Global Courant
Levi Strauss on Thursday slashed its earnings outlook for the year after the apparel retailer reported a steep fall in wholesale revenues and weak sales in the US, its largest market.
However, the blue jeans seller saw bright spots in its direct-to-consumer sales and the Chinese market.
Shares fell more than 6% in extended trading.
Here’s how the company fared in its fiscal second quarter compared to what Wall Street expected, based on an analyst survey by Refinitiv:
Earnings per share: 4 cents, adjusted, versus 3 cents expected Revenue: $1.34 billion versus $1.34 billion expected
The company’s reported net loss for the three-month period ended May 28 was $1.6 million, or 0 cents per share, compared to net income of $49.7 million, or 12 cents per share, a year earlier . During the quarter, Levi reported adjusted earnings of 4 cents per share.
Sales fell to $1.34 billion, down 9% from $1.47 billion a year earlier.
Midway through the fiscal year, Levi lowered its full-year earnings outlook. It now expects adjusted earnings per share of $1.10 to $1.20, compared to an earlier range of $1.30 to $1.40. Analysts had expected adjusted earnings of $1.29 per share, according to Refinitiv.
Levi also sharpened its sales outlook for the year. The retailer now expects sales to grow between 1.5% and 2.5% compared to an earlier range of 1.5% to 3%. Analysts had expected growth of 2.6%, according to Refinitiv.
The gloomy outlook was attributed to a number of factors, but was driven by an expected slowdown in US wholesale revenues, which plunged 22% in the quarter, Levi’s chief financial and growth officer Harmit Singh told CNBC.
The company also plans to make price cuts on about half a dozen of its more price-sensitive items, such as the 502 and 512 jeans, moves that will hurt margins in the coming quarters. The price of the jeans will drop from $79.50 to $69.50, but it’s still higher than the pre-pandemic price of $59.50, CEO Chip Bergh said.
He said the company has raised prices relative to competitors past the point where market share could continue to grow, “so we’re closing that price differential relative to the competition back to historical levels with this $10 rollback.”
Bergh noted that the price cut will only be visible in stores where Levi has wholesale partnerships, such as Macy’s, and will not be seen in store-owned stores or internationally.
Levi also plans a higher tax rate in the second half of the year, a trend it says has contributed to the lower outlook. Levi’s effective tax rate during the quarter was 78.4% compared to 36.1% in the same period last year.
“Our view of the US wholesale, even with the price moves that we’re taking and everything else, we’re cautious about it,” Bergh said. “Only in light of the recent performance and the current macroeconomic headwinds, and just the consumer dynamics in this market.”
While the sharp decline in wholesale revenue hurts Levi in the short term, moving away from wholesalers is part of the company’s larger strategy, Bergh said. The pressure is similar to from Nike Playbook.
“Our focus is on driving our direct-to-consumer business, including e-commerce, so our own stores, our franchise partner stores, which actually roll wholesale globally, and our e-commerce business. That’s our strategic priority,” Bergh said.
“It has better structural finances, higher gross margin, we have control over the consumer experience,” he said.
During the quarter, DTC’s revenues grew 13% and were driven by growth in both company-operated stores and online sales. E-commerce revenue increased 20% in the quarter.
When Bergh first joined Levi about 12 years ago, wholesale customers were like Macy’s And Kohlsaccounting for more than 40% of Levi’s total sales, but today it is less than 30%, he said.
The shift away from wholesale contributed to a 22% drop in sales in America, where Levi saw $609 million in sales, below estimates of $639.5 million, according to StreetAccount. Sales fell 2% in Europe, where the company reported $361 million in revenue, but they were higher than the $344 million analysts had expected, according to StreetAccount.
Sales were rosier in Asia, where sales rose 18% in the quarter to $262 million, driven by the strength of the company’s DTC channel. It beat Wall Street’s estimate of $230.2 million, according to StreetAccount.
Read the company’s full press release here.
