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Levi Strauss looks to double down on DTC growth with hiring, data
The apparel company posted record DTC growth in the U.S. during the fourth quarter.
Inside Levi Strauss & Co., the transformation continued in 2022.
The denim and apparel company was among the first of the big brands to shift to a direct-to-consumer strategy that bolstered its own stores and ecommerce channels as it started to pull back some from a traditional heavy reliance on wholesale. Now, DTC is a growth engine of the company, posting record U.S. gains in Q4. At the same time, it is bringing in new leaders and modernizing systems that will continue to push this business forward. To be sure, the company still has a massive wholesale business, but it's moves toward the future are flowing toward DTC.
Based on a review of the company’s fourth quarter earnings call, the company’s strengths in the fourth quarter came down to three areas: DTC, diversification and data.
Here’s a quick breakdown on each:
DTC was a clear highlight for the business in 2022. Quick stats:
- For the full year of 2022, LS&Co.’s global DTC business was up 18% for the year, with a 19% increase in owned stores and a high single-digit increase in ecommerce.
- In the U.S., the DTC business broke a record in Q4, with both stores and ecommerce delivering record revenue.
- Loyalty customers, which are a key engine of returning users at a time when brands are focusing on profitability, grew in the high single-digits last year.
- NextGen Stores, which provide an updated and expanded in-store footprint as part of the DTC strategy.
This helped to drive holiday sales growth of 10% over 2021 for the company. Growth accelerated sequentially from November into December, said chief growth and financial officer Harmit Singh. DTC tends to be a full-price channel, and it also contributed to profitability. Retailers faced a highly promotional environment as consumers sought discounts over the holidays, but Singh said gross margin was 200 basis points ahead of 2019.
It's a reminder: DTC is not an identity limited to startup brands with online-only operations, but rather a strategy for approaching sales channels. Storied and recognizable brands are embracing it as the ability to own relationships with customers in digital commerce and data gains importance.
LS&Co. is adding leadership with experience that is designed to help bolster this momentum.
Michelle Gass, the former CEO of Kohl’s, joined the company as president in the new year. There is an agreement in place for her to succeed current CEO Chip Bergh in 18 months. She is currently managing about 85% of the company’s P&L and Bergh said she is “already making a difference.”
“Michelle brings deep omni-retail experience and strong brand building skills,” Bergh told analysts this week. “As President, Michelle is responsible for the Levi's brand and the global commercial organization, which includes all go-to-market wholesale franchise retail and ecommerce.”
The company also added former Nordstrom SVP of digital commerce Jason Gowans as chief digital officer. He will start in February.
“Jason will focus on bringing together our engineering data AI and digital product management to spearhead our digital efforts for both e-commerce and our digital go to market,” Bergh said.
When it comes to products, LS&Co. is seeing growth in areas beyond jeans. The women’s and tops business is a particular priority.
“Nearly 40% of our 2022 revenue was beyond denim bottoms, including chinos, active leggings, tops, dresses, footwear, and accessories,” said chief growth and financial officer Harmit Singh. “These businesses grew 10% in 2022 and we expected sales penetration to continue to grow meaningfully over the coming years.”
But don’t count denim’s importance out yet. Bergh addressed a question about whether skinny jeans were “over,” given the recent interest in wider leg styles. Bergh said a pair of skinny jeans styles – the 311 and 721 – remained its most popular denim brands. However, half of revenue on bottoms in the fourth quarter came from looser, baggier fits.
“As Mark Twain once said, the news of my death has been greatly exaggerated. I've been known to say skinny jeans will never die. ,” Bergh said. "Having said that, the looser jeans are still a thing.”
Diversification also came into play as executives spoke of the company’s global presence. This will help at a time of macroeconomic uncertainty, and pronounced shifts between markets as inflation comes down and interest rates work through the system.
When it comes to the outlook for the year, Singh said the retailer is thinking about “a tale of two halves, where the first half is weaker than the second half. A tale of two channels – direct-to-consumer strong; wholesale, kind of flattish. And a tale of two worlds – the Western world probably growing low-single-digit, and Eastern world, which is Asia and Latin America, going low-double-digit. It's great to have a business that's so diversified.”
Within the operations of the business, LS&Co. recently completed implementation of a new enterprise resource planning system. With the DTC push, the upgrade to a cloud-based system is designed to provide visibility. This can assist with inventory, planning and a range of other functions.
“It’s really access to data and data on a real-time basis,” Singh said. “So, our commercial people, our operations people get access to data, and they can then leverage the data to actually drive business... Inventory management gets a lot better and handling direct-to-consumer gets a lot better.”
By the numbers
LS&Co.'s overall numbers for Q4 were as follows:
- Net revenue was down 6% compared to Q4 2021.
- Adjusted gross margin was 55.8% , 230 basis points below Q4 2021.
- Adjusted diluted earnings per share was $0.34, compared to $0.41 a year ago.
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This Week in Commerce: Nike earnings, Fed rate decision
Check out the agenda for March 20-24.
Welcome to a new week. Earnings offer a bellwether for the consumer economy this week, as key brands like Nike and General Mills will report results. Elsewhere, all eyes will be on the Federal Reserve as it announces its latest decision on interest rates.
Fed interest rate decision: The Federal Reserve Open Markets Committee announces its decision on whether and by how much to hike benchmark interest rates following its two-day meeting. The Fed has been hiking interest rates rapidly in an effort to bring down 40-year-high inflation, but slowed the pace at the February meeting with a 0.25% increase. (March 22, 2 p.m.)
Durable goods orders: The U.S. Commerce Department releases data on orders from manufacturers for goods that are designed to last more than three years. This is considered an indicator of business activity. In January, orders dropped at the steepest rate since April 2020. (March 24, 8:30 a.m.)
Monday, March 20: Boxed, Foot Locker
Tuesday, March 21: Nike, GameStop
Wednesday, March 22: Petco, Chewy
Thursday, March 23: General Mills, Express