Levi Strauss (LEVI -17%) saw a significant drop despite reporting impressive EPS upside in its Q2 results. The company achieved its highest year-over-year revenue growth in eight quarters at 7.8%, reaching $1.44 billion. However, this was slightly below analyst expectations due to higher-than-expected FX impacts. LEVI's decision to only reaffirm full-year guidance, despite the EPS upside, is being viewed negatively.
- The Americas segment led performance with revenues up 17% (+16% constant currency), driven by a 16% increase in DTC revenue, including double-digit growth in brick-and-mortar and e-commerce. Although US wholesale declined mid-single digits, the US market grew low-single digits due to DTC growth. Profitability improved across both channels.
- In Europe, revenue fell 2% on both reported and constant currency bases. DTC revenue increased 7% due to growth in mainline, outlet, and e-commerce, but wholesale dropped 11%. LEVI expects Europe to return to growth in the second half. Asia's revenue was flat year-over-year but up 6% in constant currency. DTC revenue increased 6%, while wholesale rose 5%. China saw a 10% decline, lapping last year's 95% growth from the COVID reopening.
- Margins were strong, with a record gross margin of 60.5%, driven by lower product costs, a shift to DTC, and faster growth in the women's business. DTC remains the fastest-growing and increasingly profitable segment, contributing to the robust EPS upside.
- LEVI expects profitability to accelerate year-over-year into the second half. The company is receiving a strong response to its new product assortment, with more launches planned. LEVI is focusing on full-price sales, especially in US mainline stores, and continues to see momentum in its DTC business. Europe is also expected to return to growth, and LEVI is confident in its back-to-school and holiday product and marketing plans.
- Why only a reaffirm for the full year? LEVI is making significant changes to its logistics strategy, moving from a primarily owned/operated network in the US and Europe to a mix of its own and third-party logistics providers. This shift requires investment in upgrading distribution capacity with omni-channel capabilities. Operating both new and old facilities through 2024 will cause inefficiencies. LEVI expects favorable EPS impacts starting in 2026, with larger benefits in 2027 and beyond. Additionally, FX headwinds are increasing.
The primary reason for today's weakness seems to be LEVI's decision to reaffirm full-year guidance despite a strong Q2 EPS beat. Investors were spooked as LEVI had raised FY24 EPS following a similar beat in Q1. The issue appears to be related to higher costs and inefficiencies from distribution changes, along with FX impacts. High sentiment due to recent stock movements made the guidance a letdown.
