Levi Strauss (LEVI, Financial) shares dropped 8% following its Q3 earnings report, which showed modest EPS growth but only a 0.4% year-over-year revenue increase to $1.52 billion. This was slightly below expectations. The company also revised its FY24 revenue outlook to a 1% increase, down from the previous 1-3% range, and adjusted EPS is expected to be in the middle of prior guidance, missing analyst predictions.
Key announcements include Levi's plan to review strategic alternatives for its Dockers brand, possibly leading to a sale. Dockers, known for khaki apparel, saw a 15% year-over-year sales decline in Q3. Additionally, Levi Strauss plans to exit its Denizen fashion line, highlighting CEO Michelle Gass's focus on the core Levi's brand and the Beyond Yoga athletic line.
Despite challenges, the Levi's brand experienced a 5% global growth in Q3, marking its best quarterly performance in two years. The brand anticipates further acceleration in Q4, driven by a new Beyoncé campaign and product innovations.
Levi's maintains its position as the #1 women's denim brand in the US, with an 11% growth in the women's segment, including double-digit increases in both bottoms and tops. It also leads the men's US jeans market, with a market share double that of its closest competitor. The brand is gaining traction among high-income consumers by elevating its image.
Levi Strauss is increasingly focusing on Direct-to-Consumer (DTC) sales, which rose 12% in Q3. The US market continued to grow, and Europe, its highest-margin region, returned to growth. The company's gross margin reached a record 60.0%, up from 55.6%, driven by lower product costs, the shift to DTC, and higher full-price sales, leading to an adjusted EBIT margin increase to 11.6% from 9.1% last year.
Challenges remain with the Dockers brand and a decline in the Levi's Signature line, though the latter is expected to recover in Q4. Issues in China and Mexico wholesale operations contributed to the lowered outlook, with Levi Strauss now expecting mid-single-digit revenue growth for Q4.
Overall, the quarter was disappointing for investors, who had high hopes for the new CEO's impact. The potential sale of the Dockers brand seems strategic, given the declining demand for khakis. Levi Strauss is clearly focused on streamlining its offerings and enhancing the Levi's brand, supported by a new ad campaign featuring Beyoncé.
