Despite Cowboy Craze Levis Stock Plunges by 12 as Sales Figures Disappoint

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A shopper leaves the store of the American clothing company brand Levi’s and the Spanish flag. Xavi Lopez | Lightrocket | Getty Images
Denim has a place in consumers’ hearts, but it hasn’t brought significant sales growth to Levi’s. On Wednesday, the jeans maker reported revenue for the second quarter that was slightly lower than Wall Street’s expectations, when shoppers were stocking up on denim dresses, skirts, and ultra-low-rise wide-leg pants. Levi’s reported earnings better than expected, as its direct-to-consumer sales and cost-cutting efforts continued to pay off. The company raised its dividend by 8% to 13 cents per share, the first increase in six quarters. Despite this, the stock fell about 12% in extended trading. According to LSEG analyst surveys, Levi’s performance in this quarter compared to Wall Street expectations as follows: Earnings per share: adjusted to 16 cents, expected to be 11 cents Revenue: $1.44 billion, expected to be $1.45 billion The company reported net income of $18 million for the three months ending May 26, or 4 cents per share, compared to a loss of $1.6 million, or zero cents per share, in the same period last year. Excluding one-time items, Levi’s reported earnings of $66 million, or 16 cents per share. Sales increased to $1.44 billion, up about 8% from $1.34 billion in the same period last year. However, the sales growth came from an easier comparison. In the same period last year, Levi’s shifted wholesale shipments from the second quarter to the first quarter, resulting in a 9% decline in sales. The company previously stated that this shift resulted in a decrease in sales of approximately $100 million last year. Excluding this shift, as well as the exit of Levi’s denim business, sales for the latest quarter would have increased by about 1% compared to the same period last year. CFO Harmit Singh attributed the sales miss to unfavorable foreign exchange conditions and soft sales of Docker’s. This quarter, sales of the khaki and twill pants brand totaled $82.4 million, an 8.6% increase from $75.8 million in the same period last year. It is not clear at this time how the timing of Levi’s wholesale orders will impact Docker’s sales. Singh told CNBC, “People are generally cautious.” “It’s not necessarily a environment where people are buying a lot, people are cautious.” While Levi’s reported strong profit performance, it only reiterated its full-year guidance, in line with expectations. The company continues to expect full-year earnings per share to be between $1.17 and $1.27, including a 5% hit from the company’s new distribution and logistics strategy. Levi’s stated that the company is transitioning from primarily owned and operated distribution and logistics networks in the U.S. and Europe to a more third-party network-dependent model. The company said, “In the near term, these changes will require operating new facilities and old facilities simultaneously through the remainder of 2024, resulting in temporary increases in distribution costs.” This change allows Levi’s to shift the responsibility for the last mile deliveries to third parties. The company noted that it has reached new terms with suppliers, resulting in Levi’s holding inventory closer to shipping points rather than final destinations. Levi’s distribution network was built for a company that primarily sells to wholesalers, but now it needs to transition to a company that is more focused on selling directly to consumers. These changes are necessary as nearly half of Levi’s sales now come from its own website and stores. This quarter, direct-to-consumer sales increased by 8%, accounting for 47% of total sales. Online sales increased by 19%. CEO Michelle Gass said in a statement, “We are transforming into the first DTC company and seeing positive results around the world, which makes me very confident that we will achieve accelerated profit growth for the rest of this year and beyond.” This quarter, wholesale revenue increased by 7%, but excluding the timing of wholesale orders, channel sales decreased by 4% Singh noted that wholesale revenue improved on a sequential basis, but the company is “cautious” about growth in that channel. By building its own direct channels, Levi’s has gained higher margins, better consumer data, and reduced reliance on struggling wholesalers like Macy’s and Kohl’s, which are no longer favored by consumers. However, direct sales may also be more expensive and could present unexpected problems that affect sales and erode profits. For example, when someone buys a pair of Levi’s from Macy’s and wants to return it, Macy’s typically foots the bill. In a direct model, including responsibility for costs and logistics will fall on Levi’s. For retailers who have long relied on struggling wholesalers and are attempting to expand their direct sales, Nike has become a cautionary tale. Nike’s focus on direct sales has raised revenue and profits for some time, but some critics say the strategic shift has led to a slowdown in innovation and ultimately a decline in market share. Recently, the company admitted that it had cut too many wholesale partners, which was a mistake, and said it has “corrected” this. Click here to read the full revenue release