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Denim-crazy consumers are turning to Levi Strauss & Co for new jeans, but the company’s overall business is being dragged down by the Dockers brand, which the company is now considering selling, it said on Wednesday.
Sales at the Levi’s brand rose 5% in the fiscal third quarter – the biggest gain in two years – but overall revenue was flat and below Wall Street expectations.
Shares of Levi’s fell more than 8% in extended trading on Wednesday.
Here’s how the jeans maker fared compared to what Wall Street expected, based on a survey of analysts from LSEG:
- Earnings per share: 33 cents adjusted vs. 31 cents expected
- Annuity: $1.52 billion vs. $1.55 billion expected
The company’s reported net income for the quarter ended Aug. 25 was $20.7 million, or 5 cents a share, compared with $9.6 million, or 2 cents a share, a year earlier. Excluding one-time items, Levi’s posted earnings 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 to go in the fiscal year, Levi’s reaffirmed guidance for full-year adjusted earnings per share of $1.17 to $1.27, in line with expectations of $1.25, according to LSEG . He expects earnings per share to come in at the middle of that range.
It cut its revenue guidance and now expects sales to rise 1%, compared with a previous range of between 1% and 3%. That’s lower than the 2.3% growth analysts were expecting, according to LSEG.
So long, Dockers
Levi’s, which owns its namesake brand, as well as Dockers and Beyond Yoga, would have printed an entirely different set of results had it not been for Dockers. He started this brand in 1986 to offer consumers an alternative to jeans: khakis.
During the 1990s and 2000s, khakis were a mainstay in most consumers’ wardrobes, but these days it has fallen out of fashion. Efforts made by Levi’s to differentiate Dockers led to too much overlap with the Levi’s brand, which 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 athleisure brand it acquired in 2021, rose 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. Our view financially is that the exit of Dockers will improve the company’s overall margins and also minimize volatility in the growth of the flagship line.” Levi’s chief financial officer Harmit Singh told CNBC in an interview. “We believe Dockers’ exit will allow both Dockers and Levi’s to operate independently and maximize each other’s value independently.”
Levi’s has hit Bank of America lead the sales process.
Instant profits
Beyond Docker’s, Levi’s is making gains by increasing its profitability as it continues to shift its focus to direct-to-consumer sales.
During the quarter, gross margin increased by 4.4 percentage points, which Singh attributed to the direct selling strategy, lower cotton costs and better products that did not need to be marked up to sell.
Like other brands, Levi’s is working to strategize direct sales and reach more customers through its own stores and websites rather than through wholesalers such as Macy’s. The strategy is a boon to profits because 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 about 10%, driven by strength in the US and 16% growth in e-commerce. Overall, direct sales made up 44% of total revenue, and Levi’s wants to bring that number closer to 55%.
Behind those numbers are a series of explosive marketing campaigns, which include a new collaboration 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 show Beyoncé some of our staples. So in the first ad, the first chapter, she’s in… 501s and a must-have white T-shirt and she doesn’t get 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 living at the center of culture and bringing Beyoncé’s image together with Levi’s image, I don’t think there’s a better example of that.”
World woes
Sales at Levi’s Europe business were higher than expected at $406.6 million, ahead of StreetAccount estimates of $392 million, but sales in the Americas and Asia were lower. Levi’s reported sales of $757.2 million in America, below the $789.2 million StreetAccount analysts were expecting. In Asia, Levi’s posted revenue of $247.1 million, below StreetAccount estimates of $258 million.
“China has been heavy,” Singh said of the region, which accounts for about 2 percent of Levi’s total business. “It has that macroeconomic headwind and we’ve had some execution issues. We just changed leadership in China and over time we still believe in China’s long-term potential.”
In America, in addition to Docker’s slowdown, sales were also affected by one of Levi’s biggest wholesale customers in Mexico, Singh said. During the quarter, the partner had a cyber security breach, which reduced shipping times and affected sales. The district also faces some “execution issues,” Singh said.
