With denim trends in its favor, Levi's shrugs off the price of cotton

Dive Brief:

Levi's uses two pounds of cotton in every pair of pants it makes, but executives shrugged off concerns about rising cotton prices, telling analysts Wednesday that they bought plenty ahead and have pricing power to make up for any future cost concerns.
Their remarks came as they reported that Q3 net revenue rose 41% year over year and 3% from 2019 to $1.5 billion. Net revenue through all digital channels rose 10% year over year and 76% from 2019; direct-to-consumer net revenue rose 34% year over year and 4% from 2019, per a company press release.
Diversified manufacturing helped keep the revenue hit from added supply chain costs below $10 million, executives also said. Net income soared 616% year over year to $193.3 million.

Dive Insight:

Supply chains are in turmoil and Levi's top raw material reached 10-year highs on the commodity markets this week. Since the beginning of September, cotton prices have risen 16%, "trading at their highest price in roughly a decade due to speculation of surging Chinese demand for cotton imports," per research released Oct. 7 from Credit Suisse.

But a surge in apparel spending, new denim styles and the company's control over its operations are easing the pain.

"The casualization trends that have been accelerated by the pandemic globally are here to stay and the denim cycle we started pre-pandemic is continuing to drive growth," Levi's CEO Chip Bergh said during the quarterly conference call. "In the U.S., both the apparel segment and the denim category are now larger than pre-pandemic, with denim growth outpacing total apparel for the second quarter in a row. We expect these drivers will provide our business with a multi-year tailwind."

The brand will likely "continue to benefit from the denim momentum as consumers update their wardrobe," Jane Hali & Associates analysts said in emailed comments. "They will also benefit from back to school and higher margins, due to pricing power."

Levi's digital growth and its direct-to-consumer sales (both online and through stores) have been key to its momentum, Hali analysts also said. Its step into resale furthers consumer interest in the brand, and its acquisition of Beyond Yoga "is strengthening its positioning and revenue trajectory," they said.

The company's firm grip on its supply chain has served it well, as executives described challenges and cost of goods sold as under control, thanks to negotiations with vendors. Levi's sources from 24 countries and no one country provides more than 20% of its capacity, Wells Fargo analysts led by Ike Boruchow noted in emailed comments.

"With all the noise surrounding supply chain issues and raw materials' inflation over the last several months, [Levi's] appears to be navigating the issues in stride," Boruchow said.

The pricing power seen at Levi's will likely play out elsewhere, too, and mitigate rising cotton costs, according to Credit Suisse analyst Michael Binetti.

"We think inventory will remain rational, margins will remain strong, and softlines brands/retailers will be able to push bigger and more consistent price increases than they've been able to for over a decade," Binetti said in emailed comments. "Most companies right-sized SG&A structures during periods of distress during COVID — many of those costs won't come back quickly either."