Levi’s posted better-than-expected earnings as direct-to-consumer sales and cost-cutting continued to pay off. The company raised its dividend by 8% to 13 cents, its first increase in six quarters.
However, shares fell around 12% in extended trading.
Here’s how Levy performed in the quarter compared to what Wall Street expected, based on LSEG’s survey of analysts:
- Stock Gains: 16 cents adjusted vs. 11 cents expected
- Revenue: $1.44 billion and $1.45 billion expected
The company’s net income for the three months ended May 26 was $18 million, or 4 cents per share, compared with a loss of $1.6 million, or zero cents per share, a year earlier. Excluding one-time items, Levy’s earnings were $66 million, or 16 cents per share.
Sales rose to $1.44 billion, up 8% from $1.34 billion a year earlier. However, the sales jump comes from an easy comparison.
In the year-ago period, sales fell 9% after Levi’s shifted its total shipments from the second quarter of its fiscal year to the first quarter of its fiscal year. The company previously said the change reduced sales by about $100 million last year. Excluding the transition and exiting the Levi’s Denizen business, sales in its latest quarter would have increased 1% from a year earlier.
Finance chief Harmeet Singh attributed the sales miss to unfavorable foreign exchange conditions and weak sales of Docker. For the quarter, the khaki and chinos brand saw sales of $82.4 million, up 8.6% from $75.8 million a year earlier. It’s unclear how Docker’s sales were affected by the timing of Levi’s wholesale orders.
“People are generally cautious,” Singh told CNBC. “It’s not necessarily an environment where people are buying more, people are being cautious.”
Although Levi’s posted strong earnings, it only reaffirmed its full-year guidance, which was in line with estimates. The company continues to expect full-year earnings per share to be between $1.17 and $1.27, which now includes a 5 percent hit from the company’s new distribution and logistics strategy.
Levi’s said it is transitioning from a distribution and logistics network primarily owned and operated in the US and Europe to one that relies more on third parties.
“More recently, these changes require parallel operation of new and old facilities through 2024, resulting in an intermediate increase in supply costs,” the company said.
The change allows Levy to shift the responsibility of final mile delivery to a third party. It has new terms with its supplier, resulting in Levy taking ownership of the cargo closer to the point of shipment than to its final destination. Levy’s distribution network was developed primarily for a business that sold to wholesalers, and now it needs to become one that focuses more on selling directly to consumers.
The changes are necessary because half of Levi’s sales these days come from its own website and stores.
Direct-to-consumer sales rose 8% in the quarter, accounting for 47% of overall sales. Online sales increased by 19%.
“Our transformational approach to operating as a DTC-first company is producing positive results around the world and gives me great confidence that we will achieve rapid, profitable growth throughout this year and beyond,” CEO Michael Case said in a statement.
In the quarter, total sales revenue grew 7%, but excluding the timing shift in total orders, sales in the channel fell 4%. Singh noted that overall revenue has improved on a sequential basis, but the company has a “conservative” view of the channel’s growth going forward.
By building its own direct channels, Levi’s is more profitable, has better data about its consumers and relies less on shaky wholesalers like Macy’s and Kohl’s.
However, selling directly can be expensive, and unexpected hiccups can affect sales and reduce profits. For example, if someone buys a pair of Levi’s from Macy’s and wants to return them, Macy’s usually covers the cost. Under a direct model, that responsibility, including cost and logistics, would fall on the levy.
Nike is known as a cautionary tale for retailers who have long relied on wholesalers trying to expand direct sales.
For a while, Nike’s focus on direct sales boosted revenue and profits, but some critics say this strategic shift led to a slowdown in innovation and ultimately losses in market share.
Recently, the company admitted it made a mistake when it cut off many of its wholesale partners and said it had “fixed” it.
Read the full earnings release Here.
