Denim is gaining traction with consumers, but it’s not driving significant growth in sales Levi Strauss.
The jeans maker on Wednesday reported fiscal second-quarter revenue just shy of Wall Street forecasts, at a time when consumers are filling their closets with denim dresses, skirts and ultra-low-rise slacks.
Levi’s reported better-than-expected profits as direct-to-consumer sales and cost cuts continued to bear fruit. The company raised its dividend 8% to 13 cents a share, its first increase in six quarters.
Still, shares fell about 12% in after-hours trading.
Here’s how Levi’s performed for the quarter compared to Wall Street expectations, according to a survey of analysts by London Stock Exchange Group (LSEG):
- Earnings per share: Adjusted 16 cents, expected 11 cents
- income: $1.44 billion vs. $1.45 billion expected
The company reported net income of $18 million, or 4 cents a share, for the three-month period ended May 26, compared with a loss of $1.6 million, or 0 cents a share, a year earlier. Excluding one-time items, Levi’s posted profit of $66 million, or 16 cents per share.
Sales increased to US$1.44 billion, an increase of approximately 8% from US$1.34 billion in the same period last year. However, the sales growth comes from a simpler comparison.
During the same period last year, Levi’s sales fell 9% after it shifted wholesale shipments from its fiscal second quarter to its fiscal first quarter. The company previously said the shift reduced sales by about $100 million last year. Excluding that shift and the exit of the Levi’s Denizen business, sales in the latest quarter were up only about 1% compared with the same period last year.
Finance chief Harmit Singh attributed the poor sales performance to unfavorable foreign exchange conditions and weak sales of Docker. For the quarter, the khaki and chinos brand’s sales were $82.4 million, an increase of 8.6% from $75.8 million in the same period last year. It’s unclear how Docker’s sales are affected by the timing of Levi’s wholesale orders.
“People are generally cautious,” Singer told CNBC. “This is not necessarily an environment where people are buying in bulk, people are cautious.”
Although Levi’s reported strong profit guidance, it only reiterated full-year guidance, in line with expectations. The company continues to expect full-year earnings per share in the range of $1.17 to $1.27, including a 5-cent benefit from the company’s new distribution and logistics strategy.
Levi Strauss said the company is transitioning from a primarily owned and operated distribution and logistics network in the United States and Europe to one that relies more on third parties.
“In the short term, these changes require new and old facilities to operate in parallel through the remainder of 2024, resulting in a temporary increase in distribution costs,” the company said.
The change allows Levi’s to shift responsibility for last-mile delivery to a third party. The denim maker noted that it reached new terms with suppliers that resulted in Levi’s taking ownership of inventory closer to where it is shipped than to its final destination. Levi’s distribution network was built for a business that sold primarily to wholesalers, and now it needed to transform into one that was more focused on selling directly to consumers.
The changes are necessary because today nearly half of Levi’s sales come from its own website and stores.
Direct-to-consumer sales increased 8% in the quarter and accounted for 47% of total sales. Online sales grew 19%.
CEO Michelle Gass said in a statement: “Our transformation of operations as a DTC-first company is delivering positive results around the world, which gives me confidence that we will continue to serve the rest of the year. Achieve accelerated profitable growth over time and beyond.
This quarter, wholesale revenue increased by 7%, but excluding changes in the timing of wholesale orders, channel sales fell by 4%. Singer noted that wholesale revenue improved sequentially, but the company took a “conservative” view on the channel’s future growth.
By building its own direct-sales pipeline, Levi’s has gained higher profits, better consumer data and reduced its reliance on faltering wholesalers like Macy’s and Kohl’s, which are shrinking and failing. be favored by consumers again.
However, direct sales can also be more costly, and unexpected problems can arise that impact sales and drain profits. For example, when someone buys a pair of Levi’s jeans from Macy’s and wants to return them, Macy’s typically covers the cost. Under the direct model, responsibility, including costs and logistics, would fall on Levi’s.
Nike has become a cautionary tale for retailers that have long relied on wholesalers trying to expand direct sales.
For a time, Nike’s focus on direct sales boosted revenue and profits, but some critics say the shift in strategy led to slower innovation and ultimately a loss of market share.
Recently, the company admitted it was wrong to cut off so many wholesale partners and said it had “corrected” the practice.
Read the full earnings report here.
About The Author
