Levi Strauss, the iconic jeans creator, recently reported its fiscal second-quarter earnings, which fell slightly below Wall Street’s expectations. Despite the current denim trend among consumers, the company’s revenue did not experience a major boost. While Levi’s earnings per share of 16 cents adjusted exceeded analysts’ expectations of 11 cents, its revenue of $1.44 billion was just shy of the expected $1.45 billion.
Despite the revenue miss, Levi’s posted better-than-expected earnings due to its strong direct sales to consumers and cost-cutting measures. The company’s direct-to-consumer sales increased by 8% during the quarter, accounting for 47% of overall sales. Online sales also saw a significant boost, rising by 19%. This shift towards a direct-to-consumer model has allowed Levi’s to enjoy higher profits, gain valuable consumer data, and reduce dependence on struggling wholesalers such as Macy’s and Kohl’s.
However, this transition comes with its challenges. Selling directly can be more expensive and can lead to unexpected complications that impact sales and profitability. For instance, under a direct model, Levi’s would bear the responsibility and costs of returns, which were previously handled by wholesalers like Macy’s. This highlights the need for careful management and logistics in the direct-to-consumer strategy.
Levi’s finance chief Harmit Singh attributed the sales miss to unfavorable foreign exchange conditions and weak sales at Docker’s, Levi’s khaki and chinos brand. Docker’s saw $82.4 million in sales during the quarter, an 8.6% increase compared to the previous year. However, it remains unclear how the timing of wholesale orders affected Docker’s sales.
Looking ahead, Levi’s reaffirmed its full-year guidance, which aligns with estimates. The company expects earnings per share to range between $1.17 and $1.27 for the year. This guidance now includes a 5-cent hit resulting from the company’s new distribution and logistics strategy.
Levi’s is currently transitioning from a primarily owned-and-operated distribution and logistics network to one that relies more on third parties. This change allows Levi’s to shift the responsibility of final mile delivery to these third parties. Additionally, Levi’s is now taking ownership of inventory closer to the point of shipment rather than its eventual destination. These changes are necessary as nearly half of Levi’s sales now come from its own website and stores.
The company’s CEO, Michelle Gass, expressed confidence in Levi’s transformational shift towards operating as a direct-to-consumer-first company. The pivot has yielded positive results worldwide and is expected to drive accelerated, profitable growth in the coming years.
Levi’s performance in the wholesale channel saw mixed results. While overall wholesale revenue grew by 7%, excluding the timing shift of wholesale orders, sales in this channel decreased by 4%. The company remains conservatively cautious about the future growth of the wholesale channel.
Levi’s stock fell about 12% in extended trading following the earnings announcement. However, it is important to note that the company’s shares have experienced significant growth over the past year, and this decline may be a temporary setback.
In conclusion, Levi Strauss’ fiscal second-quarter earnings fell slightly short of expectations, despite the denim trend among consumers. However, the company’s strong direct-to-consumer sales and cost-cutting measures have contributed to better-than-expected earnings. Levi’s transition to a direct-to-consumer model aims to increase profitability and reduce dependence on struggling wholesalers. Although challenges exist in this transition, Levi’s remains confident in its ability to achieve accelerated, profitable growth in the future.
