Levi StraussThe company said Thursday, when it reported third-quarter results, that profits were growing faster than Wall Street expected despite higher costs from tariffs, thanks to targeted price increases and a shift away from wholesalers.
According to Street Accounts, Levi’s gross profit margin increased 1.1 percentage points to 61.7% during the quarter, up from 60.6% in the same period last year and beating analysts’ expectations of 60.7%.
CEO Michelle Gass said in an interview with CNBC that the company has started raising prices on some of its jeans and clothing products, and plans to increase prices further next year in the U.S. and other markets.
“We’re taking these targeted actions and we’re not seeing any impact on demand. Of course we intend to stay very close to that, but… we’re 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.”
Finance director Harmit Singh said demand was “very strong” and added that most of the company’s revenue growth was not due to price increases.
Higher prices are boosting Levi’s profits, but the company is cutting back on discounts and selling more through its own website and stores rather than through wholesalers, leading to higher profit margins.
Singh said the company has raised its full-year outlook following the strong performance, but added that it remains “cautious” and “conservative” in its outlook for the remainder of the year as the company navigates continued macroeconomic instability.
Here’s how Levi’s’ quarterly results compare to Wall Street expectations, based on a survey of analysts by LSEG.
Earnings per share: 34 cents adjusted, 31 cents expected; Revenue: $1.54 billion, $1.5 billion expected.
Levi’s reported better-than-expected earnings, but its stock price fell more than 4% in extended trading. The company’s stock price had risen about 42% since the beginning of the year through Thursday’s close.
For the three months ended Aug. 31, the company reported net income of $218 million, or 55 cents a share, compared with $20.7 million, or 5 cents a share, in the year-ago period. Excluding one-time items related to impairment and restructuring charges, among other charges, Levi reported adjusted earnings of 34 cents per share.
Revenue was $1.54 billion, an increase of 7% from $1.44 billion in the same period last year.
Levi’s expects full-year sales to rise 3%, up from previous expectations of 1-2% growth, far ahead of expectations for a 2.9% decline, according to LSEG.
The company expects full-year adjusted earnings per share to be in the range of $1.27 to $1.32, up from the prior range of $1.25 to $1.30. At the high end, the outlook is in line with Wall Street’s expectations of $1.31 per share, LSEG said.
The jeans 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 Street accounts. It now expects gross margins to rise 1 percentage point, an outlook Levi’s announced earlier this year before factoring in tariffs into its forecast. At the time, that guidance did not reflect the impact of tariffs. For the next quarter, the company lowered its gross margin outlook by 0.2 percentage points due to the impact of new tariffs.
Now, Levi’s will return to its original outlook as long as U.S. tariffs on imports from China remain at 30% by the end of the year and other countries’ tariffs at 20%.
Under Gass’ leadership, Levi’s has expanded direct sales, expanded beyond jeans and attracted more female shoppers, strategies that have helped the company grow both its sales and bottom line.
During the quarter, direct-to-consumer sales from Levi’s websites and stores increased 11%, driven by strong U.S. markets, and women’s sales increased 9%. While Levi’s is benefiting from strong momentum in denim, the company is also expanding its lineup beyond jeans, providing a hedge in case fashion trends change.
Other types of clothing besides denim bottoms, including tops, now account for nearly 40% of the business. The company’s efforts to sell more tops also resonated with consumers, with the category increasing 9% in the quarter.
