What happened

Shares of apparel company Levi Strauss (LEVI 0.20%) plopped on Friday after the company released financial results for the fiscal third quarter of 2022, ended Aug. 28. Wall Street didn't like the report. And Levi Strauss stock was down 9% as of 1:30 p.m. ET.

So what

In Q3, Levi Strauss generated revenue of $1.5 billion, up 1% year over year. This is about what management expected. Moreover, revenue guidance for the year is relatively unchanged, with management expecting 11.5% to 12% full-year growth compared to previous guidance of 11% to 13%.

Levi Strauss doesn't have a revenue problem as much as it has a profit problem. For 2022, management is guiding for adjusted earnings per share (EPS) of $1.44 to $1.49 compared to previous guidance of $1.50 to $1.56. 

Profits are challenged and analysts are lowering their expectations for Levi Strauss stock. For example, Wells Fargo analyst Ike Boruchow lowered his price target for Levi Strauss stock from $22 per share to $19 per share, according to StreetInsider. Other analysts also lowered their price targets.

Now what

You might have noticed it in your own household budget but things are getting more expensive because of inflation. And apparel companies like Levi Strauss feel this as well. Of note in Q3, the company's inventories were up 43% year over year. However, this doesn't mean it has 43% more pairs of jeans, but rather the value of its inventory is up by this amount. 

In part, Levi Strauss wanted more inventory this year than last year. And logistics are more expensive with the price of gas up, which is prone to fluctuate. However, the third reason for the inventory increase is more actionable for investors: Levi Strauss' cost of goods sold is up, contributing about one-third of the inventory increase.

With the costs of goods up, Levi Strauss' profits are understandably down even though sales are holding up. In time, companies can pass the increased costs on to consumers and recoup their lost margins. However, it can take time, and it wouldn't be surprising to see many consumer-goods stocks similarly struggle in the coming year or more.