Levi Strauss reaffirmed its financial outlook for the year after a forecast-beating second quarter, but remained wary of potential risks including supply chain disruptions and a strong dollar.
The jeans maker continued to benefit from actions over recent quarters to raise prices on its products and reported strong year-on-year growth in several of its apparel categories.
That helped offset foreign exchange effects, the impact of Covid-19 lockdowns in China and its suspension of business in Russia earlier this year, financial chief Harmit Singh told the Financial Times.
“The state of the consumer, generally, in the US continues to be healthy,” Singh said of the company’s biggest market, but they had observed some “softness . . . in the lower-end consumer.”
Singh said the strength of the Levi’s brand allowed the company to selectively increase prices “without materially impacting demand”. In the second half of the year, “we’ve taken pricing up about mid-single digits to offset cost pressures, including commodities. This will vary around the world, depending on our competitive position, and we’ll evaluate as needed if the consumer situation generally deteriorates.”
Still, Levi’s stuck with its full-year forecast for adjusted earnings of $1.50 to $1.56 a share on revenue of $6.4bn to $6.5bn. Given concerns about a potential recession, which Singh was confident Levi’s could “weather better than a lot of others”, the “right call, right now” was to reaffirm guidance.
The company is “generally feeling optimistic” about supply chain disruptions easing, but Singh warned they would have to continue using air freight until 2023 in order to meet demand. The relatively high cost of that method took about 80 basis points off of gross margin in the second quarter, which was about flat year on year, he added. In the first quarter of this year, air freight costs took about 20 basis points off of margins.
Part of the caution is also due to the appreciation of the US dollar, which is now around 20-year-highs against the euro. Levi’s generates at least 40 per cent of its revenue outside the US. Singh conceded “foreign exchange is hurting us”, but was optimistic the company would be able to offset those costs.
For the second quarter that ended May 29, Levi’s reported a 15 per cent jump in revenue to $1.47bn, beating analysts’ estimates of $1.43bn, while adjusted earnings of 29 cents a share topped forecasts by 6 cents.
Investors welcomed the result and the reaffirmed outlook and pushed Levi’s shares about 4 per cent higher in after-hours trading on Thursday.