Levi Strauss CFO on labor shortage: we’ll see wage inflation but will withstand it

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman speak with Levi Strauss CFO Harmit Singh about the company’s latest earnings report, industry trends, and outlook.

Video Transcript

BRIAN SOZZI: Rebuilding closets for life after the pandemic powered Levi's to some impressive top and bottom-line gains in the second quarter. The company smashed analyst earnings estimates by $0.14 and issued second-half guidance that was well above consensus. Shares are up about 3% so far on today's session.

Joining us now is Levi's CFO Harmit Singh. Harmit, always good to see you. I'll start with this. You know, my Twitter feed is on fire right now. I put out this stat you all shared on your earnings call last night, 35% of consumers in the US have changed their waist sizes because of the pandemic. What has that meant to your business?

HARMIT SINGH: Good morning, Brian and everybody on the team. It's great to be here. We had a wonderful quarter. As you know, we beat top-line and bottom-line expectations and raised the outlook for the second half of the year.

To your question about the increase or the change in size, what it means is that people are out there shopping. The category apparel, as a category, has expanded. Denim is-- has grown, or is growing faster than the category. And for market leaders like us, as we set trends-- you know, we set the trend on the looser silhouette, the wider silhouette just before the pandemic. And looser, baggier fits account for about half our business and growing. And as people return to work, casualization trends, you know, tend to gather pace, it really bodes well for brands like us as people trust our brands and, importantly, return to work with more denim in their closet.

BRIAN SOZZI: Harmit, I went to the mall by me over the weekend. And really, so many things are out of stock. I pulled up a-- picked up a pair of Levi's jeans. I looked at the price on the tag, and my thought was, wow, these are pretty affordable. Levi's should be charging more for these because jeans are so much in demand. Have you been able to push through price increases, and are you going to implement more in the back half of this year?

HARMIT SINGH: You know, our products give great value to our consumers. And you know, we are very pleased with the momentum we are seeing and have seen over the years. To your question about pricing, we have successfully taken pricing even during the pandemic and continue to do so. You know, I firmly believe we have pricing power. It's always better to price when the brand's hot, the products are relevant than when you need to price, and we continue to do that.

AURs, you know, in the quarter we're up 5% globally, and our view is we are in the early innings of pricing. And as we introduce more innovation and relevant products, take our loose, baggier fits, they're higher AURs, the price a little higher, and resonating really well with the consumer. So it's clearly an opportunity for us. We are also using AI and data analytics to manage promotion to determine where we can price and where we can't, and that's making a big difference.

MYLES UDLAND: You know, Harmit, we're talking about taking pricing here in the US, perhaps, as we see, you know, some bit of an inflationary backdrop, but you guys talked a little bit about what you're seeing in Europe and where, you know, you are, as you guys mentioned, a market leader in that market. It's been a little bit more challenging with the pandemic and their economy. I'm curious how you could-- if you could outline for us the trends you're seeing in Europe and maybe how far behind you see that recovery, relative to what you've seen in the US business.

HARMIT SINGH: You know, our brand has been on fire in Europe pre-pandemic, and the team has done a phenomenal job being agile and responding to the changing situation. I'm empathetic to the folks and consumers on the ground, as all of them have been through lockdowns. But the good news is the lockdowns are lifting. And as we exited May, you know, our business in Europe was actually already showing a high single-digit growth, relative to '19.

During the pandemic, you know, we made a real pivot to e-commerce and digital. Our digital business is up and growing big time, you know, has doubled over the years. And as the lockdowns lift, you know, most of our doors now in Europe are open. During the quarter, about 30% of our doors were closed, and so business was down, relative to, you know, '19. Business is recovering and growing, relative to '19. So I'm really long in Europe. We have a huge potential. And importantly, you know, we've been able to take pricing, as well as our products are resonating with our consumers.

JULIE HYMAN: Hi, Harmit. It's Julie here. You mentioned the increase in the direct sales channel, which I believe was up 75% year over year for you guys. Does that have-- I imagine the margins are better when you sell that way. Does it also help you in terms of inventory management when you have that sort of direct channel to the customers and perhaps better insight and data on them?

HARMIT SINGH: Yeah, no, it's a great question. Structurally, we're emerging from the pandemic a much stronger company, and let me explain that. Digital is a higher mix. So if you take the total digital ecosystem, it's about 1/4 of our business. It was in the mid-teens pre-pandemic and growing. Our entire digital ecosystem was up 75%, and that was in the back of a strong, you know, quarter a year ago. It has higher gross margins. We had our third consecutive quarter of record, you know, gross margins, and we raised our guidance for the year.

More importantly, what it does is it allows us to connect directly with our consumers, and we're connecting directly with-- we're reaching out to the younger consumer. We introduced the app-- an app in the US, and 70% of the users in the app are younger consumers. And so allows us to engage with them directly, allows them to-- allows us to offer our latest collaboration and our assortments, which are head to toe, you know, directly. And I think it makes-- it's definitely making a big difference in allowing us to exemplify and endure our brand.

BRIAN SOZZI: Harmit, are you having difficulty finding workers to work in your retail stores?

HARMIT SINGH: You know, the good news for us is that, you know, our attrition rates are low, lower than the others. We are responding by ensuring that the total rewards that we offer to our employees are competitive in the marketplace. You know, we are seeing, you know, normal pressures, but we have been able to withstand them and ensure our employees are servicing our consumers with the same service levels that we maintained pre-pandemic. So the quick answer is we probably will see some wage inflation, but we'll be able to withstand that, just given the brand we are and the service levels we provide and the benefits we provide to our employees.

BRIAN SOZZI: All right, we'll leave it there. Harmit Singh, CFO of Levi's, good to see you, and good to see you back in the jean jacket. Last time, I think we caught you in a more casual look, but good to see you back in your trademark piece of apparel.

HARMIT SINGH: Thank you, Brian, and thanks for having me on your show.