In any other situation, Levi’s (LEVI) would probably be rewarded for the pretty impressive first quarter it just tossed on the board Tuesday afternoon.
Sales beat handily. Inventory fell 7% (always good to see for a retailer when sales are gaining). Earnings beat nicely. Sales in tops, bottoms, women’s and men’s all increased, no small achievement. Results reflect solid momentum in the business before the worst of the coronavirus hit the globe — Levi’s quarter ended Feb. 23.
Here are the results:
Net sales: $1.5 billion vs. estimates for $1.46 billion
Gross margin: 55.7% vs. estimates for 54%
Diluted EPS: $0.40 vs. estimates for $0.35
But as we all know, these are not normal times for consumers and retailers. Stores are closed across the country. Department stores such as Macy’s and J.C. Penney have furloughed thousands of workers. Consumer confidence has fallen off a cliff, leaving all sorts of apparel unsold online and of course, in those closed stores.
Levi’s gave investors a taste of the current situation in its earnings report.
Second quarter earnings and cash flow are expected to be “materially” adversely impacted from its own stores being closed in the U.S., Europe and other parts of the world. The company said Tuesday it will furlough its U.S. store workers as it moves to contain costs. After noting it will pay out a 16% higher dividend to shareholders, the company added it “will reassess dividend payments for the balance of the year as circumstances evolve.”
“We are very focused on how we are going to come out of this. We had a lot of momentum going into this. We are very, very focused on taking the steps we need to take to make sure we come out of it stronger,” explained Levi’s CEO Chip Bergh in an interview with Yahoo Finance.
In short, who knows what to make of Levi’s quarter. But it was solid on paper.
Don’t count Levi’s out
Bergh, a consumer products veteran, pulls no punches on the existing state of affairs in retail and what may lay ahead.
“The hardest thing to do right now is to forecast what will happen because none of us know what it’s going to take to control the virus which is absolutely step one. And then what is the economic fallout from this. How many jobs get lost. How deep a recession do we go into and how long does it continue. All of those are economic unknowns, which makes it really hard to forecast the business,” Bergh said.
“I think this economic shock that we are experiencing is just going to further separate winners from losers. It will have a significant impact on the landscape. I can’t really predict what that looks like,” continued Bergh. “But it’s going to have a shakeout impact on the entire retail landscape in the U.S. The strong will survive in the wholesale channel. They may be smaller. I think every company may be a little bit smaller and everyone is going to have to rationalize their store base and employee base as we go through this.”
That said, Levi’s may still be rewarded by the Street when it’s all said and done.
Just think of Levi’s resilience operating through 167 years of varying business conditions (think Great Depression). The fact that it has $1.8 billion in total liquidity is a godsend in this type of environment — it means that Levi’s could get prime real estate once occupied by fallen rivals, or even buy fallen rivals. The fact that liquidity — barring a new leg down in global consumer demand that keeps stores closed much longer — means the dividend at current levels is probably safe.
Add to that Levi’s is led by battle-tested pros like Bergh (nine years as Levi’s CEO) and CFO Harmit Singh (eight years as Levi’s CFO) should be comforting to investors. These are the pros that will be able to quickly identify the industry opportunities before others.
“We are uniquely set up to come out the other end, not just successful but stronger than we were before. We have one of the industry’s most iconic brands. We have a really strong balance sheet with $1.8 billion in liquidity. We have an experienced management team,” Bergh noted. “And we have demonstrated an ability to take costs out pretty aggressively. We have a 167 year track record, which nobody else can claim. We have seen it all.”
No doubt it will be a tough go this quarter and the next for Levi’s and most others in retail. But to lump Levi’s in with — say a debt-ridden J.C. Penney or a dying no name apparel brand — is not the right way for investors to think about it.