Levi’s gives upbeat sales forecast — while leaning less on jeans

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Shares of Levi Strauss & Co. rallied after hours on Wednesday after the jeans maker reported fourth-quarter results and a full-year sales forecast that beat expectations, even as demand at its own stores clashed with a pullback among clothing retailers and a harsher foreign-exchange backdrop.

However, a big chunk of those sales came from outside of jeans, amid signs of a shift in pants preferences, as people return to offices and other pre-pandemic patterns.

“We also achieved substantial progress on our diversification strategy,” Chief Executive Chip Bergh said on Levi Strauss’
LEVI,
-1.32%

earnings call on Wednesday. “Nearly 40% of our 2022 revenue was beyond denim bottoms, including chinos, active leggings, tops, dresses, footwear and accessories. These businesses grew 10% in 2022, and we expect the sales penetration to continue to grow meaningfully over the coming years.”

The company reported fourth-quarter net income of $151 million, or 38 cents a share, compared with $153 million, or 37 cents a share, in the same quarter last year. Sales slipped 6% to $1.59 billion, compared with $1.69 billion in the prior-year quarter.

On an adjusted basis, Levi Strauss earned 34 cents a share, compared with 41 cents in the same quarter last year. Analysts polled by FactSet expected adjusted earnings per share of 29 cents, on sales of $1.574 billion.

Sales in Levi Strauss’ direct-to-consumer unit rose when factoring out currency fluctuations, but they fell otherwise. Levi’s executives noted “strong growth in company-operated stores in the Americas and Asia, offsetting a decline in Europe primarily due to store closures in Russia.” Gains within the direct-to-consumer unit, which includes Levi’s own stores and its e-commerce segment, offset weaker demand among outside retailers that sell the company’s clothing.

Levi’s said it expected full-year 2023 sales of between $6.3 billion and $6.4 billion, with adjusted earnings per share of between $1.30 and $1.40. FactSet forecast sales of $6.27 billion and earnings per share of $1.35.

Shares jumped 6% after hours on Wednesday.

With higher prices still gouging shoppers, Levi’s faces questions from analysts over whether jeans are more vulnerable to a so-called “trade-down,” when customers seek cheaper alternatives. And as customers return to more formal occasions after two years of pandemic-related lockdowns, there are some signs that demand for jeans has given way to demand for chinos, khakis and cargo pants.

BofA analysts, in a note last week, said they expected last year’s big markdowns on clothing to stretch through the spring, potentially spurring consumer demand but hurting company profit. Retailers cut prices on clothes last year, as a jump in more basic costs left many without extra cash to spend on apparel.

Levi’s management has said they remained confident about the “long-term trend of casualization” that took off earlier in the pandemic, which left more people stuck at home.

However, management during the call on on Wednesday that they’d slowed down hiring for 2023 out of caution, even as they pointed to Euromonitor data that showed denim demand outpaced demand in clothing overall last year. Management also said it was focused on expanding its women’s clothing business. And they said the company had been able to keep prices and demand high, with gross margins of the core Levi’s brand above 60%.

“Our equity remains really, really strong,” Chief Financial Officer Harmit Singh said on the call. “We’re not seeing any slippage as a result of pricing.”

Levi’s stock is down around 21% over the past 12 months. Over that time, the S&P 500 Index
SPX,
-0.02%

has fallen 8%.



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