Levi Strauss (LEVI 3.65%) is set to announce its latest earnings results in just a few days, and investors are nervous heading into the report. Sure, the jeans specialist is likely to reveal strong demand thanks to robust consumer spending and a high appetite for premium apparel products. But cost and supply chain problems could bring a growth downgrade, just as they have for industry peers like Nike in recent weeks.

Let's take a closer look at the key metrics to watch for in Levi's Wednesday-afternoon announcement of third-quarter fiscal 2021 earnings.

A female shopper looks at various Levis products sitting on a table with more products sitting in the background under a glowing 501 sign

Image source: Levi Strauss.

Sales trends

Levi's last quarterly update showed no signs of a growth slowdown. Instead, sales jumped 156% in Q2 compared to the pandemic slump a year ago. Wall Street was looking for a more muted 150% boost. Revenue set a new record in Q2, despite the fact that about 17% of Levi's retailing locations (mostly in Europe) were closed for part of the quarter due to new COVID-19 restrictions. The company offset that headwind with booming digital sales and higher traffic at its other locations.

Wall Street is expecting another strong quarter this time around, with sales likely rising 36% year over year to $1.5 billion. That gain is compared to a Q3 period a year ago (covering June, July, and August) that was less heavily impacted by pandemic-related store closures. If it hits estimates, it would represent another record quarter for the business.

Levi will benefit from several tailwinds, including more store openings and booming digital sales. Management cited declining COVID-19 case rates as a big factor supporting the business through late July, and we'll find out on Wednesday whether the latest case surge related to the delta variant of the virus derailed that momentum.

Cost spikes

Levi likely faced huge cost spikes and mounting supply chain issues that might threaten sales growth and profitability. Nike and other apparel giants said in recent weeks that expenses are soaring, and transportation and manufacturing challenges are creating supply bottlenecks. Levi might post reduced gross profit margin following two straight quarters of improvements, depending on how well the company navigated that difficult cost environment.

LEVI Gross Profit Margin Chart

LEVI Gross Profit Margin data by YCharts

Yet the long-term outlook should be strong, especially if consumers are still gravitating toward Levi's more premium apparel options. CFO Harmit Singh said back in July that "the majority of the factors driving margin expansion are structural and sustainable." Look for evidence backing up that claim in the form of strong operating profit margin and a positive earnings outlook for late 2021.

Looking out to the holidays

In July, Singh also said Levi is expecting much stronger profit and sales performance in the second half of 2021 than executives had initially predicted. Yet developments since then have clouded that outlook, including a resurgence of COVID-19 cases and accelerating inflation.

Coming into Wednesday's report, Levi has been somewhat conservative in predicting sales will increase by between 28% and 29%, equating to growth of around 5% compared to the same period in 2019. Adjusted earnings for the full year should land between $1.29 and $1.33 per share.

Both forecasts could change significantly on Wednesday, depending on factors like demand, inventory, and supply chain challenges. While a downgrade wouldn't be great news, investors shouldn't let the likely short-term earnings pressure distract from the positive growth story. Levi's has a long runway for sales gains ahead as it reaches new markets, pushes deeper into e-commerce sales, and widens its apparel portfolio. Progress toward those goals will be more important to watch over the next few quarters than the chain's more volatile quarter-to-quarter profit figures.