Levi StraussWall Street earnings are growing more than Wall Street expected despite higher tariff costs, thanks to targeted price increases and a shift away from wholesalers, the company said Thursday in reporting fiscal third-quarter results.
During the quarter, Levi’s gross margin grew 1.1 percentage points to 61.7%, up from 60.6% in the same period a year ago and better than the 60.7% analysts expected, according to StreetAccount.
In an interview with CNBC, CEO Michelle Gass said the company has begun raising the price of some of its jeans and clothing and will raise more prices in the United States and other markets next year.
“As we have been taking these specific actions, we have not seen an impact on demand. Of course, we will stay very, very close to that, but… we are taking a surgical and thoughtful approach to any pricing,” Gass said. “We know we are a brand known for great quality and value. We don’t take that for granted. We know we have to earn it every day.”
Chief Financial Officer Harmit Singh added that demand is “really strong” and that most of the company’s revenue growth is not coming from price increases.
The price increases are helping Levi’s margins, but the company is also discounting less and selling more through its own website and stores rather than wholesalers, leading to a higher margin.
The denim maker said its strong results led it to raise its full-year outlook, but added It is still taking a “cautious” and “conservative” attitude for the rest of the year as it navigates the current macroeconomic volatility, Singh said.
Here’s how Levi’s performed during the quarter compared to what Wall Street anticipated, according to a survey of analysts by LSEG:
- Earnings per share: Adjusted 34 cents vs. expected 31 cents
- Revenue: $1.54 billion vs. $1.5 billion expected
Although Levi’s posted better-than-expected results, shares fell more than 6% in extended trading. Its shares had risen about 42% this year through Thursday’s close.
The company’s reported net income for the three months ended Aug. 31 was $218 million, or 55 cents per share, compared with $20.7 million, or 5 cents per share, a year earlier. Excluding one-time items related to impairment and restructuring charges, among other expenses, Levi posted adjusted earnings of 34 cents per share.
Sales rose to $1.54 billion, up 7% from $1.44 billion a year earlier.
Levi’s now expects its full-year sales to rise 3%, up from its previous guidance of 1% to 2% growth, far exceeding expectations for a 2.9% decline, according to LSEG.
Its full-year adjusted earnings per share are expected to be between $1.27 and $1.32, down from a previous range of between $1.25 and $1.30. At the high end, the outlook is in line with Wall Street estimates of $1.31 per share, according to LSEG.
The denim company said it expects its operating margin to be between 11.4% and 11.6%, which is also in line with expectations of 11.6%, according to StreetAccount. It now expects its gross margin to increase by 1 percentage point, which is the outlook Levi’s presented earlier this year before including the tariffs in its forecast. At that time, its guidance did not reflect any tariff impact. The following quarter, it cut its gross margin guidance by 0.2 percentage points due to new tariffs.
Now, Levi’s is returning to that original outlook, as long as U.S. tariffs on imports from China remain at 30% and rest of the world tariffs at 20% for the rest of the year.
Under Gass’ direction, Levi’s has been working to increase its direct sales, expand beyond jeans and win over more female shoppers, strategies that have helped the business grow both its top and bottom lines.
During the quarter, direct-to-consumer revenue, or sales from Levi’s website and stores, grew 11%, driven by strength in the U.S. market, while women’s rose 9%. Levi’s is benefiting from strong momentum in the denim category, but the company is growing its assortment beyond jeans, giving it coverage if fashion trends change.
Other types of clothing beyond jeans, including blouses, now account for nearly 40% of the business. The company’s efforts to sell more blouses are also resonating with consumers, as that category increased 9% during the quarter.
