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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.
Trending in Brand News
Labor disputes on the West Coast could cause further disruption heading into peak season.
When the first half of 2023 is complete, imports are expected to dip 22% below last year.
That’s according to new data from the Global Port Tracker, which is compiled monthly by the National Retail Federation and Hackett Associates.
The decline has been building over the entire year, as imports dipped in the winter. With the spring, volume started to rebound. In April, the major ports handled 1.78 million Twenty-Foot Equivalent Units. That was an increase of 9.6% from March. Still it was a decline of 21.3% year over year – reflecting the record cargo hauled in over the spike in consumer demand of 2021 and the inventory glut 2022.
In 2023, consumer spending is remaining resilient with in a strong job market, despite the collision of inflation and interest rates. The economy remains different from pre-pandemic days, but shipping volumes are beginning to once again resemble the time before COVID-19.
“Economists and shipping lines increasingly wonder why the decline in container import demand is so much at odds with continuous growth in consumer demand,” said Hackett Associates Founder Ben Hackett, in a statement. “Import container shipments have returned the pre-pandemic levels seen in 2019 and appear likely to stay there for a while.”
Retailers and logistics professionals alike are looking to the second half of the year for a potential upswing. Peak shipping season occurs in the summer, which is in preparation for peak shopping season over the holidays.
Yet disruption could occur on the West Coast if labor issues can’t be settled. This week, ports from Los Angeles to Seattle reported closures and slowdowns as ongoing union disputes boil over, CNBC reported. NRF called on the Biden administration to intervene.
“Cargo volume is lower than last year but retailers are entering the busiest shipping season of the year bringing in holiday merchandise. The last thing retailers and other shippers need is ongoing disruption at the ports,” aid NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “If labor and management can’t reach agreement and operate smoothly and efficiently, retailers will have no choice but to continue to take their cargo to East Coast and Gulf Coast gateways. We continue to urge the administration to step in and help the parties reach an agreement and end the disruptions so operations can return to normal. We’ve had enough unavoidable supply chain issues the past two years. This is not the time for one that can be avoided.”