Levi Strauss & Co is experiencing a surge in demand for its denim products, but its overall business is being dragged down by its Dockers brand, which the company is considering selling. While sales of Levi’s brand were up 5% during the fiscal third quarter, overall revenue came in flat and below Wall Street’s expectations, leading to an 8% drop in the company’s shares in extended trading. The company reported earnings per share of 33 cents, beating expectations, but revenue fell short at $1.52 billion.
The company’s net income for the quarter was $20.7 million, a significant increase from $9.6 million in the previous year. Excluding one-time items, Levi’s posted earnings of $132 million, or 33 cents per share, with sales reaching $1.52 billion, slightly up from the previous year. Levi reaffirmed its full-year adjusted earnings per share guidance but trimmed its revenue guidance, now expecting sales to grow by 1%, compared to analysts’ expectations of 2.3%.
Levi’s decision to sell off its Dockers brand, launched in 1986 to offer an alternative to denim with khakis, comes after years of underperformance and overlap with the Levi’s brand. Sales at Dockers were down 15% during the quarter, prompting Levi’s to focus on its Levi’s and Beyond Yoga brands to maximize value independently. By exiting Dockers, Levi’s aims to improve overall margins and minimize volatility in top-line growth. Bank of America has been tapped to lead the sale process.
Levi’s is making gains in profitability by focusing on direct-to-consumer sales, with gross margins rising by 4.4 percentage points during the quarter. The company’s direct channel saw a 10% increase in sales, driven by a 16% growth in e-commerce and strong performance in the U.S. Levi’s plans to increase direct sales as a percentage of total revenue to 55%. The company is leveraging splashy marketing campaigns, including a partnership with Beyoncé, to reach more customers and boost brand visibility.
While Levi’s Europe business outperformed expectations, sales in the Americas and Asia fell short, with China particularly challenging due to macroeconomic headwinds and execution issues. Levi’s posted $757.2 million in sales in the Americas, below analyst expectations, and $247.1 million in Asia, also falling short of estimates. In the Americas, beyond Dockers’ slowdown, sales were impacted by a cybersecurity breach at one of Levi’s largest wholesale customers in Mexico, leading to shipping constraints and lower sales. Levi’s remains optimistic about the long-term potential of China despite current challenges.
