Denim is having a moment with consumers, but it hasn't led to a significant increase in sales Levi Strauss.
The jeans maker on Wednesday reported fiscal second-quarter revenue that fell slightly short of Wall Street expectations as shoppers stocked their closets with denim dresses, skirts and low-rise baggy pants.
Levi's reported better-than-expected earnings as its direct-to-consumer sales and cost-cutting continue to pay off. The company raised its dividend by 8% to 13 cents per share, its first increase in six quarters.
However, shares fell about 12% in extended trading.
Here's how Levi's performed during the quarter compared to what Wall Street was expecting, based on a survey of analysts conducted by LSEG:
Earnings per share: 16 cents adjusted vs. 11 cents expected Revenue: $1.44 billion vs. $1.45 billion expected
The company's reported net income for the three-month period ending May 26 was $18 million, or 4 cents per share, compared to a loss of $1.6 million, or zero cents per share, the previous year. Excluding one-time items, Levi's reported earnings of $66 million, or 16 cents per share.
Sales rose to $1.44 billion, up about 8% from $1.34 billion the previous year. However, the sales jump was the result of an easier comparison.
In the same period last year, sales fell 9% after Levi's shifted its wholesale shipments from its fiscal second quarter to its fiscal first quarter. The company previously said that this shift led to a decline in sales last year by about $100 million. Excluding this shift, as well as the exit of the Levi's Denizen business, sales would have been up just 1% in the fourth quarter compared to the same period last year.
CFO Harmeet Singh attributed the loss of sales to unfavorable foreign exchange conditions and weak sales at Docker's. During the quarter, the khaki and chino brand saw sales of $82.4 million, up 8.6% from $75.8 million in the same period last year. It's not clear how sales at Docker's were affected by the timing of Levi's wholesale orders.
“People are generally cautious,” Singh said in an interview with CNBC. “It's not necessarily an environment where people are buying a lot, people are being cautious.”
While Levi's posted a strong earnings beat, it reaffirmed its full-year guidance, which was in line with estimates. The company continues to expect full-year earnings per share to be between $1.17 and $1.27, which now includes a loss of 5 cents coming from the company's new distribution and logistics strategy.
Levi's said it is transitioning from a distribution and logistics network primarily owned and operated in the United States and Europe to one that relies more on third parties.
“In the near term, these changes will require parallel operation of new and legacy facilities for the remainder of 2024, resulting in a temporary increase in distribution costs,” the company said.
This change allows Levi's to shift responsibility for final mile delivery to third parties. The denim manufacturer noted that it has new terms with its suppliers that will result in Levi's taking ownership of inventory near the shipping point rather than its final destination. Levi's distribution network was built for businesses that sell primarily to wholesalers, and now needs to change to one that is more focused on selling directly to consumers.
The changes are necessary because nearly half of Levi's sales these days come from its website and stores.
Direct-to-consumer sales jumped 8% during the quarter, representing 47% of total sales. Online sales rose 19%.
“Our transformational pivot to operating as the No. 1 DTC company is delivering positive results around the world, which gives me great confidence that we will deliver rapid, profitable growth for the rest of the year and beyond,” CEO Michelle Gass said in a statement.
During the quarter, wholesale revenue increased 7%, but excluding the shift in timing of wholesale orders, sales in the channel decreased 4%. Singh noted that wholesale revenues improved on a sequential basis, but the company has a “conservative” view on future channel growth.
By building its own direct channels, Levi's enjoys higher profits, better consumer data, and less reliance on shaky wholesalers like Macy's and Kohl's, which continue to shrink and lose popularity with consumers.
However, direct selling can also be more expensive, and can come with unexpected hurdles that can impact sales and drain profits. For example, when someone buys a pair of Levi's from Macy's and wants to return them, Macy's usually picks up that cost. Under the direct model, this responsibility, including cost and logistics, would fall to Levi's.
Nike has become known as a cautionary tale for retailers who have long relied on wholesalers trying to expand direct sales.
For a while, Nike's focus on direct sales increased revenue and profits, but some critics said the shift in strategy led to slow innovation and, ultimately, market share losses.
Recently, the company admitted it made a mistake when it cut ties with several of its wholesale partners, and said it has since “corrected” that.
Read the full earnings release here.
