Levi Strauss Downgrades Projections, Highlights Consumer Pressure

**Levi Strauss & Co. Faces Challenges Amid Weakness in US Wholesale Business and Price-Sensitive Shoppers**

Levi Strauss & Co., the renowned apparel retailer, recently lowered its guidance for the full year due to weakness in its US wholesale business and the increasing price-sensitivity among shoppers. As a result, the company’s shares fell the most in three months. Despite reporting quarterly revenue in line with expectations, Levi’s revenue was down 9% compared to the previous year, signaling a broader slowdown in apparel spending during an uncertain economic environment.

**Revenue Decline and Impact on Stock Performance**

Levi’s stock experienced a significant drop of 8.9% in New York trading, marking the largest decrease since April 6. Leading up to this decline, the stock had already experienced an 8.3% decline this year. The decline in revenue is attributed to a 22% decrease in revenue at wholesalers, reflecting weak performance at big-box retailers as opposed to Levi’s website and stores. However, direct-to-consumer revenue saw a positive increase of 13% during the three-month period ending on May 28.

**Factors Contributing to Levi’s Performance**

Levi’s Chief Executive Officer, Chip Bergh, explained that the positive results were driven by the strong direct-to-consumer business, particularly in international markets. However, these gains were offset by continued weakness in the US wholesale market. Bergh further stated that the American consumer is currently under financial pressure.

Sales in Asia performed well, showing an 18% increase, with notable growth in countries like China. Conversely, sales were down in the Americas and Europe.

**Adjusted Earnings Outlook and Economic Environment**

As a result of the challenging economic environment and the ongoing pressures faced by Levi, the company now expects adjusted earnings per share between $1.10 and $1.20 for the full year, which is lower than the prior estimate of $1.30 to $1.40 per share. However, second-quarter earnings of 4 cents per share, excluding certain items, beat the average estimate of 3 cents per share.

Bergh expressed the expectation that the economic environment will continue to present challenges. However, he believes that the headwinds and comparisons faced by the company will start to lessen in the second half of the year. Bergh highlighted that lower costs of inputs such as cotton and oil will be beneficial later in the year. He also mentioned that the end of student loan forbearance in the fall will increase pressure on consumers.

**Improvement in Gross Margin and Pricing Strategy**

Levi reported an improvement in gross margin, thanks to better inventory management, price increases, lower air-freight expenses, and favorable currency exchange rates. Despite this, the company plans to cut prices on certain items later in the year, which may impact margins in the second half. Chief Financial Officer, Harmit Singh, acknowledged this in an interview.

**Analyst Perspectives and Future Performance**

Neil Saunders, an analyst at Globaldata Plc, observed the “rapid deterioration in the Americas” for Levi and attributed it to lower orders from third-party retailers in response to weaker customer demand. Prior to the earnings report, analysts noted that cautious consumer spending could affect Levi’s results in the short term. However, they emphasized that Levi benefits from strong brand recognition and global momentum, which should support positive performance in the long run. Bergh highlighted that Levi grew its market share in both women’s and men’s businesses in the second quarter.

Levi’s report of second-quarter earnings marks the first among major US apparel retailers, and the results suggest that other brands may also face pressure due to cautious shopping behavior. Brands like Gap Inc. and Macy’s Inc. are set to release their earnings reports in late August.

**In Conclusion**

Levi Strauss & Co. faces challenges stemming from weakness in its US wholesale business and a surge in price-sensitive shoppers. Although the company reported quarterly revenue in line with expectations, overall revenue declined by 9% compared to the previous year. The decline in revenue had a significant impact on Levi’s stock performance, with shares falling the most in three months. Adjusted earnings outlook for the full year was revised downwards. However, Levi’s CEO remains hopeful that the challenging economic environment will improve in the second half of the year. The company aims to address the decline by implementing improved inventory management, price adjustments, and exploring opportunities in international markets. Despite the obstacles, Levi’s strong brand recognition and positive market performance in certain segments showcase potential for future success.

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