Competition for retail consumer dollars is fierce
Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by Reuters in an article — by Savyata Mishra and Katherine Masters, “Levi Strauss cuts annual forecasts as promotions, wholesale weakness weigh” — regarding Levi Strauss & Co.’s 👖 just reported third quarter earnings as well as their outlook and retail consumer strategy.
As we cited three months prior after their second quarter earnings, “The decline in U.S. wholesale revenues in the quarter is likely the beginning of a trend for the rest of 2023 that will induce the company to increase promotions and cut prices, thus crimping gross margins and slowing revenue growth.”
Levi’s, threading through a leery and highly competitive market
Levi Strauss is literally threading through a leery and highly competitive consumer and investor market; the stock is valued less than its 2019 lows even though revenues and earnings are higher. Last quarter, we witnessed a decline in U.S. wholesale revenues, marking the onset of a trend that would cause Levi Strauss to increase promotions and cut prices, which in turn would negatively impact gross margins and decelerate revenue growth. This pattern is ongoing. Consumers continue to spend more on services, as seen with robust summer travel, and less on goods. Growth in Latin America and Asia offset sales weakness in Europe and North America, but not enough.
150 years of the 501®
Even as the Levi’s® brand celebrates the 150th anniversary of the 501® jean, it seems that management’s narrative of an expanding casualization trend in workwear and potential European and Asian growth is not resonating with investors. The market is concerned about markdowns and promotions to move inventory as well as retail headwinds from the end of the U.S. student loan moratorium on interest expenditures as consumers redirect monies to cover college debt. Also to be seen is how the digital savvy and well accomplished current President and incoming CEO, Michelle Gass, will reinvigorate the company after current CEO Chip Bergh transitions out by mid-2024.
Expanding DTC
The brand is trying to sell more direct-to-consumer (DTC) but overall will probably face headwinds going into the holiday season—especially with the end of the U.S. student loan moratorium on interest payments as consumers redirect cash to cover college debt—alongside current concerns of inflation, possible recession, and stretched consumer budgets.
A possible bright spot down the road is that Levi may see an uptick in sales as people that lose weight on new appetite-suppressing medications refashion their wardrobes for leisure, sport, and business.
Article excerpts are below:
“The brand is trying to sell more through DTC but overall will probably face headwinds going into the holiday season,” said Michael Ashley Schulman, a partner at Running Point Capital.
Analysts have said Levi might have to increase promotions and cut prices if wholesale channel sales continue to worsen, which could pressure its margins further. Shareholders are skeptical of the company’s prospects ahead of the key holiday season, according to Schulman, even as executives pledge to expand Levi’s denim assortment into skirts, dresses and other womenswear.
Really, what are the options? Levi’s or Wranglers. And you just pick one. It’s one of those life choices.
Harrison Ford
Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Past performance is not indicative of future results. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-23-139
