Levi Strauss warns of margin decline in 2023 as promotions, costs bite

By Granth Vanaik

(Reuters) – Levi Strauss & Co on Thursday warned of a margin crunch this year as it would have to offer higher promotions than previously anticipated while also grappling with higher costs, sending its shares tumbling 16% in morning trade.

The company, which topped quarterly results estimates but maintained its annual revenue and profit forecast, said its full-year gross margin would be down about 50 basis points from 57.5% a year earlier.

Levi had previously expected margins to expand 20 to 30 basis points.

Even with multiple price hikes on its products, Levi has been unable to protect its margins from escalating costs of freight, labor and cotton, as well as lingering supply chain disruptions.

Bloated inventories have also forced Levi to follow its peers in ramping up discounts and promotions to push products out of the door, further crimping margins. Its first-quarter adjusted gross margin slid 360 basis points to 55.8%.

“Deliberate actions that we took to reduce inventories in the U.S., coupled with more promotional environment resulted in greater-than-expected pressure on gross margin,” said Chief Financial and Growth Officer Harmit Singh.

UBS analysts have noted that Levi’s promotions were up 1,500 basis points in December. 

Despite higher promotions, Levi has struggled to attract cost-conscious shoppers, especially feeling the pinch for its Signature and Denizen brands.

“The lower-end consumer is making hard choices and either trading down or just not buying denim,” Chief Executive Officer Chip Bergh said on a post-earnings call.

Levi reported an adjusted profit of 34 cents per share on revenue of $1.69 billion, both beating estimates.

However, “the street is still not necessarily pleased with the cautious outlook,” said Jessica Ramirez, senior analyst at Jane Hali and Associates.

(Reporting by Granth Vanaik in Bengaluru; Editing by Krishna Chandra Eluri)