Beyonce and Blue Jeans were not enough for Levi's

Wall Street mistook a fashion trend for a turnaround.

Shares of Levi Strauss & Co. fell as much as 16% in premarket trading after second-quarter sales fell short of expectations. Although revenue in the three months through May 26 was $1.44 billion (just slightly below the $1.45 billion average analyst estimates), performance should have been better given that denim is one of the most popular looks right now. Let's not forget that shoutout from Beyonce in March, which led the company to change her Instagram name to “Levii's.” That's the kind of advertising that other clothing companies can only dream of.

Denim is in, with wide-leg styles on the rise. And Michelle Gass, the former chief executive of Kohls Corp. who took the helm at Levi's earlier this year, is certainly taking advantage of the shift from loose-fitting casual wear to so-called “hard pants.”

Straight, loose and wide-leg styles now make up more than 50% of Levi's lower-half clothing, and sales rose 21% in the second quarter. Demand for women's clothing was particularly strong, with sales increasing 22% across Levi's stores and its own website. It is now the largest seller of women's jeans in the United States.

Gass's strategy of selling more denim clothing other than jeans, such as tops, dresses and skirts (what she calls the “head-to-toe denim lifestyle”) is contributing to this success. Products beyond pants were “selling like crazy,” Gass told analysts Wednesday. Sales of Western-style shirts increased by 40%, and denim skirts and dresses increased by a triple-digit percentage. This has helped the company avoid markdowns, contributing to a record gross margin of 60.5%.

However, this appears to be at odds with the slight second-quarter sales loss, as well as the company's forecast that full-year revenue will rise only 1% to 3%.

Of course, Gass could hope to under-promise and over-deliver. After all, some consumers remain cautious in the United States and Europe, while China's post-reopening recovery has stalled. But there are other risks that Levi's must manage.

Firstly, the company wants to sell more products through its own website and its own stores. This should be more profitable, as there is more control over what is put on sale compared to, for example, a department store.

But this strategy also has its risks. Not only does online delivery incur costs, but Nike Inc. has shown that selling less through third-party stores can give oxygen to its rivals. With everyone from Associated British Foods Plc's Primark to premium players like Paige doubling down on the category, Levi's must avoid giving up sales.

It is also trying to enter categories other than denim, such as T-shirts, which consumers tend to buy more frequently. So far, this is paying off. But it does pit the company against brands already known for these products, as well as cheaper rivals.

Meanwhile, Gass is restructuring the business, cutting costs and moving from a logistics network that it owns and operates entirely to one that includes other suppliers. For the rest of the year, this will mean that it will assume the cost of running both types of facilities. There is also the danger of bottlenecks in the supply chain during any such transition.

Fortunately for Gass, denim trends are advancing at a glacial pace. Skinny fits dominated for about a decade, from about 2005 to 2015. So the current trend for larger jeans should have more room to run.

Denim continues to sell well, although it is doing better in womenswear than in menswear, according to retail intelligence firm Edited. Wide-leg and bootcut styles are most in demand, it said.

But Gass and Levi's investors should watch for signs that we're in for a denim boom. Whether the popularity continues into the fall will be telling. After the stock nearly doubled in value between September and early June, you won't want to be caught wearing the wrong pants.