Levi Strauss (LEVI 0.04%) is about to answer some big questions for investors. The apparel specialist will announce its fiscal second-quarter results in just a few days, and expectations are low heading into that report.
Levi's management team might talk about declining consumer confidence, as well as supply chain and pricing challenges, in this operating update. Investors are also worried that the company will reduce its sales and earnings outlook, or that it will enter the second half of the year with too much inventory.
With those concerns in mind, let's look at what we might see in the earnings announcement set for Thursday, July 7.
Sales trends
Levi's sales trends were strong in the most recent quarter, although there were signs of stress on consumer spending. Sales rose 22% overall, mainly thanks to a 26% spike in the core U.S. market. "We started the year with strong consumer demand and solid momentum," CEO Chip Bergh said in a press release.
Management hinted at "incremental headwinds," though, including inflation and slowing economic growth in places like the U.S., China, and Europe. Thursday's announcement will reveal whether those headwinds strengthened by much in April, May, and June.
Most investors are looking for sales to land at $1.43 billion, or up about 10% year over year. That result would constitute a slowdown from the prior quarter's 22% increase while still setting new global sales records for the business.
If there's a bad surprise in this area, meanwhile, it might come from supply chain challenges. Inventory movement problems cleaved $60 million from sales in the first quarter, after all, and more logistical issues could have cropped up in the second quarter.
Profitability changes
Levi announced surprising increases in gross and operating profit margins last quarter, as rising prices and higher demand for premium products offset the surge in costs. Yet investors are bracing for that profitability spike to start reversing itself over the next few quarters. Shoppers are becoming more price conscious as inflation raises their expenses. It's also possible that declining consumer confidence will convince people to trade down to cheaper jeans or less-expensive brands.
LEVI operating margin (TTM). Data by YCharts. TTM = trailing 12 months.
These risks are amplified by the fact that Levi Strauss will need to adjust its prices in response to any significant demand slump. There's no evidence yet of this drop, but keep an eye on gross profit margin for early signs that the company is losing some pricing power.
The outlook
Investors will be focused on two metrics that will show whether Wall Street has been right to get more cautious about this stock in 2022. The first is the company's outlook, which currently calls for sales to rise by between 11% and 13% as earnings improve to around $1.50 per share in fiscal 2022. Shareholders are bracing for a downgrade to these forecasts due to worsening consumer spending trends.
Second, inventory levels will be crucial to watch. Management stocked up on products in the first quarter in hopes of minimizing supply chain challenges. But another quarter of rising inventory levels might point to tougher selling conditions ahead. It's one thing to have excess inventory when demand is accelerating, and another for an apparel specialist to hold those products during a sales slowdown.
Watch management's earnings forecast to judge whether Levi Strauss is entering the second half of the year with a good balance between demand and supply, or if instead the company is approaching a potentially tough third quarter and fourth quarter to close out the year.
