Levi StraussProfits rose more than Wall Street expected despite higher costs from tariffs, thanks to targeted price increases and a shift away from wholesalers, the company said Thursday as it reported third-quarter financial results.
During the quarter, Levi’s gross margin increased 1.1 percentage points to 61.7%, up from 60.6% a year earlier and better than the 60.7% expected by analysts, according to StreetAccount.
In an interview with CNBC, CEO Michelle Gass said the company has started raising the price of some of its jeans and clothing and will raise prices further in the United States and other markets next year.
“As we’ve taken these targeted measures, we haven’t seen an impact on demand. Of course, we’ll stay very, very close to that, but…we’re taking a surgical, thoughtful approach to 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 that every day.”
Chief Financial Officer Harmit Singh added that demand was “really strong” and that most of the company’s revenue growth was not coming from price increases.
Price increases improve Levi’s margins, but the company also reduces discounts and sells more through its own website and stores rather than through wholesalers, generating a higher margin.
The denim maker said its strong results led it to raise its outlook for the full year, but added it continues to take a “cautious” and “conservative” stance for the remainder of the year as it navigates the current macroeconomic volatility, Singh said.
Here’s how Levi’s performed in the quarter compared to what Wall Street expected, based on a survey of analysts by LSEG:
- Earnings per share: 34 cents adjusted versus 31 cents expected
- Revenue: $1.54 billion versus $1.50 billion expected
Although Levi’s reported better-than-expected results, shares fell more than 6% in extended trading. Its stock had climbed 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 writedowns and restructuring charges, among other expenses, Levi posted adjusted earnings of 34 cents per share.
Sales reached $1.54 billion, up 7% from $1.44 billion a year earlier.
Levi’s now expects a 3% increase in sales for the full year, compared to a previous forecast of growth of between 1% and 2%, far exceeding expectations for a 2.9% decline, according to LSEG.
It expects its full-year adjusted earnings per share to be between $1.27 and $1.32, up from a prior 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 jeans company said it expects an operating margin of between 11.4% and 11.6%, which is also in line with expectations of 11.6%, according to StreetAccount. Levi’s now expects its gross margin to increase by 1 percentage point, matching the forecast Levi’s presented earlier this year before factoring tariffs into its forecast. At the time, its forecasts did not reflect any tariff impact. In the following quarter, it reduced its gross margin forecast by 0.2 percentage points due to the new duties.
Today, Levi’s is returning to that initial outlook, as long as U.S. tariffs on imports from China remain at 30% and duties from the rest of the world remain at 20% for the rest of the year.
Under Gass’ leadership, Levi’s worked to increase direct sales, expand beyond jeans, and win over more female customers — strategies that helped the company grow both its revenue and bottom line.
During the quarter, direct-to-consumer revenue, or sales from the Levi’s website and stores, increased 11%, driven by strength in the U.S. market, while women’s increased 9%. Levi’s enjoys strong momentum in the denim category, but the company is expanding its assortment beyond just jeans, giving it a buffer if fashion trends change.
Other types of clothing beyond denim bottoms, including tops, now account for almost 40% of the business. The company’s efforts to sell more tops are also resonating with consumers, as that category grew 9% during the quarter.