Shares of Levi Straus & Co. fell $2.89, or 16.0 percent, to $15.14 Thursday after the denim giant reported first-quarter results that topped Wall Street analysts’ targets but margins missed plan due to challenges clearing elevated inventories.

Revenue in the fiscal first quarter ended February 26 was $1.69 billion, ahead of analysts’ consensus estimate of $1.62 billion. Adjusted EPS of 34 cents a share beat the average estimate of 32 cents.

However, gross margins of 55.8 percent in the three-month period ended Feb. 26 was below the 59.3 percent reported a year ago and less than the average analyst estimate of 56.9 percent. Levi officials on an analyst call indicated they faced challenges clearing inventories.

Levi’s also recognized a net restructuring charge of $11.4 million tied to job-cut-related severance benefits and an $18.2 million charge related to discontinued technology projects. The plan is designed to reduce costs and streamline operations.

“Our first quarter results reflect the strength of our brands and the progress we are making against our strategic priorities,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “We delivered strong growth in our international business and record-breaking revenue performance in our direct-to-consumer channel. As we celebrate the 150th anniversary of the iconic 501 jeans, we are deepening connections with consumers and cementing loyalty with the next generation of Levi’s fans. This past quarter in the U.S., we were the market share leader among the key 18- to 30-year-old consumer, and we continued to grow share in our women’s denim bottoms business, further narrowing the gap to number one.”

First-Quarter Highlights

  • Reported net revenues of $1.7 billion increased 6 percent, and 9 percent on a constant-currency basis versus Q1 2022, reflecting strong growth in the Direct-to-Consumer (DTC) channel, up 12 percent. Total DTC comprised 42 percent of first-quarter net revenues. Net revenues related to the shift in wholesale shipments from Q2 to Q1 primarily due to the U.S. ERP implementation benefited Q1 by approximately $100 million or 6 percent of net revenues.
  • Gross margin was 55.8 percent; Adjusted gross margin was 55.8 percent, 360 basis points below the record level of 59.4 percent in Q1 2022
  • Operating margin was 9.3 percent; Adjusted EBIT margin was 11.0 percent, down from 14.9 percent in Q1 2022
  • Net income was $115 million; Adjusted net income was $135 million, compared to $189 million in Q1 2022
  • Diluted EPS was $0.29; Adjusted diluted EPS was $0.34, including an adverse currency exchange impact of $0.01
  • Total inventories increased 33 percent on a dollar basis over the prior year, representing 25 points of sequential improvement relative to Q4 2022
  • The company paid a dividend of $0.12 per share, up nearly 20 percent from the prior year; approximately $56 million in capital was returned to shareholders

“On top of 26 percent constant currency growth a year ago, the company achieved solid results in the first quarter,” said Harmit Singh, chief financial and growth officer of Levi Strauss & Co. “Our teams also made significant progress reducing inventory levels, putting us in a stronger position as we move through the balance of the year. We are reaffirming our annual revenue and EPS guidance reflecting a cautious outlook on the macro-environment though we remain excited about the momentum in our DTC and international businesses.”

Operational Segment Performance 
In the Americas, net revenues for Levi’s brand business grew 7 percent on reported and constant-currency bases to $823 million, driven by both our DTC and wholesale channels. DTC net revenues increased 15 percent driven by strength in our company-operated mainline and outlet stores and e-commerce. U.S. DTC net revenues grew to record levels. Wholesale net revenues grew 4 percent, driven by growth of Levi’s brand in Canada and the U.S.

Operating income for the Americas segment decreased due to lower gross margins and higher SG&A expenses as a percentage of net revenues, partially offset by higher net revenues.

In Europe, net revenues for Levi’s brand business decreased 3 percent on a reported basis to $455 million. On a constant-currency basis, net revenues increased 2 percent, including a 4 percent negative impact from the suspension of our business in Russia. DTC net revenues increased 4 percent on a reported basis and 8 percent on a constant-currency basis, or 19 percent excluding Russia. Wholesale net revenues decreased 8 percent on a reported basis and 3 percent on a constant-currency basis, reflecting the ongoing retailer inventory rebalancing in the region.

Operating income for the Europe segment decreased due to lower net revenues and gross margins and higher SG&A expenses as a percentage of net revenues.

In Asia, net revenues for Levi’s brand business increased 12 percent on a reported basis to $290 million and 22 percent on a constant-currency basis. The increase in net revenues was driven by all markets outside China. DTC net revenues increased 15 percent on a reported basis and 25 percent on a constant-currency basis, driven by strength in our company-operated mainline and outlet stores and e-commerce. Wholesale net revenues increased 9 percent on a reported basis and 19 percent on a constant-currency basis.

Operating income for the Asia segment increased due to higher net revenues and lower SG&A expenses as a percentage of net revenues, partially offset by lower gross margins.

For Other Brands, Dockers and Beyond Yoga combined, net revenues increased 24 percent on a reported basis to $121 million and 25 percent on a constant-currency basis. Dockers was up 28 percent on a reported basis and 29 percent on a constant-currency basis. Beyond Yoga was up 11 percent on reported and constant-currency bases. Other Brands operating income decreased due to lower gross margins and higher SG&A expenses as a percentage of net revenues.

Guidance 
The company reaffirms expectations for fiscal 2023 as follows:

  • Net revenues between $6.3 billion and $6.4 billion, reflecting reported revenue growth of 1.5 percent to 3 percent year-over-year.
  • Adjusted diluted EPS of $1.30 to $1.40.