Levi’s (NYSE:LEVI) classic 501 play gets boost as denim is once again all the rage

Levi Strauss (NYSE:LEVI), the maker of the classic 501 denim jeans that have been a mainstay of the American zeitgeist since they were first introduced 150 years ago, is proving once again the staying power of the iconic brand. It’s also showing the promise of a good pivot. 

The San Francisco-based company saw its shares surge last week to the highest level since early 2022 after it said efforts to strengthen its direct-to-consumer focus helped push first quarter results “above expectations.” Even though overall revenue declined 8% in the first quarter, the company pointed to rising e-commerce sales as a bright spot. Increasing gross margins, meanwhile, should give investors confidence that the company’s strategy is working.

“Both newness and strength in our core offerings are fueling consumer demand and driving meaningful market share gains,” company CEO Michelle Gass said, pointing to specific growth in its key demographic of 18- to 30-year-olds. “Our performance this quarter reflects many proof points that our strategies of leading with our brands, operating as a direct-to-consumer-first business, and diversifying our portfolio are working.”

The shift toward direct sales is significant because it upends the company’s long-running reliance on selling wholesale to specialty retailers and department stores, many of which have been struggling with declining sales and changing demographics. By cutting out the middleman, Levi can increase margins and better control its brand. However, the strategy can also come with risks and increase other costs.

So far, the pivot appears to be paying off, and the company is outperforming its peers. Levi shares have returned 27% this year, while shares in department store wholesalers like Macy’s (NYSE:M) have declined. Shares in Kontoor Brands (NYSE:KTB), the maker of competing Wrangler and Lee jeans, also fell 9.6% over the same period. Levi has a strong brand that customers worldwide still value, but it’s also rearranging its business to keep up with the times. Besides the shift to direct-to-consumer sales, the company also announced cost-cutting measures and layoffs in February. 

In its latest earnings call, Levi said its US business was now more profitable than last year, while direct-to-consumer sales are also rising in Europe. The company is also looking to increase direct sales to customers in Latin America. In Colombia, the company recently closed the acquisition of its distributor and 40 retail stores. 

“This follows a very successful 2019 acquisition of our distributor in Chile, Peru and Bolivia that has significantly surpassed our revenue and profitability expectations and we’re very optimistic on the outlook for the business in Colombia,” CFO Harmit Singh said.

Levi’s efforts at diversification also appear to be paying dividends. The company reported double-digit growth in the premium athletic and lifestyle apparel Beyond Yoga brand it acquired in 2021. The company competes with Lululemon (NASDAQ:LULU), whose shares have declined almost 30% so far this year even as sales rose. That suggests investors aren’t as excited about its ongoing growth prospects. 

Perhaps the most notable growth Levi reported last quarter was in the jeans that started it all, with the 501 seeing direct consumer sales rise 23% in a jump the company said was a “clear barometer for the strength of our core business.” CEO Michelle Gass described what she said was an emerging “denim moment” in fashion, with the company well-positioned to capitalize on the trend.

“For Levi’s we are the top, we are driving the trends,” she said. “One of the things that really is significant about the Levi’s brand and we place a lot of emphasis and investment is making sure that Levi’s brand remains in the center of culture.”

In the hyper-competitive fashion industry known for fickle trends and ever-changing consumer tastes, Levi is providing a powerful lesson about the power of sticking to what you do best, without becoming stagnant. The company has made important changes to its operations and distribution strategy, and that’s enabling it to take full advantage of this latest denim moment.