Despite the cowboy fever Levis stock price plunges by 12 as sales disappoint

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A shopper walks past a Levis store and a sign in Spanish. 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 denim maker reported second-quarter revenue that was slightly below Wall Street’s expectations, as shoppers stocked up on denim dresses, skirts, and ultra-low-rise baggy pants. Levi’s reported earnings that beat expectations as its direct-to-consumer sales and cost cuts continued to pay off. The company raised its dividend by 8% to 13 cents per share, marking the first increase in six quarters. However, the stock fell about 12% in extended trading. Levi’s second-quarter performance compared to Wall Street’s expectations, according to LSEG analysts, is 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, or 4 cents per share, for the three months ended May 26, up from a loss of $1.6 million, or zero cents per share, in the same period a year ago. 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 year-ago period. However, the sales growth comes from an easier comparison. In the year-ago period, Levi’s shifted wholesale shipments from the second quarter to the first quarter, causing sales to drop 9%. The company previously said that this shift resulted in about $100 million less in sales last year. Excluding this shift and the exit of Levi’s Dockers business, sales for the most recent quarter would have grown about 1% from the year-ago period. Chief Financial Officer Harmit Singh attributed the sales miss to unfavorable foreign exchange conditions and softness in Dockers’ sales. Sales of the company’s khaki and twill pants brands totaled $82.4 million, up 8.6% from $75.8 million in the same period last year. It’s unclear how the timing of Levi’s wholesale orders has affected Dockers’ sales. “People are generally cautious,” Singh said in an interview with CNBC. “This is not necessarily an environment where people are buying in bulk. People are cautious.” While Levi’s reported strong earnings, it only reiterated its full-year guidance, which is 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% impact from the company’s new distribution and logistics strategy. Levi’s said that it is transitioning from owning and operating major distribution and logistics networks in the U.S. and Europe to relying more on third-party networks. “These changes will require operating both new and existing facilities concurrently for the remainder of 2024, resulting in temporary increases in distribution costs in the near term,” the company said. This shift allows Levi’s to transfer the responsibility of the last mile delivery to third parties. The company noted that it has reached new terms with suppliers, resulting in Levi’s holding inventory closer to the shipping point rather than the final destination. Levi’s distribution network was built for a company that primarily sold to wholesalers, and now it needs to shift to one 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 websites and stores. Direct-to-consumer sales grew 8% this quarter, accounting for 47% of total sales. Online sales grew 19%. “We are the first company transforming to DTC, and we’re seeing positive results around the world, which gives me great confidence that we will drive accelerated profitable growth for the remainder of this year and beyond,” CEO Michelle Gass said in a statement. Wholesale revenue grew 7% this quarter, but channel sales, excluding the timing of wholesale orders, fell 4%. Singh noted that wholesale revenue has improved on a sequential basis, but the company remains “cautious” on the growth of that channel. By building its own direct channels, Levi’s has gained higher margins, better consumer data, and reduced reliance on struggling wholesale partners like Macy’s and Kohl’s, which are continuing to shrink and fall out of favor with consumers. However, direct sales can also be more expensive and may come with unexpected issues that impact sales and eat into profits. For example, when someone bought a pair of Levi’s from Macy’s and wanted to return it, Macy’s would typically foot the bill. In a direct model, the responsibility, including costs and logistics, falls on Levi’s. For retailers that have long relied on wholesale partners trying to expand direct sales, Nike has become a cautionary tale. For some time, Nike’s focus on direct sales has boosted revenue and profits, but some critics say the strategic shift led to a slowdown in innovation and ultimately a decline in market share. Recently, the company admitted that it cut too many wholesale partners, calling it a mistake, and said it has “corrected” it. Click here to read the full earnings release.