Levi’s 501 blue jeans on display.
Sean Gallup | Getty Images
Levi Strauss on Thursday cut its full-year sales forecast, because it missed Wall Street’s quarterly revenue expectations and was dragged down by weaker shopping trends at department shops and big-box retailers across the U.S.
Shares fell barely in prolonged trading.
The corporate’s more cautious outlook comes just three months after it already slashed its full-year profit outlook. It said it now expects net revenues to be flat to up 1% year-over-year compared with a previous range of between 1.5% to 2.5% growth. It said it anticipates adjusted earnings per share to be on the low-end of the previously shared range of $1.10 to $1.20.
In an interview with CNBC, CEO Chip Bergh said shoppers – pinched by inflation, rising mortgage rates and gas prices – have bought fewer items from retailers that carry Levi’s apparel.
“All of the things which are impacting that middle-income consumer are impacting our wholesale business,” he said.
Here’s how the denim retailer did in its fiscal third quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly often called Refinitiv:
- Earnings per share: 28 cents, adjusted, vs. 27 cents expected
- Revenue: $1.51 billion vs. $1.54 billion expected
Net income for the three-month period that ended Aug. 27 was $10 million, or 2 cents per share, compared with $173 million, or 43 cents per share a 12 months earlier. On an adjusted basis, earnings per share were 28 cents.
Sales were roughly in line from the $1.52 billion in revenue that the corporate reported within the year-ago period.
Chief Financial and Growth Officer Harmit Singh said on the earnings call that the corporate took a conservative approach with its outlook, despite seeing continued momentum in its direct-to-consumer business and improving trends in its wholesale business in the primary a part of the fiscal fourth quarter.
Consumers under pressure
Like other retailers, Levi — which also includes Dockers and Beyond Yoga — has coped with a tougher sales backdrop within the U.S. Levi sells its items directly on its website and in its own stores across the globe, but in addition sells many items through chains retailers like Macy’s, Kohl’s and Goal. Those retailers, which buy wholesale items from Levi to hold on their stores and web sites, have seen weaker discretionary sales.
Bergh said its value-based denim lines, Signature by Levi Strauss and Denizen, have especially been softer. Within the third quarter, he said sales of those brands, that are carried by Walmart and Goal, were down double digits, he said.
“Clearly, that is a sign that that value consumer is under pressure,” he said.
For Levi, direct sales and international sales have been the stronger parts of its business. Like Nike, Levi has tried to regulate its own destiny by driving more of its overall sales through its own stores and website.
Within the fiscal third quarter, net revenues from Levi’s direct-to-consumer business increased 14% compared with the year-ago period. E-commerce revenuer shot up by 19% 12 months over 12 months, as the corporate posted double-digit growth across all of its brands.
Direct-to-consumer drove 40% of total net revenues within the fiscal third quarter. It has pledged to get that as much as 55% by fiscal 2027.
Net revenue from wholesale dropped 8% year-over-year, as sales gains in Asia and Latin America weren’t enough to offset declines in North America and Europe.
Together with driving more direct sales, Levi is trying to expand in international markets. On an earnings call with investors, Levi CEO-in-waiting Michelle Gass, tapped to succeed Bergh, said the corporate is poised for growth because its brand resonates the world over, especially with younger consumers.
The brand is already sold in 110 countries, but she said Levi can gain market share in countries similar to Mexico and India. In Mexico, for instance, sales have shot up nearly 40% compared with pre-pandemic levels, she said.
Levi can capitalize on its fashion fame by selling more of other varieties of clothing like chinos, tops and outerwear, together with jeans, she said.
Warm weather and price cuts
Bergh told CNBC unseasonably warm weather within the U.S. and Europe likely played a task in worse wholesale trends, too.
A lot of the Levi apparel that Walmart, J.C.Penney, Macy’s and others carry are jeans, he said.
“It’s hard to sell blue jeans when it’s 110 degrees outside,” he said on a call with CNBC.
At its own stores, he said, Levi can has a wider range of clothing, similar to tank tops, skirts and shorts it could actually swap out based on customer trends — and the temperature. Plus, he said, it draws shoppers who’ve higher incomes and are willing to pay more for fashion-forward premium denim.
It’s hard to sell blue jeans with 110 degrees outside.
Chip Bergh
Levi Strauss CEO
“We all know that $100,000 and up consumer is slightly bit less impacted by what’s happening from a macro [economic] standpoint,” he said. “We’re all being affected, to be clear, but they have slightly bit more income to spend and the those who are coming into our stores they need to buy Levi’s.”
Levi made an unusual move in recent months: Cutting prices of about half a dozen more price-sensitive items sold by other retailers to attempt to jumpstart sales. Bergh said in July that Levi would lower the value of select pairs of jeans from $79.50 to $69.50. That price remains to be higher than its pre-pandemic price of $59.50, Bergh said.
Retailers had control over when to chop those prices, but some took effect in early August — the ultimate month of the third quarter, Bergh said.
“As retailers have reflected price reductions to the buyer on those particular suits, the trends have improved,” he said.
He said the corporate is “cautiously optimistic” that as recent styles debut and the vacation season approaches, customers could also be more willing to open their wallets.
One factor that would help Levi this holiday season? Cleaner inventories across the retail industry, Bergh said. Within the year-ago period, many retailers’ biggest holiday wish was to clear through a glut of unsold merchandise. That led to a lot of deep discounts and fewer profitable sales.
Bergh said he expects a “barely less promotional environment than a 12 months ago.”
“We’re not gonna lead aggressive promotions, but we shall be competitive,” he said.
Shares of Levi have fallen about 14% to this point this 12 months, underperforming the 11% gains of the S&P 500. The corporate’s stock closed on Thursday at $13.21, down nearly 2%.