The U.S. consumer is ‘a lot more price sensitive today,’ Levi Strauss & Co. CFO says

Levi Strauss & Co. CFO Harmit Singh joins Yahoo Finance Live to discuss company earnings, direct-to-consumer sales, rising inventory levels, and the outlook for Levi Strauss & Co.

Video Transcript

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- Shares of Levi Strauss are recovering today after falling 16% Thursday as investors digested the company's first-quarter earnings report. The retailer saw its direct to consumer sales jump 12% year-over-year, making up 42% of its total revenue. But its 33% rise in inventory levels left room for some concern.

Levi Strauss and Co CFO and Chief Growth Officer Harmit Singh joins us now. It's great to see you, alongside Yahoo Finance's executive editor Brian Sozzi. Harmit, just to kick things off here, some of the catalysts that you see during the quarter right now, what are they? And how do you kind of ride some of those trends that you are seeing among consumers right now who are still purchasing?

HARMIT SINGH: First, good morning, Brad and Brian. And, Brian, congratulations.

BRIAN SOZZI: Thanks so much. Same guy. Just losing more hair, Harmit. You know how it goes.

HARMIT SINGH: Yeah, no, it's great. To your question, Brad, we had a solid first quarter. We beat top line, grew top line, 6% reported and 9% constant currency. And, as you said, our direct-to-consumer business was up 12% reported, 16% constant currency. Five consecutive quarters of positive comp sales, growth in our direct-to-consumer business.

And, as we've said in our investor day, our direct-to-consumer business is what is going to lead the company going forward. So a lot to feel good about. I think to your question about the inventory, inventory, actually, the inventory growth came down sequentially quarter-over-quarter. In Q4, it was up 58%. Q1, it was up 33%, but sequentially down about 25 points.

And the company has taken deliberate actions that probably hurt us in the short term in terms of gross margins, but actions to clear inventory, and set us up really well for the future. What we have said is the inventory continues to sequentially-- the inventory growth continues to sequentially drop quarter-over-quarter. And we think we'll end the year in line with sales growth, if not earlier than the end of the year.

And the composition of inventory, because we have a lot of core-- 2/3 of our product is core. Take the 501s, the 150th anniversary that we are celebrating, et cetera. We can carry that through seasons. So we're confident we can get inventory in line with sales growth, which is something that investors really cared about, we care about. And we're working hard to do that.

BRIAN SOZZI: Harmit, Brian here. Just given everything we have been seeing in the economy, a little bit of an economic slowdown here, a soft patch ahead of the spring, what is the appetite among major retailers to put through replacement orders?

HARMIT SINGH: Our wholesale customers are tightening their open-to-buy budget. However, they have a lot of time and a lot of space for brands that work. And our brand is working, especially brands that provide innovation and newness. And with 150th anniversary of the 501, you've got new products in. We're also rolling out nondenim products.

So I think newness, as well as working with brands that consumers trust-- and, as we are seeing, our consumer base, clearly the value consumer, consumers in the US who are earning less than $50,000, they're pressured. But that's a small piece of our business. Our target base is $50,000 to $150,000, folks who earn that much in the US. And that group is resonating well with our products.

We went into the year thinking it's going to be a tale of two halves, the first half being weaker, largely because of the year overlapping a period that was very-- had very little promotion. And our cost of goods was much lower. And the second half a lot stronger.

It's kind of panning out that way, plus a tale of two worlds, the Western world a little bit under pressure, in Eastern world, which is Asia, as well as our Latin American business, being a lot stronger. Actually, as we end the quarter, our European consumer is generally a lot stronger than everybody anticipated and showing in our European business. And in the US, I talked about the bifurcation between the value end consumer and the consumers that are largely our target markets.

So as long as you bring newness and your products are resonating, I think our retailers are more open to place orders. But people are generally being cautious. And that's reflected in our wholesale business that we, A, reported, as well as indicated or projected for the year.

- Harmit, it's Julie here. One of our younger producers just informing me that baggy dad Levis, 501s, are all the rage on TikTok, which I was not aware of. But I am curious what it is taking to continue to move product. In other words, what does discounting look like right now? And what's it going to look like for the remainder of the year?

HARMIT SINGH: Yeah, Q1 was promotional. Yeah, we indicated that, reflected in our gross margins. Q2, we think, continues to be slightly promotional. Again, that's incorporated into our guidance.

And I think then things get a little better for a couple of reasons. One, people will have lower inventory, number one. Number two, our view is also your lapping year, where the second half last year was promotion, a lot more promotional than the first half. And I think that makes a difference.

But I think to the point you're raising, Julie, as long as brands can bring in newness, like we have the baggy product-- people love comfortable product. Both she likes it and he likes it. And I think that makes a difference.

Our 501, for example, and where we're celebrating 150th anniversary, we've got a lot of new and innovation on that. And I think that's driving business up. Our 501 business was up 25% on top of a 50% growth last year. So I think as long as we can incorporate newness, as well as ensure-- because the consumer is a lot more price sensitive today than he or she was about a year ago, ensure that you are able to provide value in terms of pricing, I think that does resonate.

- Harmit, you had taken a net restructuring charge of about $1.4 million in the quarter as well. And when we think about the number of companies that have had to announce some cost restructuring in one form or another, that's often impacted headcount. What would you look to in the performance for the business to say that there's an all clear, to say that there is a signal that any type of cost restructuring that needs to continue to be done is out the window and off the table?

HARMIT SINGH: Yeah, I'd say definitely certainty in the future. But going back to what we did or what we're doing is-- and we do this on a regular basis. It's about realigning resources to priorities. And, as with the macro uncertainty, at times you have to take a hard look at the priorities and say, OK, what will make a difference in '23? And how will things pan out going forward?

So, for example, we have a new CDO, chief digital officer. We're taking a hard look at realigning our digital priorities so that we grow our e-commerce business, which, for the quarter, was up 14%. And so that's one piece of it, in the same way as we think about our business longer term.

And we're becoming more of a direct-to-consumer company. So we're really thinking hard about how do we organize to be a DTC-led company, et cetera. And it's all about allocating or aligning resources to align with priorities more than a major restructure, like you've heard from other companies.

BRIAN SOZZI: Harmit, a lot of investors on our platform only know you as CFO and then Chip Bergh as CEO. But now there's going to be a little bit of a change in leadership with former Kohl's CEO Michelle Gass, who's currently president, taking over that position. To the extent you could, how might her first 90 days look? How might her leadership differ than both of you?

HARMIT SINGH: Yeah, first, it's great to have Michelle with us. She's been with us now for 100 days. And the transition is going great. She's got a real job. Chip has got a real job. I have a real job. And she's spending the time learning the business, interacting with people, understanding what is working, what are the areas of opportunity. And it's great.

Chip, Michelle, and I have gone on a couple of market tours. We've been to Europe. We've been to parts of the US. And we're seeing other parts of the world, really understanding, again, what's working and where the opportunities are.

I think to your question about how will she complement, I think she brings retail skills, which for a company that wants to be DTC led is important. She brings e-commerce skills. And she brings skills that will be important as we become more of a lifestyle brand, working on products that are waist up because that's a clear opportunity for us.

And I am seeing it on the ground with the stores. People are seeing it on the ground. And so I believe the combination of all three of us plus the leadership that she'll bring forward will actually really help us for the longer term.

- Harmit, great to see you. Thanks for joining us today. Harmit Singh is Levi's CFO and chief growth officer appreciate it. And there's Sozz as well. Let's take a look at some of the--

HARMIT SINGH: Thank you, folks.

- Thank you.