Levi Strauss (LEVI) earnings Q2 2023

Levi Strauss on Thursday drastically cut its profit outlook for the 12 months after the apparel retailer reported a steep drop off in wholesale revenues and soft sales within the U.S., its largest market.

The blue jean seller saw brilliant spots, nonetheless, in its direct-to-consumer sales and China market.

Shares dropped greater than 6% in prolonged trading.

Here’s how the corporate did in its fiscal second quarter compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

Earnings per share: 4 cents, adjusted, vs. 3 cents expected
Revenue: $1.34 billion vs. $1.34 billion expected

The corporate’s reported net loss for the three-month period that ended May 28 was $1.6 million, or 0 cents per share, compared with a net income $49.7 million, or 12 cents a share, a 12 months earlier. Through the quarter, Levi reported adjusted earnings of 4 cents per share.

Sales dropped to $1.34 billion, down 9% from $1.47 billion a 12 months earlier.

Halfway through its fiscal 12 months, Levi slashed its full-year profit outlook. It now expects adjusted earnings per share of $1.10 to $1.20, in comparison with a previous range of $1.30 to $1.40. Analysts had expected adjusted earnings of $1.29 per share, in keeping with Refinitiv.

Levi also tightened its revenue outlook for the 12 months. The retailer now expects sales to grow between 1.5% to 2.5% in comparison with a previous range of 1.5% to three%. Analysts had expected growth of two.6%, in keeping with Refinitiv.

The dismal outlook was attributed to numerous aspects but was driven by an expected slowdown in U.S. wholesale revenues, which plunged 22% within the quarter, Levi’s chief financial and growth officer Harmit Singh told CNBC.

Wholesale revenue has fallen due to a consumer slowdown impacting the retail industry at large and internal issues at Levi that resulted in items being out of stock, said CEO Chip Bergh.

Bergh noted the corporate has grappled with high inventory levels, which created congestion at its distribution centers and made it harder to fill orders for wholesale partners.

“Now our inventory levels are improving significantly, that’s improving our customer fill rates, which is improving our in stock position,” he said.

“We’re now partway into Q3 already, we’re seeing our US wholesale sell out trends improve and numerous that is just attributable to the indisputable fact that we have now higher in-stock position today,” Bergh added.

The corporate can also be planning on taking price reductions on a couple of half dozen of its more price sensitive items, akin to its 502 and 512 jeans, moves that may cut into its margins within the quarters ahead. The jeans will drop in price from $79.50 to $69.50 but are still higher than their pre-pandemic price of $59.50, Bergh said.

He said the corporate raised prices relative to competitors past the purpose where it could proceed to grow market share, “so we’re just narrowing that price gap versus competition back to the historical levels with this $10 rollback.”

Bergh noted the value reduction will only show at stores where Levi has wholesale partnerships, akin to Macy’s, and won’t be seen at its owned stores or internationally.

Levi can also be planning for the next tax rate within the second half of the 12 months, a trend it said contributed to the lower outlook. Levi’s effective tax rate through the quarter was 78.4%, in comparison with 36.1% within the year-ago period.

“Our outlook on U.S. wholesale, even with the pricing moves that we’re taking and all the things else, we’re being cautious about it,” said Bergh. “Just in light of the recent performance, and the present macro headwinds, and just the buyer dynamics on this market.”

While the steep drop in wholesale revenue is hurting Levi within the short term, shifting sales away from wholesalers is a component of the corporate’s larger strategy, said Bergh. The push is comparable to Nike’s playbook.

“Our focus is to drive our direct-to-consumer business, including e-commerce, so our own stores, our franchise partner stores, which actually rolls up through wholesale globally, and our e-commerce business. That’s our strategic priority,” said Bergh.

“It has higher structural financials, higher gross margin, we’re answerable for the buyer experience,” he said.

Through the quarter, DTC revenues increased 13% and were driven by growth in each company-operated stores and online sales. E-commerce revenue increased 20% within the quarter.

When Bergh first joined Levi about 12 years ago, wholesale customers akin to Macy’s and Kohls, accounted for greater than 40% of Levi’s total business, but nowadays, it’s lower than 30%, he said.

The slowdown in wholesale revenue contributed to a 22% sales drop within the Americas, where Levi saw $609 million in revenue, below estimates of $639.5 million, in keeping with StreetAccount. Sales fell 2% in Europe, where the corporate reported $361 million in revenue, but they were higher than the $344 million analysts had expected, in keeping with StreetAccount.

Sales were rosier in Asia, where revenue was up 18% within the quarter at $262 million, driven by strength in the corporate’s DTC channel. It beat Wall Street’s estimate of $230.2 million, in keeping with StreetAccount.