Levi Strauss (LEVI -0.54%) stock declined 11.7% on Friday, following the jeanswear and casual clothing retailer's release on the prior afternoon of its report for the fiscal third quarter, which ended on Aug. 28.

A portion of the stock's decline is likely attributable to market dynamics. On Friday, the S&P 500 and Nasdaq indexes were down 2.8% and 3.8%, respectively. Shares of athletic-wear specialist Lululemon Athletica, which are often more resilient than those of others in the apparel category, declined 4% on no news. So it seems likely that the market headwind was responsible for roughly 4% or 5% of Levi stock's decline on Friday.

The rest of Levi stock's decline is attributable to the company's fiscal third-quarter revenue that missed Wall Street's expectation, and also to management's paring back its previously issued full-year revenue and earnings guidance. The latter was probably the bigger issue, as investors typically react very negatively to cuts in annual guidance.

Following is an overview of Levi's third quarter, along with its outlook, centered on four key metric categories.

Many pairs of blue jeans hanging vertically.

Image source: Getty Images.

1. Revenue edged up 1%

Levi's quarterly sales grew 1% year over year (7% in constant currency) to $1.52 billion. This result missed the $1.61 billion Wall Street consensus estimate.

Below are the segment results. Levi changed its reporting structure starting in the fourth quarter of fiscal 2021. The new "other brands" category includes Dockers and Beyond Yoga, the latter of which Levi acquired in August 2021.

Segment Fiscal Q3 2022 Revenue Change (YOY)
Americas  $805 million 3%
Europe $390 million (19%)
Asia $221 million 36%
Other brands $101 million 37%*
Total $1.52 billion 1%

Data source: Levi Strauss. YOY = year over year. *Excluding Beyond Yoga, this category grew 7% year over year.

The Europe segment's underlying performance wasn't nearly as bad as suggested by its 19% revenue decline. Of this decline, 10% of it was due to foreign-currency exchange and 4% of it stems from Levi's suspension of its business in Russia. So, in constant currency and excluding the impact from Russia, Europe revenue fell just 5% year over year. That's no so bad when you consider the macroeconomic environment. Like in the United States, inflation is also surging in Europe. But Europe is being walloped much more than the U.S. by rising energy prices stemming from the Russia-Ukraine war.  

Levi's wholesale channel's sales edged up 1% year over year (and 6% in constant currency). The direct-to-consumer (DTC) channel's sales increased 2% (and 8% in constant currency), driven by strength in company-operated e-commerce. The DTC channel generated 35% of total revenue.

2. Adjusted EPS fell 17%

Net income under generally accepted accounting principles (GAAP) was $173 million, or $0.43 per share, down 9% from the year-ago period. Adjusted for one-time items, net income landed at $161 million, or $0.40 per share, down 17% year over year. This result exceeded the $0.37 analysts had expected.

Adjusted EPS includes a $0.04 adverse impact from foreign-currency exchange. This stems from the strengthening of the U.S. dollar relative to other currencies over the last year.

3. Operating cash flow declined 74%

In fiscal Q3, cash generated from operations decreased 74% year over year to $64.4 million.

Levi ended the quarter with $599.4 million in cash, cash equivalents, and short-term investments, and $963.5 million in long-term debt.

4. Fiscal 2022 revenue is now expected to grow just 6.7% to 7% year over year 

For fiscal 2022, which ends in late November, management lowered its revenue and earnings guidance as follows. It attributed these moves to "the significant incremental currency headwinds from the stronger U.S. dollar, as well as a more cautious outlook for North America and Europe due to macroeconomic conditions and ongoing supply chain disruptions."

  • Reported annual revenue growth of 6.7% to 7% (representing 11.5% to 12% revenue growth in constant currency). Prior guidance was for reported annual revenue growth of 11% to 13%.
  • Adjusted EPS of $1.44 to $1.49, compared with adjusted EPS of $1.47 in the prior fiscal year. Prior guidance was for adjusted EPS of $1.50 to $1.56. (The new guidance includes incremental foreign-currency exchange headwinds of $0.05 since the company's last earnings report in July.)

In short, Levi had a somewhat disappointing quarter, especially considering its performance has been solid in recent quarters. 

Given the challenging global macroeconomic environment, companies that sell consumer discretionary products (such as apparel) probably have more tough quarters ahead of them. Investors should hold off considering buying all but the strongest players in this group. Lululemon -- whose customers tend to have higher discretionary income -- is in better shape than most in this group to weather the current macro environment.