Dive Brief:

• Levi’s on Wednesday reported that Q4 net revenues fell 6% year over year to $1.6 billion, as DTC net revenues fell 2% and wholesale revenues fell 8%.

• The global wholesale decline was largely due to the inability to fulfill some $40 million in orders due to capacity challenges at U.S. distribution centers, CEO Chip Bergh told analysts. Ending inventory was up 58% year over year, or 35%, excluding the effects of ongoing systems changes, and executives said they expect levels to normalize by the end of the second quarter.

• Currency-adjusted gross margin contracted by 230 basis points year over year to 55.8%, but was up 150 basis points compared to 2019, per a company press release. Net income dropped 1% to $151 million.

Dive Insight:

Already saddled with a huge pile of inventory — the denim maker ended its previous quarter with inventory up 43% — Levi’s is also now dealing with a host of outside forces that are challenging its operations.

That includes the war in Ukraine, (which led to the dissolution of its Russia business that in turn sent revenues down in Europe), financially strapped consumers and shifting apparel trends affecting denim.

“Concerns over [a] weakening denim cycle have grown loud,” Wells Fargo analysts led by Ike Boruchow said in emailed comments.

But Bergh noted that denim sales so far are remaining consistent. Even supposedly out-of-style skinny jeans performed well: Levi’s two bestselling items in women’s were both skinny jeans, according to Bergh.

“I've been known to say skinny jeans will never die. Having said that, the looser jeans are still a thing. They're definitely the trend,” he said. “Half of our revenues on bottoms this past quarter came from the looser, baggier fits, but our top two women's bottoms items were the 311 and the 721. So, the skinny jean is not going anywhere anytime soon.”

He remained upbeat about the company’s prospects, which he said remain bright in part because of the enduring strength of the company’s 170-year-old brand. Levi’s has also diversified, both its assortment and its sales channels. Nearly 40% of the company’s 2022 revenues came from outside of denim bottoms, with business in chinos, active leggings, tops, dresses, footwear and accessories up 10% for the year, for example, Bergh told analysts on Wednesday. 

Meanwhile, Levi’s global DTC business was up 18% for the year, up 19% via company owned and operated brick-and-mortar stores and by high single-digits online, Bergh said. The company opened 11 U.S. stores in the quarter, for a total of 66, with more opening this year, including in Honolulu, Miami and Nashville, Tennessee.

“Early results are very encouraging with most of them exceeding revenue and profitability expectations since their opening,” he said of the new stores. 

Analysts by and large see Levi’s doing well in the quarter despite the dips and challenges. The company has managed its business well over the past 12 to 18 months, though Q4 marks the second straight quarter with major gaps, Boruchow said.

“Big picture, wholesale headwinds are persisting and inventory is building,” he said, adding that, with positive comps in all geographies, “the lone bright spot is DTC ... which is good to see. We remain cautiously optimistic.”

The company’s wholesale declines are understandable given the inventory pileups at several retailers, but the brand could also use more help from some of its major retail partners, according to emailed comments from GlobalData Managing Director Neil Saunders.

“[M]any sellers of Levi’s products, especially department stores, are not doing anywhere near enough to push product in a compelling way,” he said. “Rather, the Levi’s brand is lost in the wider mess of retailers like Macy’s and Kohl’s. This is an issue for Levi’s, which is one of the reasons it has pushed direct distribution much harder, including opening up more stores in select locations. This may well cannibalize sales from other retail channels, but it is the right move if Levi’s wants to take back more control over its brand and showcase its offerings effectively.”