Levi Strauss & Co Cuts Annual Forecasts After Missing Sales Estimates

Levi Strauss & Co, the renowned denim brand, has revised its annual forecasts for the second time this year after falling short of sales estimates in the third quarter. The company attributes the disappointing results to heavy promotions and declining demand at wholesale channels in North America.

The challenging retail environment, marked by subdued consumer spending, has affected not only Levi’s but also other retailers like Macy’s and Nordstrom. High prices and borrowing rates have put pressure on consumer budgets, leading to a decline in demand for Levi’s denim bottoms, tops, and cargo pants.

Unseasonably warm weather during the late summer and fall also played a role in the sales slump, particularly for men’s jeans in wholesale channels where Levi has less control over product displays, according to Chief Financial and Growth Officer Harmit Singh. However, the company’s own stores have seen better performance due to a wider range of buy-now, wear-now products such as shorts, lighter denim, skirts, and dresses.

Levi’s wholesale business, especially in North America, has been struggling with declining sales, primarily impacting middle-income consumers. Shoppers in the $50,000 to $100,000 income range, who are particularly value-conscious, have been under pressure. Consequently, Levi’s sales at retail partners like Walmart and Target, where its more affordable lines start below $30, have been affected.

While Levi’s direct-to-customer (DTC) business, catering to a more affluent consumer, experienced a 12% increase in net revenue, the overall Americas segment saw a 5% decrease. The company’s margins were also impacted by price cuts on certain denim bottoms sold to wholesale retailers like Macy’s and Nordstrom, aimed at attracting price-sensitive shoppers. Adjusted gross margins declined 130 basis points to 55.6% during the third quarter, further affected by lower full-price selling and higher product costs.

Analysts suggest that Levi may need to increase promotions and lower prices if wholesale channel sales continue to worsen, which could further pressure its margins. Shareholders are expressing skepticism about the company’s prospects ahead of the crucial holiday season, despite executives’ plans to expand Levi’s denim assortment into skirts, dresses, and other womenswear.

Levi now forecasts flat to 1% revenue growth in fiscal 2023, compared to the previous estimate of 1.5% to 2.5% growth. The company also expects its adjusted profit per share to be at the lower end of the previously estimated range of $1.10 to $1.20. Analysts, on average, were anticipating $1.12.

In the quarter ended August 27, Levi’s net revenue declined to $1.51 billion from $1.52 billion a year earlier, missing analysts’ estimate of $1.54 billion.

Despite management’s efforts to address the challenges and expand its product offerings, investors remain unconvinced about the company’s ability to navigate the current market conditions and achieve growth.