Levi Strauss Shares Drop After Retailer Slashes Guidance on Weak Wholesale Revenue

Levi Strauss barely beat Wall Street estimates after reporting a sharp drop in U.S. Wholesale revenue.

Blue jean retailer has slashed their profit forecast for the year. They expect wholesale revenue in the U.S. will continue to decline as they shift to a direct-to consumer model.

The apparel company expects to earn adjusted earnings per share between $1.10 and $1.20 compared to the previous range of $1.30-0.40.

Levi Strauss

On Thursday, the apparel retailer drastically reduced its profit forecast for the year. This was after it reported a sharp drop in wholesale revenue and soft sales in its biggest market in the U.S.

Blue Jeans saw some bright spots in direct-to consumer sales and the China market.

In extended trading, shares fell by more than 6%.

Refinitiv surveyed analysts to find out how the company performed in its second fiscal quarter, and compared it with Wall Street's expectations.

Earnings per share:

4 cents, adjusted, vs. 3 cents expected

Revenue:

$1.34 Billion versus $1.34 Billion expected

The reported net loss of the company for the three-month span that ended on May 28th was $1.6m, or 0c per share. This compares to a net profit of $49.7m, or 12c per share, one year ago. Levi reported an adjusted profit of 4 cents a share during the quarter.

Sales fell to $1.34bn, down 9% compared to $1.47bn a year ago.

Levi has lowered its profit forecast for the full year half way through its fiscal. Levi now expects to earn adjusted earnings per share between $1.10 and $1.20 compared to the previous range of $1.30-0.40. According to Refinitiv, analysts had predicted adjusted earnings per share of $1.29.

Levi has also tightened up its revenue forecast for the year. The retailer expects to see sales grow by 1.5%- 2.5%, compared to the previous range of 1.5%-3%. According to Refinitiv, analysts had predicted a growth rate of 2.6%.

Harmit Singh, Levi's Chief Financial and Growth Officer, told CNBC that the dismal outlook could be attributed to several factors, but was most likely driven by a slowdown expected in U.S. Wholesale revenues, which fell 22% during the third quarter.

The company also plans to reduce the price of a half-dozen items that are more sensitive to price, like its 502 jeans and 512 denim, which will affect its margins for the next few quarters. Chip Bergh, CEO of the company, said that although the jeans' price will be reduced from $79.50 down to $69.50 it is still higher than its pre-pandemic $59.50 price.

He said that the company had raised its prices in comparison to competitors beyond the point at which it could grow market share. "So we are just narrowing the price gap with the competition back to historical levels by this $10 rollback."

Bergh stated that the price reduction would only be visible in Bergh.

Levi's will only be sold in stores with which it has wholesale partnership, like Macy's. It won't sell at its own stores or abroad.

Levi also plans to increase its tax rate for the second half of this year. This trend, it says, contributed to the company's lower outlook. Levi's effective rate of tax during the quarter was at 78.4% compared with 36.1% for the same period last year.

Bergh said, "Our outlook for U.S. wholesale is cautious, even though we are taking pricing actions and other measures." "Just by looking at the recent performance and the macro headwinds and just the consumer dynamic in this market," said Bergh.

Bergh said that while the sharp drop in wholesale revenues is hurting Levi's short-term, the shift away from wholesalers was part of the larger strategy. This is similar to

Nike's

playbook.

Our focus is on driving our direct-to consumer business, which includes ecommerce. This means our own stores, franchise partner stores that actually roll up through wholesale globally and our ecommerce business. Bergh said that this was the strategic priority.

He said, "It's got better financial structurally, a higher gross margin and we control the consumer experience."

DTC revenues grew 13% during the quarter. This was driven by both growth in company-operated retail stores and online sales. The quarter saw a 20% increase in e-commerce revenues.

Wholesale customers like Levi, who Bergh joined about 12 years ago.

Macy's

You can also find out more about the following:

Kohls

He said that in the past, Levi's business accounted for over 40% of its total sales, but now it is less than 30%.

According to StreetAccount, the shift away from wholesale sales contributed to a 22 percent drop in sales in the Americas. Levi reported $609 million of sales in this region, which was below estimates for $639.5 millions. StreetAccount reports that sales in Europe fell by 2%, with the company reporting $361 million, which was higher than the $344 millions analysts expected.

In Asia, sales rose 18% to $262 million in the third quarter, largely due to the DTC channel. StreetAccount reported that it exceeded Wall Street's $230.2-million estimate.

The company's earnings report is available in full.

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