Executive Summary / Key Takeaways

• Levi Strauss & Co. delivered a strong start to fiscal year 2025, exceeding Q1 expectations across sales, margins, and EPS, driven by momentum in its strategic pivot towards a Direct-to-Consumer (DTC) first, denim lifestyle company.
• The DTC channel continues to be the primary growth engine, achieving 12% organic net revenue growth in Q1 2025 and now representing 52% of total net revenues, fueled by store performance, expansion, and robust e-commerce growth (up 16%).
• Profitability saw significant expansion, with Q1 2025 gross margin hitting a record 62.1% (up 330 bps) and Adjusted EBIT margin expanding 400 bps to 13.4%, reflecting lower product costs, favorable mix, higher full-price selling, and operational efficiencies.
• The company is sharpening its portfolio focus by classifying the Dockers business as discontinued operations (with a sale process underway targeting FY 2025 completion) and exiting Denizen and European footwear, aiming to improve structural economics and accelerate growth in the core Levi's brand and Beyond Yoga.
• Despite macroeconomic uncertainties and potential tariff impacts (not included in current guidance), LEVI maintains its full-year 2025 organic net revenue growth outlook of 3.5% to 4.5% and expects significant EBIT margin expansion to 10.9%-11.1%, supported by strategic execution, brand strength, and cost management initiatives like Project Fuel.

Setting the Scene: An Icon's Evolution

Levi Strauss & Co., born in San Francisco in 1853 and forever etched in history with the creation of the first riveted blue jean around 1873, stands today as one of the world's largest brand-name apparel companies. While its legacy is undeniably rooted in denim bottoms, the company is actively undergoing a significant transformation, pivoting from its historical wholesale-heavy model to become a best-in-class, DTC-first, denim lifestyle retailer. This strategic evolution is not merely a response to changing market dynamics but a deliberate effort to amplify the power of the iconic Levi's brand, accelerate growth in promising areas like Beyond Yoga, and improve the overall structural economics of the business.

The apparel industry is characterized by intense competition, evolving consumer preferences, and dynamic retail landscapes. LEVI competes directly with a range of players, from broad apparel retailers like Gap, Inc. (GPS) and lifestyle brands like Ralph Lauren Corporation (RL) to athletic wear giants like Nike, Inc. (NKE) and denim specialists like VF Corporation (VFC), which owns Wrangler. Indirect competition comes from fast-fashion brands and other athleisure players. In this environment, brand heritage, product innovation, distribution channel effectiveness, and operational efficiency are critical differentiators.

LEVI's core strength lies in its globally recognized brand, which affords it significant pricing power and customer loyalty. This brand equity is a powerful moat against competitors, enabling LEVI to command higher average selling prices (ASPs) in premium segments compared to more value-focused rivals like Gap (GPS) or Wrangler. While competitors like Nike (NKE) leverage technological innovation in performance wear and Ralph Lauren (RL) focuses on luxury lifestyle branding, LEVI is strategically expanding its own definition of "denim lifestyle" and investing in digital and operational capabilities to enhance its competitive edge.

Competitive Positioning and Strategic Differentiation

In the competitive arena, LEVI is not just holding its ground; it's actively gaining share. The company has solidified its position as the number one brand in U.S. women's denim bottoms and maintains its dominant leadership in the men's U.S. jeans category, holding twice the market share of its closest competitor. This market leadership is a testament to the brand's enduring relevance and the success of its product diversification and marketing efforts.

Compared to key rivals, LEVI's strategic emphasis on elevating its DTC channel is a crucial differentiator. While companies like Gap (GPS) and Ralph Lauren (RL) also have significant retail footprints, LEVI's rapid shift has seen DTC grow to 52% of its business in Q1 2025, up from 49% a year prior. This compares favorably to competitors who may still have higher reliance on traditional wholesale channels. The DTC model generally offers higher gross margins than wholesale, although it comes with higher selling expenses. LEVI's focus on improving DTC productivity (conversion, traffic, AURs) is driving significant margin expansion in this channel, contributing meaningfully to overall profitability.

