Please ensure Javascript is enabled for purposes of website accessibility

Levi Strauss Is Winning Overseas, but Not So Much at Home

By Timothy Green - Updated Oct 9, 2019 at 4:54PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A weak wholesale business in the Americas and flat sales in its core business troubled investors.

Denim company Levi Strauss (LEVI -1.45%) beat analyst expectations with its third-quarter results on Tuesday evening, but investors weren't satisfied. The stock was down Wednesday morning, with weak sales in the Americas, a profit decline, and a stagnant men's bottoms business overshadowing all the positives. Here's what investors need to know.

Growth in most places

Levi's posted strong growth in its key strategic areas during the third quarter, which drove overall revenue higher.

Metric

Q3 2019

Change (YOY)

Compared to Average Analyst Estimate 

Revenue

$1.45 billion

3.8%

Beat by $10 million

Non-GAAP earnings per share

$0.31

(8.8%)

Beat by $0.03

Data source: Levi Strauss. YOY = year over year. GAAP = generally accepted accounting principles.

Levi's growth strategy revolves around expanding its business outside of men's bottoms, which saw flat sales during the third quarter. Sales of tops were up 17% adjusted for currency, revenue from women's products jumped 12%, and direct-to-consumer revenue was up 12% as well.

"Our strategies to diversify to faster-growing, high-opportunity, high gross margin businesses continue to drive momentum, as we again grew revenues double-digits internationally, in our direct-to-consumer business, and in the women's and tops categories," said Levi Strauss CEO Chip Bergh in prepared remarks included in the earnings release.

Close-up of a button on a pair of jeans

Image source: Levi Strauss.

Asia and Europe performed well for the company during the third quarter. Sales in Europe soared 18% on a constant currency basis, while sales in Asia jumped 12%. Both the wholesale and direct-to-consumer businesses grew revenue in both regions.

The Americas was a different story. Revenue from the Americas was down 3% in the third quarter, driven by a decline in the wholesale business. Direct-to-consumer revenue was up 9%, but it wasn't enough to offset weak wholesale demand. A reset of the Dockers product line and lower shipments to off-price retailers contributed to the decline.

The company does expect its wholesale performance in the Americas to improve in the fourth quarter, although headwinds will remain in place. "For now, we see the third quarter as the toughest comp for the full year. And while we'll have the tail of the Dockers impact, and lower off-price sales again in Q4, we expect that U.S. wholesale comparisons to prior year will improve in the fourth quarter," Bergh said during the earnings call.

Lower profits and unchanged guidance

Levi's adjusted earnings per share slumped during the third quarter, but taxes were mostly to blame. Tax benefits during the prior-year period reduced income tax expense and inflated net income, leading to a tough comparison. Levi reported a tax rate of 18% in the third quarter, up from just 8% in the prior-year period.

Also hurting the bottom line was a lower gross margin. Gross margin was down 20 basis points year over year, although this was entirely due to currency. Adjusted for currency, gross margin would have increased by 40 basis points thanks to revenue growth in the direct-to-consumer and international businesses.

Levi kept its full-year guidance unchanged. The company expects constant-currency revenue growth of 5.5% to 6%, roughly flat gross margin and adjusted operating income, and an effective tax rate between 19% and 20%. A strong U.S. dollar is expected to have a negative impact of 275 basis points on revenue growth and 450 basis points on adjusted operating income growth.

With Levi struggling in the Americas, partly offsetting strength in other areas, the growth story the company pitched earlier this year when it went public doesn't look all that compelling. Diversification is helping to push up revenue, but the core men's bottoms business is treading water. This just doesn't look like a growth stock, and its valuation should reflect that.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Levi Strauss & Co. Stock Quote
Levi Strauss & Co.
LEVI
$19.08 (-1.45%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.