Levi's remains optimistic about the Chinese market despite closing 15 stores in H1 2023

American cowboy brand Levi's recently released its second-quarter performance report for the 2023 fiscal year. In the three months ending on May 28, 2023, Levi's net income decreased by 9% year-on-year to 1.34 billion yuan, with a net loss of 1.6 million US dollars.

Affected by the US wholesale market, the second quarter of this year became the quarter with the largest decline in revenue for Levi's since the 2021 fiscal year. Amidst uncertainties, Levi's has revised down its full-year performance guidance, expecting a year-on-year growth of 1.5% to 2.5% in net revenue for the 2023 fiscal year, lower than the previous expectation of 1.5% to 3%.

In the Chinese market, the number of Levi's stores in shopping centers has seen negative growth for several consecutive years. In the first half of 2023 alone, 15 stores were closed, resulting in a net decrease of 10 stores.

According to the financial report, the decline in performance was primarily attributed to weak wholesale business and underperformance in North America and Europe, while the company's direct retail business and growth in Asia and Latin America remained strong.

In the second quarter, Levi's saw a sales increase of 18% to 260 million US dollars in Asia, including China, with growth achieved in all Asian markets. Meanwhile, revenue from the wholesale business decreased by 22% year-on-year, while revenue from direct-to-consumer channels increased by 13%. This indicates that the performance of Levi's physical stores and e-commerce sales was more impressive.

Levi's President and CEO, Chip Bergh, also pointed out that the company's performance is largely driven by its strong direct-to-consumer (DTC) business.

Since 2011, Levi's has embarked on a strategic transformation, with one key initiative being the transition to DTC sales and the expansion of company-owned stores worldwide. Data shows that Levi's global company-owned stores have grown from 44 in FY2005 to 1,089 in FY2023, with DTC revenue accounting for 38% of the total in FY2023.

Currently, Levi's is attempting to find new vitality through offline retail transformation and upgrades. Last year, Levi Strauss & Co. announced a long-term growth strategy with the goal of achieving $9 billion to $10 billion in revenue by 2027, an organic annual growth rate of 6-8%, and a DTC revenue (direct-to-consumer) share of total revenue at 55%.

However, some industry insiders believe that Levi's denim products have relatively high prices and are not competitive in the e-commerce price competition. Additionally, the brand's heavy focus on first and second-tier cities and insufficient coverage in other areas have caused it to gradually fade from the consumer's perspective. Currently, Levi's strategic direction in the Chinese market is not clear, and whether it can return to its peak will require time to verify.