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Big Questions Abound Until Levi's Starts to Report Same-Store Sales

Motley Fool - Wed Nov 8, 2023

Levi Strauss(NYSE: LEVI) reported a mixed quarter on the earnings front. A decline in its wholesale business was offset by an increase in sales through the company's own stores. The end result was a top line that was roughly flat year over year.

But there's one small problem here: It is almost impossible to know just how well Levi's own stores are performing.

Levi's is making big changes

Historically, Levi's biggest business has been selling its products to other retailers that then sell the clothing to customers. This wholesale business is still the company's largest division, accounting for roughly 60% of the top line. It's direct-to-consumer segment, which includes Levi's stores and its online operations, made up 40% of revenue in the third quarter.

Three people with shopping bags walking on a street.

Image source: Getty Images.

The long-term goal, however, is to get the direct-to-consumer business up to 55% of the top line. That figure is expected to be reached in 2027. In 2021, the number was just 36%. So this is a rather large shift in the company's business plan. Part of the process of getting to 55% includes opening new stores.

That makes complete sense, with Levi operating "approximately 3,200 brand-dedicated stores and shop-in-shops" at the end of the third quarter. In Q3 2022, the company had 100 fewer stores listed in its business description. There's a subtle problem here, however, because new stores require time to ramp up, and early results aren't always indicative of a store's long-term performance.

Strong same-store sales, but how strong?

This is why companies report same-store sales, which measures the performance of stores that have been open for at least a year.

Management noted, "In the third quarter, we delivered double-digit growth in our direct-to-consumer business, driven by strong comp-store gains, which helped offset continued softness in the wholesale channel, primarily in the U.S."

That's nice, but it didn't actually give a same-store sales (what it calls "comp-store") number.

In the earnings conference call, executives noted that same-store sales have been positive for six quarters, and that the comp-store growth was broad based across geographies and channels. But again, no specific number.

Same-store sales is a pretty common figure for a retailer to provide when it reports earnings. Given the increasing importance of Levi's own stores and the long-term goal for this segment to represent slightly more than half of the top line, it is a number investors should be interested in seeing. American Eagle Outfitters(NYSE: AEO), for example, reports the figure.

From a big-picture perspective, a company can improve sales through its own store footprint in two ways. The first is by selling more from each store, which would mean positive same-store sales. The other is by just opening more stores, which can actually hide poor performance at existing stores because new stores add fairly significantly to the total.

Given Levi's comments, it sounds like its stores have been performing well. But without a number to track, you are left taking management's word for that. It's not an ideal outcome, and given the large number of stores the company already operates, providing the metric seems like a reasonable expectation.

Indeed, Levi's wholesale business (sales to other retailers) declined 8% year over year in the third quarter but its direct-to-consumer sales grew 14%.

How much of the direct-to-consumer strength came from new stores and how much from strong sales at existing stores? The difference matters when you consider the drop in sales to wholesale customers (other retailers), which could suggest less overall consumer demand for Levi's products. Same-store sales could help you decide whether that was a legitimate worry.

It would be nice to see more data

To be fair, competitor VF Corporation(NYSE: VFC), which made a similar shift toward becoming a fashion-focused retailer a few years ago, doesn't report same-store sales. But it owns multiple brands, so investors can see how its brands are actually performing against each other. (The answer is that some important brands are performing rather poorly.) So perhaps there's no pressure on Levi's to report the same-store figure.

However, with the Levi brand being the most important asset at Levi Strauss and the rapid pace of new store openings, this situation is a bit different. It would be helpful for the company to better quantify the same-store results so investors can actually track how well the business is performing between new stores and existing ones.

Given the wholesale weakness, investors should probably view Levi's shift toward a more direct-to-consumer orientation with a degree of caution for now.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.

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