The Return Of The Everlasting Denim Craze Was Not Enough To Boost Levi's Sales

On Wednesday, Levi Strauss & Co. (NYSE: LEVI) reported its fiscal second quarter results. While Levi managed to top Wall Street estimates on the earnings front due to its direct sales channel and cost cutting initiatives, revenue fell short. Upon the report, shares fell about 15% during extended trading. 

Fiscal Second Quarter Highlights

For the quarter ended on May 26th, Levi reported that revenue rose about 8% YoY to $1.44 billion, coming short of LSEG’s consensus estimate of $1.45 billion. However, when taking into account that during last year’s comparable quarter, Levi shifted its wholesale shipments from its fiscal second quarter into its fiscal first quarter which lowered sales by about $100 million, along with exit of Levi’s Denizen business, sales only grew about 1% even though consumers are stocking up on denim items.

When segmenting revenue, direct-to-consumer sales expanded 8% while online sales grew 19%. On the other hand, wholesale revenue grew 7%, but when excluding the shift in timing of wholesale orders, it actually dropped 4% .

For the May quarter, Levi earned a net income of $18 million, or 4 cents per share, improving from last year’s quarter when it reported a loss of $1.6 million, or zero cents a share. When adjusted, Levi earned $66 million, or 16 cents per share, surpassing LSEG’s consensus estimate of 11 cents. 

Guidance

Despite the earnings beat, Levi only reaffirmed its full year guidance that was in line with estimates. For the full-year, Levi guided for earnings per share to range from $1.17 to $1.27.

The Distribution Shift

In the U.S. and Europe, Levi is transitioning from a primarily owned-and-operated distribution and logistics network to a third party one, which is resulting in a transitory increase in distribution costs. The reason behind the shift is that its distribution network was built to deal with wholesalers and Levi changed its strategy focus on selling directly to its consumers, with almost half of its current sales being from its website and owned stores. During the just reported quarter, direct-to-consumer sales made as much 47% of overall revenue. This pivot allowed Levi to boost its profits, gain valuable data to get to know its consumer betters, while it got to reduce its reliance on wholesalers.

On the other hand, Nike NKE, who also pursued this strategy, recently acknowledged it might not have been the best choice. Nike serves as a cautionary tale for drifting away from wholesale as its seems to have slowed down its innovative capabilities that many consider to be the key of its success story, consequently allowing its upstart rivals to steal its market share. Also this week, Nike reported its quarterly earnings that showed it is trying to restore its wholesale relationships. Therefore, if the mighty Nike admitted it went too far when it chose to ice out its wholesale partners, maybe Levi should be more cautious as selling directly is also more expensive and it brings potential hiccups along the way that could threaten profits.

Just because denim seems to have an everlasting appeal, the jeans maker’s revenue is by no means safe from harm in an uncertain world of cautious shoppers.

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