into the quarterly update.

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