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Denim-crazed consumers are turning to Lévi Strauss & Cie for new jeans, but the company’s overall business is being held back by its Dockers brand, which the company now plans to sell, it announced Wednesday.
Levi’s brand sales rose 5% in its fiscal third quarter – the biggest increase in two years – but overall revenue remained flat and below Wall Street expectations.
Shares of Levi’s fell more than 8% in extended trading Wednesday.
Here’s how the denim maker performed compared to what Wall Street expected, based on a survey of analysts by LSEG:
- Earnings per share: 33 cents adjusted versus 31 cents expected
- Income: $1.52 billion versus $1.55 billion expected
The company’s reported net income for the three months ended Aug. 25 was $20.7 million, or 5 cents per share, compared with $9.6 million, or 2 cents per share, a year earlier. . Excluding one-time items, Levi’s reported a profit of $132 million, or 33 cents per share.
Sales were $1.52 billion, up slightly from $1.51 billion a year earlier.
With one quarter remaining in the fiscal year, Levi 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. He expects earnings per share to be in the middle of that range.
It reduced its revenue forecast and now expects sales growth of 1%, compared to a previous range of between 1% and 3%. This is below the 2.3% growth expected by analysts, according to LSEG.
Goodbye, Dockers
Levi’s, which owns its namesake brand, as well as Dockers and Beyond Yoga, would have reported entirely different results without Dockers. She launched this brand in 1986 to offer consumers an alternative to denim: khakis.
Throughout the 1990s and 2000s, khakis were a staple in most consumers’ wardrobes, but these days they have gone out of fashion. Levi’s efforts to differentiate Dockers led to too much overlap with the Levi’s brand, which became a lifestyle brand with many more products than jeans.
During the quarter, Dockers’ sales fell 15% to $73.7 million, while Beyond Yoga, the popular athleisure brand it acquired in 2021, saw sales increase by 19% to $32.2 million.
“Over the past two years, the brand has underperformed. …We felt this was the right decision in the long term. From a financial perspective, we believe the exit of Dockers will improve overall margins for the business and will also minimize volatility in revenue growth.” Levi’s CFO Harmit Singh told CNBC in an interview. “We believe the exit of Dockers will allow Dockers and Levi’s to operate independently and maximize the value of each independently.”
Levi’s appealed Bank of America to lead the sales process.
Direct earnings
Beyond Docker’s, Levi’s is making gains in terms of increasing its profitability while continuing to focus on direct-to-consumer sales.
During the quarter, its gross margin increased by 4.4 percentage points, which Singh attributes to the direct sales strategy, lower cotton costs and product quality that does not require be reduced for sale.
Like other brands, Levi’s has been working to build its direct sales strategy and reach more customers through its own stores and websites rather than through wholesalers like Macy’s. The strategy is a boon to profits as margins are higher and it also allows brands to get closer to their customers through data collection.
During the quarter, Levi’s direct channel grew approximately 10%, driven by strength in the U.S. and 16% growth in e-commerce. Overall, direct sales accounted for 44% of total revenue and Levi’s wants to bring that figure closer to 55%.
Behind those numbers are a slew of splashy marketing campaigns, including a new partnership the jeans brand announced Monday with Beyoncé 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 ad, chapter one, she’s wearing… 501s and a basic white t-shirt and there’s nothing more of Levi’s than that,” CEO Michelle Gass told CNBC. “Part of the recipe for Levi’s success has been and will continue to be that we live at the center of culture and bring together the icon of Beyoncé with the icon of Levi’s. I don’t think it There’s no better example of that.”
Global woes
Sales in the Levi’s Europe business were above expectations at $406.6 million, above StreetAccount’s estimate of $392 million, but sales in the Americas and Asia were lower. Levi’s posted revenue of $757.2 million in the Americas, below the $789.2 million expected by StreetAccount analysts. In Asia, Levi’s reported 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 overall business. “We’re facing macroeconomic challenges and we’ve had some execution issues. We just changed direction in China and, over time, we still believe in China’s long-term potential.”
In the Americas, beyond 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 limited shipping times and impacted sales. The region also faces some “enforcement issues,” Singh said.