Financially, LEVI's Q1 2025 gross margin of 62.1% is robust. Comparing this to recent TTM gross margins of competitors (GPS: 41%, RL: 69%, NKE: 45%, VFC: 53%), LEVI demonstrates a strong ability to capture value, exceeding mass-market players like Gap (GPS) and VF Corporation (VFC), while approaching the higher margins of premium/lifestyle brands like Ralph Lauren (RL) and athletic leaders like Nike (NKE). This margin strength provides a buffer against competitive pricing pressures and allows for continued investment.

LEVI's operational agility in sourcing from 28 countries, with only about 1% of U.S. imports from China and 5% from Mexico, is a competitive advantage, particularly in the face of volatile trade relations and potential tariffs. This diversified supply chain, described by management as "more agile today than it ever has been," allows for pivots that can mitigate cost impacts, a factor that could differentiate it from competitors with more concentrated sourcing bases.

Product Innovation and Operational Technology

LEVI's competitive strategy is deeply intertwined with its product innovation and the technology supporting its operations. While not a technology company in the traditional sense, LEVI leverages innovation to enhance its offerings and improve efficiency.

In product, the focus is on expanding the "denim lifestyle" concept. This goes beyond traditional jeans to include tops, skirts, dresses, and outerwear, aiming to capture a larger share of the consumer's wardrobe. Key initiatives include:

• Fit Diversification: Capitalizing on trends like loose and baggy fits (now ~15% of bottoms) while maintaining strength in slim and skinny styles (>20%). New launches like the Cinch Baggy and 568 Loose Straight/578 Baggy cater to evolving preferences.
• Fabric Innovation: Introducing new platforms like "linen and Denim" and expanding the "Tech series" (e.g., 511 Slim Fit Tech) to offer comfort, performance, and versatility, expanding wear occasions.
• Category Expansion: Driving growth in non-denim bottoms (XX Chino) and tops (up 7% in Q1 2025), leveraging the brand's aesthetic across new product types.

Operationally, LEVI is investing in technology and infrastructure to support its DTC-first pivot and improve efficiency.

• E-commerce Platform: Efforts to fix fundamentals, evolve assortment, and elevate the consumer experience are driving significant growth (up 16% in Q1 2025) and improving customer satisfaction scores. E-commerce now represents 12% of total net revenues.
• Distribution & Logistics: The multi-year Project Fuel initiative includes changing the distribution strategy to a mix of owned and third-party operated centers. This involves agreements with 3PL providers to replace owned facilities, aiming to leverage third-party capital, reduce fulfillment costs per unit, and improve inventory efficiencies over time. While this transition incurs temporary costs, it is expected to drive savings beginning late 2025/early 2026, contributing to long-term margin goals.
• Data & Analytics: Investments in systems for better forecasting, inventory management, and loyalty programs (37 million members globally) enhance retail execution and consumer engagement.

These innovations and operational improvements are critical for driving AURs, conversion rates, and overall productivity, directly supporting the strategic goals of growth and margin expansion.

Financial Performance: Momentum Builds

The strategic pivot is yielding tangible financial results. Q1 2025 performance demonstrated significant acceleration compared to the prior year. Net revenues from continuing operations increased 3.1% on a reported basis and a robust 8.6% organically, reaching $1,526.8 million. This organic growth was broad-based, with Americas up 11.1%, Europe up 2.9%, Asia up 10.0%, and Beyond Yoga up 9.8%.

The shift towards DTC is evident in the channel mix, with DTC revenues growing 12.5% organically to $787.5 million, now comprising 52% of total net revenues, while wholesale saw 4.7% organic growth to $739.3 million. This channel mix shift, coupled with lower product costs and higher full-price selling, propelled the gross margin to a record 62.1% in Q1 2025, a 330 basis point increase from 58.8% in Q1 2024.

Operating expenses saw mixed trends. Selling, general, and administrative expenses decreased slightly on a reported basis ($749.3M vs $756.1M), but adjusted SGA was up 2% due to higher distribution costs related to the 3PL transition. However, the significant gross profit expansion outpaced the increase in adjusted SGA, resulting in strong operating leverage. Operating income from continuing operations surged to $191.6 million (12.5% margin) in Q1 2025, a dramatic improvement from $0.6 million (0.04% margin) in Q1 2024, which was heavily impacted by restructuring charges. Adjusted EBIT margin expanded 400 basis points to 13.4%.

Net income from continuing operations was $140.2 million ($0.35 diluted EPS) in Q1 2025, a significant turnaround from a net loss of $9.8 million ($0.03 diluted loss per share) in Q1 2024. Adjusted diluted EPS was $0.38, up from $0.25.

