On Thursday, Levi Strauss & Co (LEVI.N) announced a cut in its annual forecast for the second time this year, following a miss in their third-quarter sales estimates. The company has been grappling with intense promotions and a sharp decline in demand across its North American wholesale channels.
The Retail Environment
The mood in consumer spending remains gloomy, with established retailers like Macy’s (M.N) and Nordstrom (JWN.N) taking the brunt as well. Factors such as high prices and elevated borrowing rates have strained consumer budgets, further diminishing demand for Levi’s offerings ranging from denim bottoms to cargo pants. This unfavorable trend is evident not just for Levi, but many US retailers.
Warm Weather Impacts Sales
According to Harmit Singh, Chief Financial and Growth Officer at Levi, sales were further dented due to an extended period of warm weather throughout the late summer and fall. This especially affected sales of men’s jeans, a category where Levi has limited control over how products are displayed in wholesale channels.
Singh stated, “In our own stores we have a lot more buy-now, wear-now products — things like shorts, lighter denim, skirts, and dresses.”
Facing the Wholesale Challenge
An ongoing challenge for Levi remains its declining sales across the overall wholesale business, especially in North America. This region predominantly targets middle-income consumers who have lately felt the economic pinch. Singh emphasized the impact on “value-conscious” consumers, particularly those with incomes ranging between $50,000 and $100,000.
As a result, Levi’s sales took a hit at retail giants like Walmart and Target, where prices for its lines, Signature, and Denizen, commence just below the $30 mark.
In contrast, the company’s Direct-to-Customer (DTC) segment, which primarily caters to a wealthier demographic, witnessed a 12% surge. However, overall net revenue for Levi’s Americas unit dropped by 5%.
Margin Pressures and Analyst Predictions
The company’s margins have been strained due to reductions in prices for specific denim products, targeting wholesale clients such as Macy’s and Nordstrom. Levi’s objective was to catalyze sales among consumers who are more price-sensitive.
This strategy saw Levi’s adjusted gross margins fall by 130 basis points, landing at 55.6% in the third quarter. This decline was also influenced by an increased preference for discount selling and the rise in production expenses.
Market analysts speculate that if sales in the wholesale domain continue to deteriorate, Levi may need to bolster promotions and slash prices even further. Such a move could amplify pressure on their already strained margins.
Despite these challenges, company executives remain optimistic, signaling plans to diversify Levi’s denim range by introducing skirts, dresses, and other women’s wear.
Looking forward, Levi predicts its revenue to hover between a flat rate and a 1% increase in fiscal 2023, which is a downward revision from their previous growth projection of 1.5% to 2.5%.
The company’s anticipated adjusted profit per share is expected to lie at the lower end of their earlier forecasted range of $1.10 to $1.20. For reference, the average analyst expectation was $1.12.
For the third quarter, ending on August 27, net revenue descended to $1.51 billion from $1.52 billion, a year prior. This fell short of the analyst’s prediction of $1.54 billion, as indicated by LSEG data.
A Broader Industry Perspective
The situation at Levi Strauss & Co. is not isolated. Multiple legacy brands and retail giants across the industry spectrum are encountering similar challenges, confronting the evolving dynamics of consumer preferences, global economic flux, and rapidly changing market environments.
Shift in Retail Dynamics
A noteworthy shift in the retail landscape is the diminishing appeal of physical stores and a surge in the digital shopping experience. While Levi has been making commendable strides in its Direct-to-Customer (DTC) segment, the broader industry trend underscores the importance of robust online platforms and seamless e-commerce experiences.
Consumer Behavior and Brand Loyalty
Brands today, more than ever, are in a constant struggle to retain consumer loyalty. The modern shopper is well-informed, has a plethora of choices, and prioritizes value for money, often leading to a fickle brand commitment. Levi’s challenges in the North American wholesale channels could, in part, be attributed to this changing consumer allegiance.
Levi Strauss’s challenges mirror the broader pressures faced by many in the retail industry. Between unpredictable weather patterns, evolving consumer behaviors, and a shifting economic landscape, brands like Levi will need to demonstrate adaptability and resilience to navigate the complex retail ecosystem successfully.