Dive Brief:
- Levi Strauss & Co.’s push to boost its direct-to-consumer sales was waylaid in Q3, as net revenues in the channel rose just 2% year over year and comps were flat.
- Wholesale, by contrast, rose 6%, with growth in all segments and particular strength in Europe and Asia. Overall net revenues rose 4% to $1.6 billion.
- Tariff refunds boosted profitability, executives told analysts Wednesday. Gross margin expanded 450 basis points to 66.2%, with refunds contributing 370 basis points. Net income fell nearly 23% to about $169 million.
Dive Insight:
Thanks in part to a concerted marketing effort, Levi’s DTC sales are already recovering since the Q3 slump — which coincided with the brand’s first net revenue miss in two years, per Wells Fargo.
The need for marketing is one reason why DTC margins often don’t reach the level of wholesale margins, research shows. With wholesale, retail partners take on much of the expense and effort of marketing.
Distribution costs in the U.S. also remain higher than expected, Chief Financial Officer Harmit Singh said during a call with analysts Wednesday.
The tariff refunds are therefore coming at an opportune time for the denim giant. In Q3, the company took in about $80 million in refunds, which was almost all of what it expects, he said.
Levi’s is plowing roughly three-quarters of that back into the business to fund “incremental marketing to drive demand, enhanced supply chain capabilities to improve competitiveness over time and sharper value for consumers during key holiday promotional moments,” he added. About $25 million was spent during Q3 and about $35 million is slated for Q4.
“Our view is, the tariff refunds were timely,” Singh said.
Other challenges also buffeted Levi’s in the quarter. Traffic and demand for the back-to-school season were weaker than expected, in part because the brand over-emphasized loose fits at a time when U.S. consumers turned to low-rise ones, CEO Michelle Gass said.
“The good news is the team got after it very quickly, and we sharpened our focus,” she said, adding that loose styles do remain “an important business” and “big volume driver.”
Then, Europe’s brutally hot summer took a toll on DTC sales.
“When the temperature started cooling and weather moderated, we saw the trends come back,” she said. “In Europe right now, DTC quarter-to-date, the trends are very robust, very positive and robust. So you should feel good about that. The other thing worth mentioning in Europe is that we had an incredible wholesale business. So suffice it to say, like I said, the brand is very healthy there.”
