Levi Strauss & Co.: U.S. market ‘seeing the greatest challenges’, CEO says

Levi Strauss & Co. CEO Chip Bergh joins Yahoo Finance Live’s Brian Sozzi at the Milken Institute’s 26th annual Global Conference in Beverly Hills, to discuss first-quarter earnings, the history of the company, pivoting the business away from being a bottoms business, and the outlook for profit growth.

Video Transcript

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BRAD SMITH: As the word recession dominates the mind of consumers, retailers are fighting against the current to navigate cost-cutting. Denim giant Levi Strauss is among them. And despite a hike in prices, the brand wasn't able to escape the rising cost in goods. Our executive editor Brian Sozzi had a chance to sit down with Chip Bergh, Levi Strauss & Co. CEO at this year's Milken Conference, where they discussed everything from the economic slowdown to the growth of its top business.

CHIP BERGH: When I joined the company, we were basically a men's denim bottoms business sold in US wholesale. I mean, that was a big part of our business. And 12 years ago, after I joined, we put a strategy in place that fundamentally was to protect our profitable core business, which is that men's bottoms business, but to begin to expand the Levi's brand and Levi's portfolio further.

We needed shock absorbers to absorb all of the potential disruption that could be coming. And obviously, one of the big choices was tops. In the apparel industry, the basic rule of thumb is somewhere between four or five tops for every bottom. When I joined the company, we were the exact opposite. Our tops business when I joined was only 10% of our total revenues. Today it's more than 20%.

It should be more. And we are still focused on a much bigger number. But I jokingly, half-jokingly say we don't even buy tops market share because we don't even scratch the surface. We don't even have a 1% share of tops globally?

BRIAN SOZZI: Why is that? Is it because I go to the store, I see Levi's jeans, I still don't think about Levi's as doing this other stuff?

CHIP BERGH: Right. And our ambition, our aspiration, if you will, is for the Levi's brand to be a true head-to-toe lifestyle brand. And for us to do that, we have to be successful in tops. So where we have had success is obviously expanding the tops that make the most sense, like a white T-shirt or a white batwing T-shirt, which we had tremendous success with. But no, this is a Levi's top. This is an indigo top woven shirt. And it's beautiful.

And so a lot of it is just creating the product, first and foremost. We've got to have the right product, and then buying that product and making sure that it gets to our store. And to pivot the business away from being a bottoms business you have to buy less bottoms and buy more tops. And every merchant in the world is trained to buy based on what's sold last season.

So you have to really lean into it. You have to create the right products, lean into it, assort your stores. And we're on that path right now. But our tops business has been growing double digit for the last several years. And it still represents a real meaningful opportunity for us.

BRIAN SOZZI: I went to your website before this interview, Chip, saw a pair of jeans, $325. I thought, wow, is that the impact of inflation? But when I clicked through, there's a real story to these jeans. I believe they're called the selvedge jeans. Tell us about that story. And are consumers open to spending $325 on jeans?

CHIP BERGH: In fact, the higher end of our business is probably the best performing part of our business right now. But selvedge has this incredible history. And this year, we are celebrating the 150th anniversary of the Levi's 501, our most iconic item. And the 501 saw exceptional growth last year. It grew 50% last year. It's our biggest, our most iconic item.

And this last quarter, our first quarter, we grew 25%, comping a 50% base. And it is really on fire. Selvedge is-- it actually stands for self-edge, which is, when the fabric is made, it's made on a loom. And if you go way back into the day when we first launched Levi's, to have an edge on the end of the fabric so that the fabric wouldn't fray, they created this self-edge.

And it had a white strip, which later, they put a red line down the middle of. And true denim aficionados know what selvedge is. And a typical real denim head will wear their selvedge jeans cuffed so that you can see the selvedge. I'm actually not wearing selvedge today. I own a lot of selvedge.

BRIAN SOZZI: Your secret's safe with me.

CHIP BERGH: You can't see it anyway. But I own a lot of selvedge because it tends to be much higher quality product.

The other thing I'll mention, so through the history of Levi's, back right around World War I, we developed a relationship with Cone Mills, which today is still one of our important denim suppliers. But back in the kind of World War I days in, I think it was, 1917 or '16, Cone Mills had a loom in North Carolina. And that white Oak loom became really famous to true denim heads.

Cone Mills closed that factory about four years ago. And when they closed it, we bought the last remaining supply of Cone denim-- Cone White Oak denim. And as we celebrate the 150th, we are launching product with true White Oak denim. And it is the last White Oak denim you are ever going to be able to buy brand new ever again because that factory is gone.

BRIAN SOZZI: Selling a $325 pair of jeans, I mean, it's a phenomenal story. The product is great. But the economy is slowing. What are you seeing in terms of demand for your jeans right now, given things have slowed down?

CHIP BERGH: Yeah, so we knew coming into this year that we were going to be navigating a very challenging year, in part because last year was very bifurcated. We had a very strong first half as we were coming out of the pandemic. We grew 20%-plus in the first half. And then in the summer, kind of the bottom fell out as inflation started to impact the consumer.

Fear of recession started to grab hold. Currency headwinds-- and the second half, we were basically flat. We were flattish. So we have a huge base period in the first half and a soft base period in the second half. And this year, guess what, it's going to be the opposite. The first half is going to be really, really challenging. And we should see some real progress with some tailwinds in the second half.

But as I look at the consumer around the world, there is-- first of all, the US market is where we are seeing the greatest challenges. In the first quarter, our US wholesale business was very challenged. We have two value brands that we sell in the key mass retailers in this country. Those businesses are both off double digits. But the lower-income, low to moderate-income consumer, they are now making very tough tradeoffs with their monthly budget.

And they are literally to the point where they're making decisions about, do I really need another pair of jeans, or can I trade down from the Levi's value brand to--

BRIAN SOZZI: What's even below the Levi's value brand?

CHIP BERGH: Private label brand at Walmart or Target. And those are the tradeoffs that we're seeing. The Levi's brand, the Levi's Red brand, our core consumer is in the $50,000 to $150,000 income level. And that consumer is still buying jeans.

In fact, the US denim market, in the first quarter, grew 1%, comping 16% growth first quarter a year ago. So the category is still OK. We're growing share. We're growing share with the core 18 to 30-year-old. We're growing share with women.

And our business and the brand is still really, really healthy. But wholesale is very, very challenging for us right now and especially the lower end of wholesale.

BRAD SMITH: That was Levi Strauss & Co. CEO Chip Bergh alongside Yahoo Finance's executive editor Brian Sozzi.