Denim is having a moment with consumers, but it hasn’t led to a huge increase in sales Levi Strauss.
The denim maker on Wednesday posted fiscal second-quarter earnings that fell short of Wall Street expectations, at a time when shoppers are stocking their wardrobes with ultra-low-cut denim dresses, skirts and slacks.
Levi’s posted better-than-expected earnings as its direct-to-consumer sales and cost-cutting continue to bear fruit. 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 by LSEG:
- Earnings per share: 16 cents adjusted vs. 11 cents expected
- Income: $1.44 billion vs. $1.45 billion expected
The company’s reported net income for the three-month period ended May 26 was $18 million, or 4 cents per share, compared with a loss of $1.6 million, or zero cents per share, a year earlier. Excluding one-time items, Levi’s posted earnings of $66 million, or 16 cents per share.
Sales rose to $1.44 billion, up about 8% from $1.34 billion a year earlier. However, sales growth was coming from a lighter comparison.
In the year-ago period, sales fell 9% as Levi’s shifted its bulk shipments from the fiscal second quarter to the fiscal first quarter. The change cut sales last year by about $100 million, the company said previously. Excluding the move, as well as the exit of the Levi’s Denizen business, sales would have increased by only about 1% in its most recent quarter compared to the year-ago period.
Chief financial officer Harmit Singh attributed the lack of sales to unfavorable foreign exchange conditions and weak sales at Docker’s. During the quarter, the khakis and chinos brand saw $82.4 million in sales, up 8.6% from $75.8 million in the year-ago period. It’s not clear how sales at Docker’s were affected by the timing of Levi’s bulk orders.
“People are generally cautious,” Singh told CNBC in an interview. “It’s not necessarily an environment where people buy a lot, people are cautious.”
While Levi’s posted a strong earnings beat, it only 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 5-cent hit 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 US and Europe to one that relies more on third parties.
“In the short term, these changes require the parallel operation of new and old facilities for the rest of 2024, resulting in a temporary increase in distribution costs,” the company said.
The change allows Levi’s to shift the responsibility of final mile delivery to third parties. The jeans maker noted that there are new terms with its supplier that result in Levi taking ownership of inventory closer to the point of shipment than to its final destination. Levi’s distribution network was built for a business that sold primarily to wholesalers, and now needs to change to a network 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 increased 8% during the quarter, representing 47% of total sales. Online sales increased by 19%.
“Our transformational pivot to operate as the first DTC company is delivering positive results around the world, giving me great confidence that we will achieve accelerated and profitable growth for the rest of the year and beyond,” said in a statement CEO Michelle Gass.
During the quarter, wholesale revenue increased 7%, but excluding the change in the timing of bulk orders, channel sales decreased 4%. Singh noted that wholesale revenue improved on a sequential basis, but the company has a “conservative” view of channel growth going forward.
By building its own direct channels, Levi’s enjoys higher profits, better data about its consumers and less reliance on struggling wholesalers like Macy’s and Kohl’s, which are continuing to shrink and fall out of favor. of consumers.
However, direct selling can also be more expensive and can come with unexpected hiccups that can affect sales and drain profits. For example, when someone buys a pair of Levi’s at Macy’s and wants to return them, Macy’s usually covers that cost. Under a direct model, this responsibility, including cost and logistics, would fall on Levi’s.
Nike has been known as a cautionary tale for retailers long dependent on wholesalers trying to expand direct sales.
For a time, Nike’s focus on direct sales boosted revenue and profits, but some critics said the change in strategy led to a slowdown in innovation and, ultimately, a loss of market share.
The company recently admitted it made a mistake when it terminated so many of its wholesale partners and said it has since “corrected” it.
Read the full earnings release here.