What happened

Shares of Levi Strauss (LEVI -3.26%) were moving lower today after the apparel company beat estimates in its first-quarter earnings report, but warned that margins would be compressed this year due to rising costs and a promotional sales environment.

As a result, the stock was down 15.5% as of 11:08 a.m. ET.

A person in a clothing store.

Image source: Getty Images.

So what

Overall revenue in the quarter rose 6%, or 9% in constant currency, to $1.69 billion, topping estimates at $1.62 billion, and followed 26% constant currency revenue growth in the quarter a year ago. Growth in the quarter was driven by 12% growth in the direct-to-consumer channel, which made up 42% of total revenue, and the company said it benefited from a $100 million shift from wholesale shipments going out in Q1 instead of Q2 after it implemented a new enterprise resource planning system. Wholesale revenue was up just 2%.

Like other retailers, Levi Strauss has struggled with rising costs and elevated inventory, which was up 33% from a year ago. That led gross margin to fall 360 basis points to 55.8%. 

As a result, adjusted earnings per share declined from $0.46 to $0.34, but that still beat the analyst consensus at $0.32.

CEO Chip Bergh said: "Our first quarter results reflect the strength of our brands and the progress we are making against our strategic priorities. We delivered strong growth in our international business and record-breaking revenue performance in our direct-to-consumer channel."

Now what

Despite beating guidance in the first quarter, investors seemed spooked by commentary about the rest of the year. Levi Strauss sees full-year revenue of $6.3 billion to $6.4 billion, up just 1.5% to 3%, meaning revenue will be close to flat for the rest of the year. 

On the bottom line, it forecast adjusted earnings per share of $1.30 to $1.40, down from $1.50 in 2022 and in range of estimates at $1.33.

While the headline numbers weren't alarming, investors seem to be reacting to the weakening economic environment and the weak gross margin, which are likely to persist.

The apparel stock seems well priced at a price-to-earnings ratio of 12 based on this year's forecast, but the stock seems likely to struggle until the economy starts to recover.