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Denim-obsessed consumers are turning to… Levi Strauss & Co Its Dockers brand, which the company is now considering selling, is falling out of its overall new jeans business, the company announced Wednesday.
Sales at the Levi's brand rose 5% during the fiscal third quarter — the biggest gain in two years — but overall revenue was flat and lower than Wall Street expected.
Shares of Levi's fell more than 8% in extended trading Wednesday.
Here's how the denim maker fared compared to what Wall Street expected, based on a survey of analysts conducted by LSEG:
Earnings per share: 33 cents adjusted vs. 31 cents expected Revenue: $1.52 billion vs. $1.55 billion expected
The company's reported net income for the three-month period ending August 25 was $20.7 million, or 5 cents per share, compared to $9.6 million, or 2 cents per share, the previous year. Excluding one-time items, Levi's reported earnings of $132 million, or 33 cents per share.
Sales were $1.52 billion, up slightly from $1.51 billion the previous year.
With one quarter remaining in the fiscal year, Levi's reaffirmed its full-year adjusted earnings per share guidance of $1.17 to $1.27, in line with expectations of $1.25, according to LSEG. It expects earnings per share to come in the middle of this range.
It trimmed its revenue guidance and now expects sales to grow 1%, compared to a previous range of 1% to 3%. This is lower than the 2.3% growth that analysts had expected, according to LSEG.
So long, port workers
Levi's, which owns its namesake brand, as well as Dockers and Beyond Yoga, would have printed a very different set of results if not for Dockers. This brand started in 1986 to offer consumers an alternative to denim: khaki.
Throughout the 1990s and 2000s, khakis were a mainstay in most consumers' closets, but they're falling out of style these days. Levi's efforts to differentiate Dockers have led to a lot of overlap with the Levi's brand, which has expanded into a lifestyle brand offering much more than jeans.
During the quarter, sales at Dockers fell 15% to $73.7 million, while Beyond Yoga, the buzzy fitness brand it acquired in 2021, saw sales grow 19% to $32.2 million.
“Over the past two years, the brand has underperformed…. We felt this was the right decision over the long term. Our financial view is that Dockers' exit will improve the company's gross margins and also reduce volatility in revenue growth.” Harmeet Singh, Levi's CFO, told CNBC in an interview. “We believe the exit of Dockers will allow both Dockers and Levi's to operate independently and increase their respective value independently.”
Levy has exploited it Bank of America To lead the sales process.
Direct gains
Beyond Docker's, Levi's is making gains in increasing its profitability as it continues to shift its focus to selling directly to consumers.
During the quarter, gross margin rose 4.4 percentage points, which Singh attributed to a direct selling strategy, lower cotton costs, and improved products that did not need to be devalued to sell.
Like other brands, Levi's is working on its direct selling strategy and reaching more customers through its stores and websites rather than through wholesalers such as Messi. This strategy is a boon to profits because the margins are higher and it also allows brands to get closer to their customers by collecting data.
During the quarter, Levi's direct channel rose nearly 10%, driven by strength in the U.S. and 16% e-commerce growth. 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 slew of impressive marketing campaigns, which includes a new partnership the denim brand announced with Beyoncé on Monday after the pop star released a song called “LEVII'S JEANS” earlier this year on her country album.
“Our strategic decision was to have Beyoncé represent some of our core products. So in the first act of the first ad, she's wearing… the '50s and wearing a basic white T-shirt and it doesn't get much more Levi's than that.” CEO Michelle Gass told CNBC. “Part of the recipe for success for Levi's has been and will continue to be that we live in the epicenter of the culture and combining Beyoncé's icon with Levi's icon, I don't think there's any better example of that.”
Global problems
Sales in Levi's Europe business came in higher than expected at $406.6 million, beating StreetAccount estimates of $392 million, but sales in the Americas and Asia were lower. Levi's reported sales of $757.2 million in the Americas, lower than the $789.2 million that StreetAccount analysts had expected. In Asia, Levi's had revenue of $247.1 million, below StreetAccount's estimate of $258 million.
“China has been a drag,” Singh said of the region, which accounts for about 2% of Levi's total business. “We've had these macro headwinds, and we've had some issues with execution. We've just changed leadership in China, and over time we still believe in China's long-term potential.”
In the Americas, in addition to the 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 experienced a cybersecurity breach, which restricted shipping times and impacted sales. The district is also working to resolve some “implementation issues,” Singh said.
