Levi Strauss reduces its full-year sales prediction once more as inflation takes its toll.
Levi Strauss dropped its full-year sales projection on Thursday after missing Wall Street’s quarterly revenue expectations and being weighed down by worse purchasing habits at department shops and big-box retailers across the United States.
Shares dipped marginally in after-hours trading.The company’s more cautious view comes only three months after it cut its full-year earnings forecast. It now forecasts net revenues to be flat to up 1% year on year, compared to a previous range of 1.5% to 2.5% increase. It expects adjusted earnings per share to be at the low end of the previously disclosed range of $1.10 to $1.20.
In an interview with CNBC, CEO Chip Bergh stated that buyers had purchased less things from merchants carrying Levi’s clothes due to inflation, rising mortgage rates, and petrol prices.
“All the things that are impacting that middle-income consumer are impacting our wholesale business,” he went on to say.
Here’s how the denim retailer fared in its fiscal third quarter versus what Wall Street expected, according to an LSEG, now known as Refinitiv, survey of analysts:
Net income for the three months ending Aug. 27 was $10 million, or 2 cents per share, compared to $173 million, or 43 cents per share, the previous year. Earnings per share were 28 cents on an adjusted basis.
Sales were broadly in line with the $1.52 billion in sales recorded by the corporation in the prior year quarter.
On the earnings call, Harmit Singh, Chief Financial and Growth Officer, stated that the company took a conservative approach to its outlook, despite seeing continued momentum in its direct-to-consumer business and improving trends in its wholesale business in the first half of the fiscal fourth quarter.
Consumers who are under pressure
Levi’s, like other businesses, has been dealing with a harder sales environment in the United States. Levi’s sells its products directly on its website and in its own locations throughout the world, but it also sells many goods through chain retailers such as Macy’s and Kohl’s.
as well as Goal
Those merchants who buy wholesale Levi products to sell in their stores and on their websites have witnessed lower discretionary sales.
Bergh stated that its value-based denim products, Signature by Levi Strauss and Denizen, have been particularly soft. He stated that in the third quarter, sales of those brands, which are carried by Walmart and Target, were down by double digits.
“Clearly, that’s an indication that that value consumer is under pressure,” he went on to say.
Direct sales and foreign sales have been the most profitable areas of Levi’s company. Nike, for example.
Levi has attempted to take charge of its own destiny by pushing a greater proportion of its overall sales through its own stores and website.
Net revenues from Levi’s direct-to-consumer business climbed 14% year on year in the fiscal third quarter. Year over year, e-commerce revenue increased by 19%, as the firm saw double-digit growth across all of its brands.
In the fiscal third quarter, direct-to-consumer sales accounted for 40% of total net revenues. It has promised to raise it to 55% by fiscal 2027.
Net wholesale revenue fell 8% year on year, as sales growth in Asia and Latin America were insufficient to overcome decreases in North America and Europe.
Along with increasing direct sales, Levi intends to expand into overseas markets. During an earnings call with investors, Levi CEO-in-waiting Michelle Gass, who has been tapped to follow Bergh, stated that the firm is set for development since its brand resonates globally, particularly with younger customers.
The brand is now distributed in 110 countries, but she believes Levi can increase market share in Mexico and India. According to her, sales in Mexico have increased by over 40% compared to pre-pandemic levels.
She believes Levi can leverage on its stylish reputation by offering more other sorts of clothes, such as chinos, shirts, and outerwear, in addition to jeans.
Warm weather and price reductions
Bergh told CNBC that extremely warm weather in the United States and Europe also played a factor in the weaker wholesale trends.
The majority of Levi’s clothing sold by Walmart
and some wear jeans, he explained.
“It’s hard to sell blue jeans when it’s 110 degrees outside,” he stated on a conference call with CNBC.
According to him, Levi may have a greater choice of items in its own stores, such as tank tops, skirts, and shorts that can be swapped out based on client trends – and the climate. Furthermore, he claims that it attracts buyers with higher incomes who are prepared to spend more for fashion-forward premium denim.
It’s difficult to sell blue pants when it’s 110 degrees outdoors.
“We know that $100,000 and up consumer is a little bit less impacted by what’s happening from a macro [economic] standpoint,” he went on to say. “We’re all being affected, to be clear, but they’ve got a little bit more income to spend, and the people that are coming into our stores want to buy Levi’s.”
In recent months, Levi made an uncommon move: lowering the pricing of approximately a half-dozen additional price-sensitive goods offered by other shops in order to boost sales. Bergh announced in July that Levi’s will reduce the price of certain pairs of jeans from $79.50 to $69.50. According to Bergh, this price is still more than the pre-pandemic price of $59.50.
Retailers had flexibility over whether to reduce prices, but some went into effect in early August – the final month of the third quarter, according to Bergh.
“As retailers have reflected price reductions to the consumer on those particular fits, the trends have improved,” he went on to say.
According to him, the firm is “cautiously optimistic” that when new fashions hit the market and the Christmas season approaches, customers will be more inclined to open their wallets.
One thing that can come in handy for Levi this Christmas season? Cleaner inventory across the retail business, according to Bergh. Many merchants’ top holiday wish a year ago was to clear off a surplus of unsold items. As a result, there were a lot of significant discounts and fewer profitable sales.
Bergh predicted a “slightly less promotional environment than a year ago.”
“We’re not gonna lead aggressive promotions, but we will be competitive,” he was quoted as saying.
Levi shares have lost approximately 14% this year, behind the S&P 500’s 11% increase. On Thursday, the company’s shares finished at $13.21, down about 2%.