Levi Strauss, a prominent apparel retailer, delivered disappointing news on Thursday as it significantly reduced its profit forecast for the year due to a sharp decline in wholesale revenues and weak sales in the U.S., its largest market. Despite this setback, the company experienced positive performance in its direct-to-consumer sales and the Chinese market. Consequently, the company’s shares fell more than 6% during extended trading.
Let’s delve into the company’s fiscal second-quarter results compared to analysts’ expectations. Adjusted earnings per share stood at 4 cents, surpassing the projected 3 cents per share. Revenue matched expectations at $1.34 billion. However, Levi Strauss reported a net loss of $1.6 million or 0 cents per share for the three-month period that ended on May 28. This marked a decline from the net income of $49.7 million or 12 cents per share recorded in the same period last year. Sales also decreased by 9% from $1.47 billion to $1.34 billion.
As we reach the midpoint of the fiscal year, the company has lowered its full-year profit outlook. Adjusted earnings per share are now expected to fall within the range of $1.10 to $1.20, compared to the previous range of $1.30 to $1.40. Analysts surveyed by Refinitiv anticipated adjusted earnings of $1.29 per share. Furthermore, Levi Strauss has revised its revenue outlook, predicting growth between 1.5% to 2.5%, down from the previous range of 1.5% to 3%. Analysts had anticipated a 2.6% increase according to Refinitiv.
The pessimistic outlook can be attributed to various factors, primarily the anticipated decline in U.S. wholesale revenues, which plummeted by 22% during the quarter. Levi Strauss’ Chief Financial and Growth Officer, Harmit Singh, identified a consumer slowdown affecting the retail industry in general and internal issues such as stock shortages as the reasons behind the decline in wholesale revenue. CEO Chip Bergh acknowledged the challenge of high inventory levels, which caused congestion at distribution centers and hindered order fulfillment for wholesale partners. However, steps have been taken to address this issue, resulting in improved inventory levels and customer fill rates.
To address market dynamics and regain market share, the company plans to reduce prices for select items, including the popular 502 and 512 jeans. Although this move will impact profit margins in the near term, it aims to bridge the price gap relative to competitors. These price reductions will only apply to stores with wholesale partnerships, such as Macy’s, and will not affect company-owned stores or international markets.
Apart from navigating challenges in wholesale revenue, Levi Strauss is strategically refocusing its sales away from wholesalers and towards direct-to-consumer channels, including e-commerce and franchise partner stores. This shift aligns with their long-term plan and mirrors the approach adopted by companies like Nike. Direct-to-consumer revenues experienced a 13% increase during the quarter, driven by growth in company-operated stores and online sales.
While the decline in wholesale revenue has impacted Levi Strauss in the short term, the company remains committed to its directive of strengthening direct-to-consumer sales. The Americas witnessed a substantial sales drop of 22%, generating $609 million in revenue, below estimations of $639.5 million. However, European sales fell by only 2%, with revenue totaling $361 million, surpassing expectations of $344 million. Asia emerged as a bright spot, recording an 18% increase in revenue at $262 million, propelled by robust performance in the direct-to-consumer channel.
In summary, Levi Strauss faced challenges in the form of declining wholesale revenues and subdued sales in the U.S. market. However, the company remains optimistic as it focuses on bolstering direct-to-consumer channels and navigating the ever-evolving retail landscape.
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