Icon for blue jeans Levi Strauss (NYSE: LEVI) is a game about artificial intelligence. Wait, do not laugh! Digging deeper into the company’s operations reveals that it is serious about pursuing this technology – and its efforts in AI can help increase returns for investors.
The company’s push to incorporate AI begins with the renewal of its loyalty app, which delivers content based on users’ browsing and purchases. This personalization means less search and more compelling offers. IN Levi Strauss’ third quarter, its app downloads increased by 20% compared to the first quarter, and Levi also saw increases in average order values and e-commerce revenue contribution rates.
Levi Strauss also uses AI for its recommendation engine in Europe. Its algorithms predict what types of products users are interested in, and then suggest complementary offers. It can even tell users about sales of products they have previously searched for. According to a blog from the company, the recommendation engine “contributed to LS & Co’s sound Q3 and Q4 2020 financial margins.”
Levi plans to move beyond these early stages by incorporating computer vision and sophisticated neural networks into product searches scheduled for release in November in the United States. Using photos for AI should provide even more insight than text-based data, which may not capture all the colors, textures, and shapes of Levi’s products. AI often finds patterns and insights that are not obvious – and it can do so on a large scale when and where shoppers need help finding clothes that look good together.
But perhaps most importantly, Levi uses AI to manage its supply chain – which has been marked by increases in transportation costs and cotton prices – with sophisticated predictions. According to Levi Strauss, the cost of goods sold is only expected to increase by 1% year over year in the first half of 2022, thanks in part to AI efficiency.
Success starts at the top
Back in February 2019, Levi Strauss hired his first head of strategy and artificial intelligence, Katia Walsh, who reported directly to the CEO. Prior to that, she worked in leadership positions for computer science at companies such as Vodafone, Prudential Financial and Fidelity Investments.
The role of Chief AI Officer is fairly new, even for tech companies and quite rare for regular retailers. But for Levi Strauss, this buy-in has spurred innovation and highlighted AI’s strategic importance to the global workforce.
Another critical advantage for Levi Strauss – especially compared to smaller retailers – is the company’s scale, which provides the huge amounts of data that help its algorithms work better.
This rapid transition to direct-to-consumer transactions helps drive even more of this data against Levi’s pending AIs. In the last quarter, revenue directly to the consumer jumped by 34% year-on-year, and direct sales grew to represent 20% of Levi’s $ 1.5 billion. The company also plans to spend two-thirds of its capital budget on digital efforts.
Fighting for talent
One of the biggest challenges with AI is recruiting skilled computer scientists and engineers. But Levi Straus is not just dependent on hiring from outside. It has created its own AI bootcamp, an eight-week, full-time, fully paid program that includes courses on coding, statistics, and computer science. The program is unique among major retailers and has already led to new employees for the AI division.
Yet Levi Strauss still faces challenges. AI does not always provide accurate answers, and several governments are drafting rules for the use of data, especially for personally identifiable information. And while Levi gets AI right, other major retailers also have the resources to invest in artificial intelligence and its benefits.
But as an early adopter, Levi benefits from more efficient models and data and more of a head start in building AI systems that comply with new rules. And while the complexity of artificial intelligence can be daunting for employees, Levi’s in-house training can help them better understand how to apply the technology to their own jobs, whether improving the design of baggy jeans or lowering the cost of a production process.
What to look for
Stocks in artificial intelligence generally retrieves stratospheric valuations, as seen in firms such as C3.ai, Lemonade, and Palantir. However, investors can find a more creative approach to this sector by looking for companies that are ready to take advantage of the technology.
Consider Domino’s Pizza (NYSE: DPZ), whose shares have grown 15 times since 2011. Domino’s massive investment in online ordering faster and easier, including AI features like voice recognition, helped drive the company’s turnaround. Today, more than 75% of Domino’s sales come through digital channels.
Levi Strauss seems to be using a similar playbook; the company is still in an early stage, but there are already signs that technology is making a difference. In its most recent quarterly report, sales increased by 41% and earnings increased by 570%. This stemmed in part from the company’s recovery from the COVID-19 pandemic, but management also credited AI and machine learning, calling it “a huge opportunity for us in the long run.” There is no standard index for artificial intelligence success, but investors can follow Levi’s blog, which has frequent updates on innovations and seeks improvements in margins and revenue.
For investors looking for a unique way to play AI, it may not be at all laughable to buy shares in Levi Straus.
This article represents the opinion of the author, who may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment task – even one of our own – helps all of us to think critically about investments and make decisions that help us become wiser, happier and richer.
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