While denim is well received by consumers, it has not yet led to a major increase in sales Levi Strauss.
The jeans maker reported fiscal second-quarter sales Wednesday that fell just short of Wall Street expectations at a time when shoppers are filling their closets with denim dresses, skirts and ultra-low-rise baggy pants.
Levi’s posted better-than-expected profits as its direct-to-consumer sales and cost cuts continue to bear fruit. The company raised its dividend 8% to 13 cents per share, its first increase in six quarters.
Still, shares fell about 12% in extended trading.
Here’s how Levi’s performed in the quarter compared to Wall Street’s expectations, based on an LSEG analyst survey:
- Earnings per share: 16 cents adjusted versus 11 cents expected
- Revenue: $1.44 billion versus expected $1.45 billion
The company’s reported net income for the three-month period ended May 26 was $18 million, or 4 cents per share, compared with a loss of $1.6 million, or zero cents per share, a year earlier. Excluding one-time items, Levi’s earned $66 million, or 16 cents per share.
Revenue rose to $1.44 billion, up about 8% from $1.34 billion a year ago. However, the jump in sales was due to a simpler comparison.
In the year-earlier period, sales fell 9% after Levi’s shifted its wholesale shipments from the second fiscal quarter to the first fiscal quarter. The move reduced sales by about $100 million last year, the company previously said. Without the postponement and exit from the Levi’s Denizen business, sales would have only increased about 1% in the latest quarter compared to the same period last year.
Chief Financial Officer Harmit Singh attributed the loss in sales to unfavorable exchange rate conditions and weak sales at Docker’s. In the quarter, the khaki and chino brand posted revenue of $82.4 million, up 8.6% from $75.8 million in the year-ago period. It’s not clear how the timing of Levi’s wholesale orders affected sales at Docker’s.
“People are generally cautious,” Singh said in an interview with CNBC. “It’s not necessarily an environment where people are buying a lot, people are cautious.”
While Levi’s reported a strong increase in profits, the company only confirmed its full-year forecast, which was in line with estimates. The company continues to expect full-year earnings per share to be between $1.17 and $1.27, which now includes a 5-cent hit due to the company’s new distribution and logistics strategy.
Levi’s said it is transitioning from a primarily owned-and-operated distribution and logistics network in the U.S. and Europe to one that relies more heavily on third parties.
“In the short term, these changes will require new and old facilities to operate in parallel for the remainder of 2024, resulting in a temporary increase in distribution costs,” the company said.
The change allows Levi’s to shift responsibility for last-mile delivery to a third party. The denim maker noted that it has new terms with its supplier that will result in Levi’s taking ownership of the inventory that is closer to the point of shipment rather than the final destination. Levi’s’ distribution network was built for a company that sold primarily to wholesalers and now needs to be transformed into a company more focused on selling directly to consumers.
The changes are necessary because Levi’s now generates nearly half of its sales through its website and stores.
Direct-to-consumer sales increased 8% in the quarter and accounted for 47% of total sales. Online sales increased by 19%.
“Our transformation to operating as a DTC-first company is driving positive results globally, giving me confidence that we will deliver accelerated, profitable growth for the remainder of the year and beyond,” CEO Michelle Gass said in a statement.
During the quarter, wholesale sales increased 7%, but excluding the timing of wholesale orders, channel sales decreased 4%. Singh noted that wholesale sales improved sequentially, but the company has a “conservative” view of the channel’s future growth.
By expanding its own direct channels, Levi’s benefits from higher profits, better data about its consumers and less dependence on shaky wholesalers like Macy’s and Kohl’s, which are shrinking and falling out of favor with consumers.
However, direct selling can also be more expensive and involve unexpected disruptions that can impact sales and reduce profits. For example, if someone buys a pair of Levi’s from Macy’s and wants to return them, Macy’s typically covers that cost. In a direct model, this responsibility, including costs and logistics, would fall to Levi’s.
Nike has become known as a cautionary tale for retailers that have long relied on wholesalers trying to expand direct sales.
For a time, Nike’s focus on direct sales boosted sales and profits, but some critics said the change in strategy led to a slowdown in innovation and ultimately a loss of market share.
Recently, the company admitted it had made a mistake by cutting off so many of its wholesale partners and said it has since “corrected” this.
Read the full earnings release here.
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2024-06-26 21:47:17
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