Levi (LEVI) Q3 2024 earnings

Denim-crazy consumers are reaching out Levi Strauss & Co for new jeans, but the company's overall business is being weighed down by the Dockers brand, which the company is now considering selling, the company announced Wednesday.

Levi's brand sales rose 5% in the fiscal third quarter – its biggest gain in two years – but overall sales were flat and below Wall Street expectations.

Shares of Levi's fell more than 8% in extended trading on Wednesday.

Here is the denim maker's performance compared to Wall Street's expectations, based on an analyst survey by LSEG:

• Earnings per share: 33 cents adjusted versus 31 cents expected
• Revenue: $1.52 billion versus expected $1.55 billion

The company's reported net income for the three-month period ended Aug. 25 was $20.7 million, or 5 cents per share, compared with $9.6 million, or 2 cents per share, a year earlier. Excluding one-time items, Levi's earned $132 million, or 33 cents per share.

Revenue was $1.52 billion, up slightly from $1.51 billion a year ago.

With a quarter still left in the fiscal year, Levi reiterated its full-year adjusted earnings per share forecast of $1.17 to $1.27, in line with expectations of $1.25, according to LSEG. The company expects earnings per share to be in the middle of this range.

The company cut its revenue forecast and now expects sales growth of 1%, compared to a previous range of 1% to 3%. According to LSEG, this is below the 2.3% growth expected by analysts.

Levi's, which owns the eponymous brand, as well as Dockers and Beyond Yoga would have achieved very different results if it were not for Dockers. The brand was founded in 1986 to offer consumers an alternative to denim: khakis.

In the 1990s and 2000s, khaki was a staple in most consumers' wardrobes, but today it has fallen out of fashion. Levi's efforts to differentiate Dockers resulted in too much overlap with the Levi's brand, which has evolved into a lifestyle brand offering many more products than just jeans.

During the quarter, sales at Dockers fell 15% to $73.7 million, while Beyond Yoga, the popular athleisure brand that the company acquired in 2021, posted a 19% increase in sales to $32.2 million -dollar recorded.

“The brand has developed worse in recent years. … We felt this was the right decision in the long run. From a financial perspective, we believe Dockers' exit will improve the company's overall margins and also minimize volatility in sales growth,” Levi's CFO Harmit Singh said in an interview with CNBC. “We believe that Dockers’ exit will allow both Dockers and Levi’s to operate independently and maximize each other’s value independently.”

Levi's has tapped Bank of America to manage the sales process.

Beyond Docker's, Levi's is making progress in increasing its profitability as the company continues to shift its focus toward direct-to-consumer sales.

During the quarter, gross margin increased 4.4 percentage points, which Singh attributed to the direct sales strategy, lower cotton costs and better products that did not have to be marked down to sell.

Like other brands, Levi's has worked to refine its direct sales strategy and reach more customers through its own stores and websites rather than through wholesalers Macy's. The strategy is a boon for profits as margins are higher and also allows brands to get closer to their customers through data collection.

During the quarter, Levi's direct channel increased approximately 10%, driven by strength in the U.S. and 16% growth in e-commerce. Overall, direct sales accounted for 44% of total sales and Levi's wants to get that number closer to 55%.

Behind those numbers are a series of spectacular marketing campaigns, including a new partnership the jeans brand announced Monday with Beyoncé, after the pop star released a song called “LEVII'S JEANS” on her country album earlier this year.

“Our strategic decision was to have Beyoncé actually represent some of our core products. So in the first ad, chapter one, she's wearing … 501 pants and an essential white T-shirt, and you can't get more Levi's than that,” CEO Michelle Gass told CNBC. “Part of Levi's recipe for success has been and continues to be that we live at the center of culture and bring together the icon of Beyoncé with the icon of Levi's. I don’t think there’s a better example of that.”

Sales at Levi's European store were higher than expected at $406.6 million, beating StreetAccount estimates of $392 million. However, sales in North and South America and Asia were lower. Levi's posted sales of $757.2 million in the Americas, below the $789.2 million that analysts at StreetAccount had expected. In Asia, Levi's posted sales of $247.1 million, below StreetAccount estimates of $258 million.

“China has been a drag,” Singh said of the region, which accounts for about 2% of Levi's total business. “There are macroeconomic headwinds and we have had some implementation issues. We have just changed leadership in China and over time we still believe in the long-term potential of China.”

In the Americas, in addition to a slowdown at Docker's, sales were also hit by one of Levi's largest wholesale customers in Mexico, Singh said. During the quarter, the partner experienced a cybersecurity breach that reduced delivery times and impacted revenue. The region is also working on some “execution issues,” Singh said.