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Denim-crazed consumers are turning to Levi Strauss & Co. buy new jeans, but the company's overall business is being dragged down by its Dockers brand, which the company is now considering selling, it announced Wednesday.
Levi's brand sales rose 5% during its fiscal third quarter (the biggest increase in two years), but overall revenue remained flat and was lower than Wall Street expected.
Shares of Levi's fell more than 8% in extended trading Wednesday.
Here's how the denim maker performed compared to what Wall Street expected, according to a survey of analysts by LSEG:
- Earnings per share: 33 cents adjusted versus 31 cents expected
- Revenue: $1.52 billion vs. $1.55 billion expected
The company's reported net income for the three-month period ended Aug. 25 was $20.7 million, or 5 cents per share, compared with $9.6 million, or 2 cents per share, from the previous year. Excluding one-time items, Levi's posted earnings of $132 million, or 33 cents per share.
Sales totaled $1.52 billion, up slightly from $1.51 billion a year earlier.
With one quarter left in the fiscal year, Levi reaffirmed its full-year adjusted earnings per share guidance of between $1.17 and $1.27, in line with expectations of $1.25, according to LSEG. He expects earnings per share to be around the midpoint of that range.
It cut its revenue forecast and now expects sales to grow 1%, compared with a previous range of between 1% and 3%. This is below the 2.3% growth that analysts were expecting, according to LSEG.
See you later, dockers
Levi's, which owns the eponymous brand as well as Dockers and Beyond Yoga, would have had quite different results if it hadn't been for Dockers. He created that brand in 1986 to offer consumers an alternative to denim: khaki pants.
Throughout the 1990s and 2000s, khaki pants were a mainstay in most consumers' closets, but these days they have fallen out of fashion. The efforts Levi's has made to differentiate Dockers led to excessive overlap with the Levi's brand, which has expanded into a lifestyle brand that offers many more products than jeans.
During the quarter, sales at Dockers fell 15% to $73.7 million, while Beyond Yoga, the buzzy athleisure brand it acquired in 2021, saw sales grow 19% to $32.2 million.
“In recent years, the brand has underperformed… We felt this was the right decision for the long term. Our financial view is that the exit of Dockers will improve the company's overall margins and also minimize volatility in the growth of gross revenues. Levi's chief financial officer, Harmit Singh, told CNBC in an interview. “We believe that Dockers' exit will allow both Dockers and Levi's to operate independently and maximize the value of each independently.”
Levi's has taken advantage bank of america to lead the sales process.
direct profits
Beyond Docker's, Levi's is making progress in increasing its profitability as it continues to shift its focus toward selling directly to consumers.
During the quarter, its gross margin increased 4.4 percentage points, which Singh attributed to the direct sales strategy, lower cotton costs and better products that did not need to be marked down to sell.
Like other brands, Levi's has been working to forge its direct sales strategy and reach more customers through its own stores and websites rather than through wholesalers like Macy's. The strategy is a boon for profits because margins are higher and it also allows brands to get closer to their customers through data collection.
During the quarter, Levi's direct channel increased approximately 10%, driven by strength in the US and 16% growth in e-commerce. Overall, direct sales accounted for 44% of total revenue, and Levi's wants to get that number closer to 55%.
Behind those numbers are a series of eye-catching marketing campaigns, including a new partnership the jeans brand announced with Beyoncé on Monday after the pop star released a song titled “LEVII'S JEANS” earlier this year on her country album.
“Our strategic decision was to have Beyoncé represent part of our core product. So in the first ad, episode one, she's wearing… 501 and an essential white T-shirt and it doesn't get any more Levi's than that.” CEO Michelle Gass told CNBC. “Part of the recipe for Levi's success has been and will continue to be that we live in the center of culture and bring together the icon of Beyoncé with the icon of Levi's. I don't think there is a better example of that.”
Global problems
Sales in Levi's business in Europe were better than expected at $406.6 million, above StreetAccount estimates of $392 million, but sales in the Americas and Asia were lower. Levi's posted sales of $757.2 million in the Americas, below the $789.2 million StreetAccount analysts expected. In Asia, Levi's posted revenue of $247.1 million, missing StreetAccount estimates of $258 million.
“China was a drag,” Singh said of the region, which accounts for about 2% of Levi's total business. “There are macroeconomic headwinds and we had some execution issues. We just changed leadership in China and over time we still believe in China's long-term potential.”
In the Americas, beyond a slowdown at Docker's, sales were also affected by one of Levi's largest wholesale customers in Mexico, Singh said. During the quarter, the partner suffered a cybersecurity breach, which limited shipping times and affected sales. The region is also resolving some “execution issues,” Singh said.
