Levi’s 501 blue jeans on display.
Sean Gallup | Getty Images
Levi Strauss On Thursday, the company lowered its full-year sales forecast as it missed Wall Street’s quarterly sales expectations and was hurt by weaker shopping trends at department stores and major retailers across the U.S
Shares fell slightly in extended trading.
The company’s more cautious outlook comes just three months after it already cut its full-year profit outlook. The company now expects net sales to be flat or increase 1% from the same period last year, compared with previous growth of between 1.5% and 2.5%. The company expects adjusted earnings per share to be at the lower end of the aforementioned range of $1.10 to $1.20.
In an interview with CNBC, CEO Chip Bergh said shoppers hit by inflation, rising mortgage rates and gasoline prices have purchased fewer items at retailers that carry Levi’s apparel.
“All the things that impact middle-income consumers also impact our wholesale business,” he said.
Here’s how the denim retailer performed in its fiscal third quarter compared to Wall Street expectations, based on an analyst survey from LSEG, formerly known as Refinitiv:
- Earnings per share: 28 cents, adjusted, versus 27 cents expected
- Revenue: $1.51 billion vs. expected $1.54 billion
Net income for the three-month period ended August 27 was $10 million, or 2 cents per share, compared to $173 million, or 43 cents per share, a year ago. On an adjusted basis, earnings per share were 28 cents.
Sales were roughly in line with the $1.52 billion the company reported in the same period last year.
Harmit Singh, chief financial and growth officer, said on the earnings call that the company took a conservative approach with its outlook, although it saw continued momentum in its direct-to-consumer business and improving trends in its wholesale business in the first half of its fourth fiscal year Quarter.
Consumers under pressure
Like other retailers, Levi – which also owns Dockers and Beyond Yoga – has struggled with a tougher sales environment in the US. Levi sells its items directly on its website and in its own stores around the world, but also sells many items through chains such as retailers Macy’s, Kohl’s And Goal. Retailers that purchase Levi’s wholesale items to carry in their stores and on their websites experienced weaker sales of cyclical products.
Bergh said his value-driven denim lines Signature by Levi Strauss and Denizen are particularly softer. In the third quarter, sales for brands carried by Walmart and Target fell by double digits, he said.
“This is clearly an indication that this value consumption is under pressure,” he said.
For Levi, direct sales and international sales were the strongest areas of his business. How NikeLevi has tried to control its own destiny by generating more of its overall sales through its own stores and website.
In the fiscal third quarter, Levi’s direct-to-consumer net revenue increased 14% compared to the same period last year. E-commerce sales rose 19% year-over-year as the company reported double-digit growth across all of its brands.
Direct-to-consumer sales generated 40% of total net sales in the third fiscal quarter. The company has promised to increase this share to 55% by fiscal year 2027.
Wholesale net sales fell 8% year-over-year as sales increases in Asia and Latin America were not enough to offset declines in North America and Europe.
Levi not only wants to increase direct sales, but also expand into international markets. In a conference call with investors, Levi CEO-in-waiting Michelle Gass, who was tapped to succeed Bergh, said the company is poised for growth because its brand resonates around the world, particularly with younger consumers.
The brand is already sold in 110 countries, but she said Levi could gain market share in countries such as Mexico and India. In Mexico, for example, sales are up nearly 40% compared to pre-pandemic levels, she said.
Levi can capitalize on its fashion reputation by selling more other types of clothing, such as chinos, tops and outerwear, in addition to jeans, she said.
Warm weather and price drops
Bergh told CNBC that unseasonably warm weather in the U.S. and Europe also likely played a role in the worsening wholesale trends.
Most Levi dresses carry this WalmartJCPenney, Macy’s and others wear jeans, he said.
“It’s hard to sell blue jeans when it’s 110 degrees outside,” he said in a phone call with CNBC.
He said that in its own stores, Levi could offer a wider selection of clothing items such as tank tops, skirts and shorts, which could be swapped out depending on customer trends – and the temperature. It also attracts buyers who have higher incomes and are willing to pay more for fashionable, premium denim, he said.
“We know that consumers above $100,000 are slightly less affected by macroeconomic events [economic] “We’re all affected, to be clear, but they have a little more income to spend and the people coming into our stores want to buy Levi’s.”
Levi has taken an unusual step in recent months: cutting prices on about a half-dozen other price-sensitive items from other retailers to boost sales. Bergh said in July that Levi would reduce the price of select pairs of jeans from $79.50 to $69.50. That price is still higher than the pre-pandemic price of $59.50, Bergh said.
Retailers had control over when to lower those prices, but some took effect in early August – the last month of the third quarter, Bergh said.
“As retailers have passed on discounts on specific fits to the consumer, trends have improved,” he said.
He said the company was “cautiously optimistic” that as new models were introduced and the holiday season approached, customers might be more willing to open their wallets.
One factor that could help Levi this holiday season? Cleaner inventory across retail, Bergh said. Last year, many retailers’ biggest holiday wish was to get rid of the flood of unsold merchandise. This led to a lot of steep discounts and less profitable sales.
Bergh said he expects a “slightly less promotional environment than a year ago.”
“We won’t do aggressive promotions, but we will be competitive,” he said.
Shares of Levi have fallen about 14% so far this year, lagging the S&P 500’s 11% gains. The company’s shares closed at $13.21 on Thursday, down nearly 2%.