Liquidity remains solid. As of March 2, 2025, cash and cash equivalents stood at $574.4 million, with total liquidity (cash + unused credit facility) of approximately $1.4 billion. The company's debt profile is manageable, with $993.5 million in total debt (100% fixed rate) and no borrowings under its $1 billion credit facility. Debt principal payments on unsecured long-term debt begin in 2027. Cash flow from operations decreased in Q1 2025 ($52.5M vs $286.0M), primarily due to higher inventory spending, incentive payments, and SGA, while investing activities remained consistent. The company continues to return capital to shareholders, paying $51.4 million in dividends and repurchasing $30.0 million in stock during Q1 2025.

Outlook and Strategic Trajectory

LEVI's management expressed confidence in the momentum heading into the rest of 2025, reiterating their full-year guidance despite acknowledging a dynamic and uncertain macroeconomic environment, including potential tariff impacts. The full-year 2025 outlook, which does not include the impact of recently announced tariffs as of the Q1 earnings call date, projects organic net revenue growth of 3.5% to 4.5%. This builds on the 3% organic growth achieved in FY 2024. Reported net revenues, however, are expected to be down 1% to 2%, reflecting an estimated 250 basis point headwind from foreign exchange and a collective 300 basis point headwind from the exit of the Denizen and footwear businesses and the impact of the 53rd week in FY 2024.

The guidance anticipates continued strength in the DTC channel, with expected high single-digit organic growth, while the wholesale channel is projected to be flat organically for the full year. Gross margin is expected to expand by another 100 basis points to approximately 61% for the full year, driven by ongoing benefits from lower product costs (partly from Project Fuel savings), favorable mix shifts, and the exit of lower-margin businesses. The full-year SG&A rate is expected to be approximately 50%, flat to 2024, as cost management offsets investments in DTC growth. This is projected to result in a significant expansion of the Adjusted EBIT margin to a range of 10.9% to 11.1%. Adjusted diluted EPS is guided to be between $1.20 and $1.25, including an estimated $0.20 headwind from FX and a higher effective tax rate (expected to normalize around 23%).

Capital expenditures in 2025 are planned at approximately $260 million, primarily supporting new store openings (targeting 50-60 net new system doors), fleet improvements, and digital investments. The strategic decision to classify Dockers as discontinued operations and pursue a sale is expected to further enhance the structural economics and profitability of the remaining business, aligning the portfolio with the core Levi's brand and Beyond Yoga.

Risks and Considerations

While the strategic transformation is showing promising results, several risks warrant investor attention. The macroeconomic environment remains challenging, with inflation, potential new tariffs, and recession fears potentially impacting consumer discretionary spending. The recently announced U.S. tariffs on certain goods imported from China are expected to have a material impact on results in FY 2025, although the full extent and mitigation strategies are still being assessed. Volatile foreign exchange rates, particularly with the Euro and Mexican Peso, are expected to be a significant revenue drag in 2025.

Operational risks include the successful execution of the multi-year Project Fuel initiative and the transition to a hybrid distribution network, which involves temporary cost increases and potential disruption. The wholesale channel, despite recent improvements, remains subject to mixed growth prospects and retailer dynamics, requiring prudent management. Specific market headwinds, such as the ongoing reset in China and volatility in Mexico wholesale, could also impact performance. Furthermore, the competitive landscape is intense, requiring continuous product innovation and effective brand positioning to maintain market share against diverse rivals.

Conclusion

Levi Strauss & Co. is demonstrating tangible progress in its strategic pivot to become a DTC-first, denim lifestyle leader. The strong Q1 2025 results, marked by accelerating organic growth, record gross margins, and significant EBIT margin expansion, underscore that the transformation is gaining momentum and improving the company's structural economics. By sharpening its portfolio focus through strategic divestitures, investing in product innovation and operational capabilities, and leveraging the enduring power of the Levi's brand, LEVI is positioning itself for profitable growth. While macroeconomic uncertainties and potential tariff impacts present headwinds, the company's agile supply chain, diversified global revenue base, and commitment to cost management provide resilience. The clear trajectory towards higher margins and a more focused business model, supported by specific guidance targets, presents a compelling narrative for investors looking at this iconic brand's reinvention.