Levi Stock Drops on Lowered Annual Earnings Guidance

Levi Strauss (LEVI -1.60%) stock edged down 1.2% in Thursday's after-hours trading, following the jeanswear and casual clothing retailer's release of results for the third quarter of fiscal 2023 (ended Aug. 27). The stock's decline was probably largely due to management modestly paring back its previously issued full-year earnings guidance. It now expects adjusted earnings per share (EPS) at the low end of its previously guided range of $1.10-$1.20. 

Following is an overview of Levi's third quarter, along with its annual outlook, centered on four key metric categories.

1. Revenue was flat

Levi's quarterly sales were flat with the year-ago period (and down 2% in constant currency) at $1.51 billion. This result missed the $1.54 billion Wall Street consensus estimate.

Below are the segment results. 

Data source: Levi Strauss. Fiscal Q3 2023 ended Aug. 27. YOY = year over year. *Other brands include Dockers and Beyond Yoga.

Levi's wholesale-channel's sales fell 8% year over year (10% in constant currency), as growth in Asia and Latin America was more than offset by declines in North America and Europe.

The company's direct-to-consumer (DTC) channel's sales grew 14% (13% in constant currency), driven by strength in the company-operated e-commerce business, where revenue jumped 19%, and company-operated mainline and outlet stores. The DTC channel generated 40% of total revenue, up from 35% in the year-ago period.

2. Adjusted EPS fell 30%

Net income under generally accepted accounting principles (GAAP) was $10 million, or $0.02 per share, down 95% from $0.43 per share in the year-ago period. The non-cash impairment charge the company took for Beyond Yoga (which it acquired in 2021) dented reported EPS by $0.17. 

Excluding one-time items, net income landed at $112 million, or $0.28 per share, down 30% year over year. This result edged by the $0.27 per share analysts had expected.

3. Operating cash flow declined 20%

In fiscal Q3, Levi generated cash of $51.2 million running its operations, down 20% year over year. The company ended the quarter with $294.5 million in cash, cash equivalents, and short-term investments, and $1 billion in long-term debt.

4. Fiscal 2023 EPS now expected to decline close to 27%, rather than about 23% (the midpoint of the guidance range) 

For fiscal 2023, which ends in late November, management guided for the following:

• Revenue will be flat to up 1% year over year. 

• Adjusted EPS will be on the low end of the previously guided range of $1.10 to $1.20. This translates to an adjusted EPS decline of approximately 27% to 20% year over year. 

Regarding the modest lowering of the expectation for adjusted EPS, CFO Harmit Singh said: "While we saw sequential improvement in the business across the company as we moved through Q3 with both July and August up versus prior year, given the ongoing uncertainty in the macro environment, we are taking a cautious approach to our outlook for the fourth quarter."

A disappointing, but not surprising, quarter

Many apparel retailers and other consumer discretionary companies are facing challenging market conditions, driven by high interest rates and inflation, which is still above more recent historical averages. So it's particularly important for investors to only consider buying shares of the strongest companies in their respective industries. 

In the apparel retailing space, athletic-wear specialist Lululemon Athletica is such a company. Along with its emphasis on performance fabrics, its positioning as a higher-end brand is a plus in the current environment because higher-income folks usually weather tough macro conditions better than others.