Levi Strauss $LEVI+1.5%, the well-known jeans retailer, again cut its full-year sales forecast following poor quarterly earnings results that fell short of Wall Street expectations. The company's shares fell slightly in extended trading as shopping trends at department stores and major retail chains in the U.S. weakened.
Levi's had expected its fiscal third quarter net sales to be flat, rising 1% year-on-year, below its previous forecast of growth between 1.5% and 2.5%. This lowered forecast came three months after Levi's had already lowered its full-year earnings outlook. The company expects adjusted earnings per share to be at the low end of its previously projected range of $1.10 to $1.20.
Based on a survey of analysts conducted by LSEG, formerly known as Refinitiv, you can see how the jeans retailer performed in its fiscal third quarter compared to Wall Street expectations:
Earnings per share: 28 cents, adjusted, versus 27 cents expected.
Revenue: $1.51 billion versus $1.54 billion expected.
Net income for the three-month period ended Aug. 27 was $10 million, or 2 cents a share, compared with $173 million, or 43 cents a share, a year earlier. On an adjusted basis, earnings per share were 28 cents.
CEO Chip Bergh attributes those setbacks to customers feeling the pinch of inflation, rising mortgage rates and gasoline prices, which has led to reduced purchases at retailers supplying Levi's apparel. Harmit Singh, chief financial and growth officer at Levi's, noted that the company has taken a conservative approach to its outlook, despite continued momentum in direct-to-consumer sales and better trends in wholesale in the first part of the fourth fiscal quarter.
In addition, retailers are under pressure due to a more challenging sales environment in the US. Chains such as Macy's, Kohl's and Target are part of a number of retail stores that stock Levi's brands. As these retail stores, which purchase wholesale merchandise from Levi's for sale in their stores and on their websites, have experienced weaker discretionary sales, the impact of shoppers has left a significant imprint on Levi's business.
Items from its value-priced denim lines, including Signature by Levi Strauss and Denizen, sold by Walmart and Target, weakened, and sales of those brands fell by double digits in the third quarter. This downward trend shows that the value segment is under severe financial pressure.
Despite these challenges, Levi's direct sales and international sales look more promising. As it seeks to control its destiny similar to Nike, Levi has focused on increasing sales directly from its stores and website. In the third fiscal quarter, Levi's net sales from direct-to-consumer sales rose 14% year-over-year, while e-commerce sales surged 19% year-over-year.
This growth in direct-to-consumer sales, which now account for 40% of Levi's total net revenue in the third fiscal quarter, is expected to reach 55% by fiscal 2027. However, net sales from wholesale declined 8% year-over-year as sales growth in Asia and Latin America failed to offset declines in North America and Europe.
Nevertheless, the company remains hopeful about its future growth prospects. Michelle Gass, Levi's incoming CEO, noted that the company's brand resonates with young consumers around the world and could gain more market share in countries such as Mexico, where sales have shot up nearly 40% compared to pre-pandemic levels, and India.
Levi's is looking to leverage its strong fashion reputation by selling a diverse range of products such as chinos, tops and outerwear. Bergh mentioned that the decline in wholesale trends may be due to unusually warm weather in the US and Europe. However, Levi's own stores have been successful in attracting higher-income customers who are willing to spend more on premium jeans.
The company has even resorted to cutting prices on half a dozen price-sensitive items sold by other retailers to improve sales, with price cuts showing positive effects on sales trends. Bergh expects Levi's sales to increase during the holiday season due to cleaner inventories across the retailer, and anticipates a "slightly less promotional environment" compared to a year ago.
Despite these positive forecasts, however, Levi's stock has fallen roughly 14% this year, underperforming the 11% rise in the S&P 500 index, and closed nearly 2% lower at $13.21 on Thursday.