Levi beats earnings estimates but expects pressure this year from strong U.S. dollar
Levi Strauss issued dismal guidance for its current fiscal year on Wednesday, as the denim maker grapples with unfavorable currency exchange rates, one fewer selling week and a loss in revenue from its Denizen and footwear businesses.
The company said it expects sales to decline between 1% and 2%, well behind estimates of 3.7% growth, according to LSEG.
It also anticipates adjusted earnings per share will be between $1.20 and $1.25, below estimates of $1.37, according to LSEG.
Shares fell about 6% in extended trading.
CEO Michelle Gass told CNBC the expected drop in revenue in the current fiscal year does not reflect slower demand, but is more due to the currency trends, one fewer fiscal week and the divested businesses.
Levi ended fiscal 2024 on a high note and reported earnings and sales that both topped expectations.
Here is how the apparel company fared during its fiscal fourth quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:
- Earnings per share: 50 cents adjusted vs. 48 cents expected
- Revenue: $1.84 billion vs. $1.73 billion expected
The company’s reported net income for the three-month period that ended Dec. 1 was $182.6 million, or 46 cents per share, compared with $126.8 million, or 32 cents per share, a year earlier. Excluding one-time expenses related to impairments, restructurings, acquisitions and leases, among other items, Levi reported adjusted net income of $202 million, or 50 cents per share, compared with adjusted profits of $179 million, or 44 cents per share, a year earlier.
Sales rose to $1.84 billion, up about 12% from $1.64 billion a year earlier. Organic sales, which exclude an extra 53rd week Levi had during the quarter, along with foreign exchange effects and divested businesses, grew 8%.
Since Gass took the helm of Levi a year ago, she has moved swiftly to cut aspects of the business that weren’t working, grow higher margin sales on its website and stores, boost profitability and bring more female customers to the brand. Under her leadership, Levi inked a high-profile marketing partnership with Beyonce in September after she released a song about the brand on her album “Cowboy Carter” earlier in the year.
“Of course, we have to acknowledge the Beyonce effect. We are very pleased with the launch of that campaign, which we’re seeing drive demand across the business,” Gass said in an interview with CNBC.
Gass has been working to bring more women to Levi, which traditionally has drawn more men, because women tend to spend more money and shop for new clothes more often. Women’s apparel is now about 36% of Levi’s overall business, up slightly from a year ago, but Gass said it should represent about half over time.
The company has won female shoppers over not only with loose and wide-legged denim fits, but also with a wide range of new tops such as woven shirts and blouses.
During the quarter, Levi saw strong sales increases across all of its regions, brands and channels. Sales in the Americas grew 12%, Europe increased 15% and Asia expanded 9%. Sales for its Beyond Yoga brand spiked 10%. Direct-to-consumer sales increased 19% and made up 45% of total organic net sales, which includes the extra selling week, currency fluctuations and the divested businesses.
Wholesale revenues, which have been soft across the industry, grew 7% during the quarter.
Since President Donald Trump was elected for a second term, all eyes have been on the retail industry to see what kind of effect his proposed tariffs could have on consumer prices and company profits.
Levi’s finance chief Harmit Singh said the company sources its products from 25 countries and less than 1% of it comes from China, which Trump has threatened with 10% tariffs. In Canada and Mexico, where Trump has suggested duties as high as 25%, Levi’s exposure is minimal, as it only imports about 5% of products from Mexico and nothing from Canada.
When asked if the company will raise prices if broad-based tariffs are implemented, Singh said it plans to work with its suppliers and look at its own costs so it can spare consumers as much as possible.
The “first objective would be to minimize the impact on the consumer. So we work internally with our suppliers, we look at our cost base, we look at other pricing opportunities and if we cannot cover it, obviously we got to protect the structural economics of the business,” said Singh. “At that point, we’ll decide, you know, what should be passed on to the consumer or not, but we won’t start from that. That’s where we will end.”
During the quarter, Levi posted what it called a record gross margin of 61.3%, up from 57.8% in the year-ago period, driven by lower product costs, higher full price sales and a better mix between direct and wholesale revenue.
Still, Levi reported $111.4 million in impairment charges related to its Beyond Yoga brand for fiscal 2024, on top of the $90.2 million it reported in fiscal 2023, bringing those costs to $201.6 million in the years since it acquired the athleisure company in 2021 for $400 million.
The brand and yoga category overall is growing, but Singh said Levi was potentially a bit “aggressive” in its expectations “of how quickly the brand could grow.”
The good news, he said, is Beyond Yoga is now led by Nancy Green, the former CEO of Gap‘s Athleta, who is credited with scaling the athleisure brand into a billion-dollar business.
“It’s a category that’s growing big time. I know there are other competitors, but we feel good about the management team and good about the potential growth for the business,” said Singh.