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Levi's beats quarterly earnings estimates; CFO says China still a growth market

Brian Sozzi

The 2019 holiday shopping season was far from grand for many major retailers as the sector grappled with fewer days between Thanksgiving and Christmas. Even still, jeans giant Levi Strauss & Co. (LEVI) managed to put up a respectable quarter Thursday afternoon given the challenging environment. Gross profit margins rose 110 basis points from the prior year, while inventory was unchanged — both are no small feats.

Here are the quarterly results.

  • Net sales: $1.57 billion vs. estimates for $1.58 billion

  • Diluted EPS: $0.26 vs. estimates for $0.21

  • 2020 EPS outlook: $1.18 to $1.22 vs. estimates for $1.17

  • The wins: new $100 million stock buyback plan announced; 14% increase in the dividend announced; gross profit margins up; inventory levels unchanged; sales and operating profits in Europe rose 5% and 47%, respectively; fiscal year ended with an impressive $934 million in cash on the balance sheet.

  • The misses: a shift in the retail calendar weighed on Levi’s financials, mostly the Americas where sales and operating profits dropped 5% and 7%, respectively; U.S. wholesales fell 4%; sales in Asia only rose 1% and operating profits declined 43% amid unrest in the key markets of Hong Kong and India.

Yahoo Finance caught up with Levi’s CFO Harmit Singh to discuss the results and outlook. Here are several takeaways from our chat:

Singh expects U..S wholesale sales to be “flat” in 2020 as Levi’s continues to restrict shipments into off-price retailers TJ Maxx and Ross Stores to support healthier profit margins. He does expect some strength in wholesale, however, from Levi’s selling more tops at key retailers and going into more upscale department stores such as Nordstrom.

‘Still long on China’

Levi’s has long viewed China as an important growth market — sales were strong in December, Singh says, pretty much before the coronavirus began to take hold. In the wake of the coronavirus outbreak, Singh says Levi’s has taken several actions. “We are taking it very seriously. Protecting the safety of our people and our business partners is our top priority. We have closed approximately 50% of our fleet [store] as of now, and have stopped all employee travel in and out of China. It probably puts a damper — at least in the short-term — for our growth plans in China, but we are here for the long-term. We are still long on China.”

Singh adds Levi’s hasn’t felt any production issues as it has moved a good bit of its production out of the country over the past year. Only 2% of Levi’s products are made in China, Singh notes.

Levi’s jeans deal with Target is progressing very well, Singh said. Levi’s and the discounter expanded a deal for several jeans styles to 50 stores back in August 2019. Singh says there are plans to double the Target store count where jeans are available.

Countless apparel makers would love to switch positions with Levi’s.

The company has a strong brand, strong balance sheet, well-respected management team and a clear growth plan on the table. One of the biggest questions right now is whether the market will warm up to apparel retailers given a looming fresh wave of store closures in the U.S. (see Macy’s and JC Penney) and demand/production concerns emanating out of the Chinese market. While those factors may temper enthusiasm for Levi’s shares near-term, it puts the company in the driver’s seat to gain investor attention once the coast clears externally.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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