Levi Strauss On Thursday, the apparel retailer slashed its profit forecast for the year after it reported a sharp drop in wholesale revenue and weak sales in the United States, its largest market.

However, the blue jeans seller saw bright spots in its direct-to-consumer sales and the Chinese market.

Shares fell more than 6% in after-hours trading.

Here’s how the company’s fiscal second-quarter results compared with Wall Street expectations, according to a Refinitiv survey of analysts:

  • EPS: Adjusted to 4 cents vs. 3 cents expected
  • income: $1.34 billion vs $1.34 billion expected

The company’s net loss for the three-month period ended May 28 was $1.6 million, or 0 cents a share, compared with a net profit of $49.7 million, or 12 cents a share, a year earlier. For the quarter, Levi’s reported adjusted EPS of 4 cents.

Sales fell to $1.34 billion, down 9% from $1.47 billion a year earlier.

Halfway through the fiscal year, Levi’s has sharply lowered its full-year profit forecast. Adjusted EPS is now expected to be $1.10 to $1.20, compared with a previous range of $1.30 to $1.40. Analysts had expected adjusted earnings of $1.29 a share, according to Refinitiv.

Levi also tightened its revenue forecast for the year. The retailer now expects sales to rise between 1.5% and 2.5%, compared with a previous rise of 1.5% to 3%. Analysts had expected growth of 2.6%, according to Refinitiv data.

Harmit Singh, Levi’s chief financial and growth officer, told CNBC that the gloomy outlook is due to a combination of factors, but it’s largely due to an expected slowdown in U.S. wholesale revenue, which fell 22% in the quarter. %.

Chief Executive Chip Bergh said wholesale revenue was down as slowing consumer growth affected the retail sector as a whole, coupled with internal problems at Levi’s that left items out of stock.

Berger noted that the company has struggled with high inventory levels, which have created congestion at distribution centers and made it more difficult to place orders with wholesale partners.

“Now our inventory levels are improving significantly, which has increased our customer fill rates, which has improved our inventory position,” he said.

Bergh added: “We’re now into the third quarter, and we’re seeing an improvement in our U.S. wholesale sales trends, largely because we’re in a better inventory position today.”

The company also plans to cut prices on about half a dozen price-sensitive products, such as 502 and 512 jeans, a move that will cut into profits in the coming quarters. Jeans will be priced at $69.50, down from $79.50, Bergh said, but still up from the pre-pandemic price of $59.50.

He said the company raised its prices relative to its competitors to the point where it could continue to gain market share, “so we’re just taking this $10 price cut to close the price gap with our competitors to historical levels.”

Berger noted that the price cuts would only show In stores where Levi’s has a wholesale partnership, such as Macy’s, you won’t see it in its own or international stores.

Levy also plans to raise tax rates in the second half of the year, a trend said to have contributed to the downward revision to the outlook. Levi’s effective tax rate for the quarter was 78.4%, compared with 36.1% a year earlier.

“We’re cautious about the outlook for wholesale in the U.S., even though we’re taking pricing moves and everything,” Berger said. “Given recent performance, current macro headwinds and consumer dynamics in this market.”

While the sharp drop in wholesale revenue hurt Levi’s in the short term, sales volume Moving away from wholesalers is part of the company’s larger strategy, Berger said.Push something like Nike’s script.

“Our focus is on driving our direct-to-consumer business, including e-commerce, our own stores, our franchise partner stores (actually scaling through global wholesale), and our e-commerce business. is our strategic priority,” Berg said.

“It has better structural financials, higher gross margins and we can control the consumer experience,” he said.

For the quarter, DTC revenue rose 13%, driven primarily by growth in company-operated stores and online sales. E-commerce revenue grew 20% in the quarter.

When Bergh first joined Levi about 12 years ago, wholesale clients such as Macy’s and cabbageHe said that accounts for more than 40% of Levi’s total business, but is currently less than 30%.

A slowdown in wholesale revenue led to a 22% drop in sales in the Americas, with Levi’s revenue of $609 million missing expectations for $639.5 million, according to StreetAccount. Sales in Europe fell 2 percent to $361 million, according to StreetAccount, but topped analysts’ expectations for $344 million.

Sales in Asia were more upbeat, with revenue up 18% to $262 million in the quarter, driven by the strength of the company’s DTC channel. It beat Wall Street expectations of $230.2 million, according to StreetAccount.

Read the company’s full earnings report here.

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