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Zipping It Up: Levi's, Wrestling With Wholesale, Manages To Slightly Exceed Analyst Expectations

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Zipping It Up: Levi's, Wrestling With Wholesale, Manages To Slightly Exceed Analyst Expectations

In September, Levi Strauss and Co. (NYSE: LEVI) gained 12.7% as the stock managed to recover from its August drop due to US-China trade tensions. The 166-year-old denim-apparel began offering its shares to the public in March after being private for 34 years. Unfortunately, its profit dropped 4.1% drop in the third-quarter profits as the denim giant wrestles with a weak in the U.S. But the company did manage to report slightly better than expected earnings, causing its stock to go up 2% in after-hours trading on Tuesday.

Third Quarter Earnings Report

Earnings for the third quarter were $124.5 million, whereas they were $129.58 million in the same period one year ago. But the company managed to slightly beat Wall Street's expectations. And revenue did increase from $1.39 billion to $1.45 billion. Moreover, the San Francisco-based company did manage to offset the 3% decline in North America by its online business growth, achieving 9% growth in direct-to-consumer net revenues. In fact, net revenues increased 14% in Europe and 9% in Asia. But decline in wholesale definitely remains as a persisting challenge due to competitors.

Concerns

Besides Chinese tariffs, the American wholesale segment is struggling but is luckily partially offset by growth in direct-to-consumer sales. Management was actively working to mitigate the impact of these blows and its earnings do show slow progress. In its second quarter, the company managed to achieve 5% growth despite the lower growth from the wholesale channel and third quarter results show further progress. Strong sales overseas and higher e-commerce sales are what made it happen.

Competitors

Let's face it, the denim space is crowded. In May, VF Corp (NYSE: VFC) spun off its Levi competing jeanswear brands Wrangler, Lee, and Rock & Republic into a newly public company called Kontoor Brands. American Eagle Outfiters (NYSE: AEO) already claims the most share of the jeans market among for 15- to 25-year-olds and ranks second in all jeans brands. They even recently launched a curvy style of jeans for women with a smaller waist and bigger hips. Abercombie & Fitch Co. (NYSE: ANF) did the same, and even Madewell Inc who is preparing to go public did so earlier this year, along with expanding its size range to 24, online. And let's not forget that Diesel USA, the NY based unit of Italian Diesel SpA filed for bankruptcy in March due to blaming mounting losses, a sales plunge, expensive leases and cyber fraud.

Then there's Cavlin Klein at PVH Corp (NYSE: PVH). CK revenues declined 6% year over year to $873 million, but this also includes a total net reduction of nearly 2% from the winding down of PVH Corp's women's jeanswear (imagine that) wholesale business in the United States and even Canada, and of closing of the Calvin Klein 205 X39 NYC brand. And there's Carlos Ortega's Pepe Jeans which is surely the biggest success of venture capital in Spanish fashion that has shown it is an equivalent rival to Levi Strauss. Along with changing its capital structure, the group has internationalized over the past ten years and evolved its portfolio with brands like Esprit.

With offices throughout Europe and even in India, its jewel, Pepe Jeans became a Spanish name with many international surnames and one of the main denim groups in the world, going strong both in Europe and India. However, the bad performance in the last two fiscal years, led the company to a restructuration process and in May 2019, the company decided to cut expenses and is trying to renegotiate its debt as its 250 million euros loan expires in June 2021. So, everyone is struggling.

Outlook

The diversifying strategy is working out for Levi but it takes time. Consumer spending is expected to increase in the jeans segment, so Levi's should see rising demand for its iconic product. Despite the trade wars, investors do see better days ahead for the iconic jeans brand. Additionally, the direct-to-consumer business, including company-owned stores and e-commerce, should continue growing and possibly in double-digits, which can, just like now, offset the weakness from the wholesale business. In the short term, investors will surely monitor the wholesale performance, because the stock is likely to react to how the company is handling that headwind. But Levi Strauss is definitely going strong!

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