Levi's wants to sell a 'denim lifestyle' directly to consumers. Wall Street needs more convincing.

By Bill Peters

Denim products beyond pants are 'selling like crazy,' CEO says

Shares of Levi Strauss & Co. sank after hours on Wednesday, after the iconic jeans maker grew quarterly sales but still missed Wall Street's estimates, and said it expected higher costs as it tries to sell more clothing through its own physical and online stores.

Levi Strauss (LEVI) offered that outlook as its executives try to push new types of denim, tops and dresses, along with what Chief Executive Michelle Gass - several times on Wednesday - called a "denim lifestyle." But the company has cut staff and costs, following caution from inflation-weary consumers and retailers, which have tried to keep their product selections leaner as a result.

Shares sank 12% after hours, after finishing regular trading up 0.5%. The drop followed a long-term rally for the stock, which has climbed 39.8% so far this year.

Levi's reported second-quarter net income of $18 million, or 4 cents a share, contrasting with a loss of $2 million, or break-even on a per-share basis, in the same quarter last year. Adjusted for restructuring and severance charges, Levi Strauss earned 16 cents a share, above FactSet forecasts for 11 cents.

Sales rose 8% year over year to $1.44 billion, helped by newer products and gains in women's clothing, as well as demand from younger shoppers. But those results were just shy of estimates for $1.45 billion, as a dip in sales in Europe added top-line pressure.

Sales in Levi's direct-to-consumer segment, which sells clothes through its own stores and its online ecosystem, rose 8%. At least one analyst has said selling more product through that segment gives Levi's more data on consumer behavior.

And despite retailer caution, sales in the company's wholesale segment, which sells to outside stores, rose 7%.

Tastes in jeans have shifted away from narrower fits to wider-leg styles. Meanwhile, Western-themed wear - thanks to Taylor Swift and Beyoncé - has enjoyed newfound popularity. Meanwhile, low-rise jeans, an emblem of the early aughts, have shown signs of a comeback.

Sales of looser fits were up 21% in the second quarter, Levi's said. It plans to roll out new products in the months ahead, like chinos and sweaters. And after launching pants designed to keep a person cool in warmer weather, this fall it will launch a line with a softer interior made for warmth in cooler climates.

"Denim product beyond bottoms is selling like crazy," Gass said during the call.

But one analyst, during the call, described what he said was a disconnect between the company's optimism and its sales. Levi's stuck with its full-year outlook for sales growth of 1% to 3% year over year, and said that due to pressures from foreign exchange, it expected those sales to land at the midpoint of that range.

The company also said that as part of its plans to trim costs and sell more product directly, it would begin working with more third-party logistics companies to handle how it gets its jeans and other items to stores and customers, after largely owning and running that business itself in the U.S. and Europe. That changeover could cause near-term hiccups.

"In the near term, these changes require the parallel operation of new and old facilities for the rest of 2024, resulting in a transitory increase in distribution costs," management said in Levi's earnings release.

Levi's said it expected adjusted earnings per share of $1.17 to $1.27 this year.

That's the same as the forecast it offered in April. But the company on Wednesday said included "a 5 cent adverse impact" to earnings per share "attributable to our new distribution and logistics strategy, increased marketing spend in [the second half of the fiscal year], and incremental [foreign exchange] headwinds."

Levi's in April said that its U.S. market share for jeans had "stabilized" after higher food prices over the past two years made shoppers pickier about what else they buy.

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-26-24 2018ET

Copyright (c) 2024 Dow Jones & Company, Inc.