Shares in Levi Strauss slumped about 11% in premarket trading today after it forecast tepid holiday quarter revenue as the denim maker grapples with weak demand from retailers with consumers paring back spending.
The company, whose stock has risen about 27% so far this year, also said yesterday it was considering a sale of its underperforming khaki and chinos brand Dockers.
Clothes makers from VF Corp to Nike have been rethinking their product assortments and relationship with wholesalers or retailers who stock the brands as they focus on popular styles to tackle choppy demand amid sticky inflation.
Disappointing segments such as wholesale and Dockers weigh on the company's full year earnings and its credibility for improving revenue growth, said Stifel analyst Jim Duffy in a note.
Dockers' sales dropped 15% for the third quarter. Levi, which is in the midst of a turnaround strategy, is now looking to focus on its core denim clothing.
"While challenges remain near-term, we remain encouraged by continued strength in Levi's business as well as the announcement that the company is evaluating strategic alternatives for the Dockers business," Telsey Advisory Group analyst Dana Telsey said.
Levi's margins have benefited from cost-cutting measures and exiting businesses like its footwear and Denizen brand. This helped its third-quarter adjusted profit beat Wall Street expectations by two cents.
The company's forward price-to-earnings ratio for the next 12 months, a common benchmark for valuing stocks, was 14.96, compared with 16.02 for Ralph Lauren RL.N and 27.26 for Nike.
"We are narrowing our focus to realize the full potential of the Levi's brand as well as accelerate Beyond Yoga. Accordingly, we are undertaking an evaluation of strategic alternatives for the global Dockers business," CEO Michelle Gass said on a post-earnings call.
Levi is in the midst of a turnaround strategy to operate mainly by offering tighter assortment that focuses on core denim clothing and achieve major sales through its direct-to-consumer stores at full prices.
The company had already exited businesses that have not fetched much, such as the Denizen brand and its footwear category, in some regions as part of its cost cut plans, which also included layoffs.
This helped the company post third-quarter adjusted profit per share of 33 cents, topping expectations of 31 cents, according to analysts' estimates compiled by LSEG.
As part of the strategic review process of Dockers, the company has retained Bank of America as its financial adviser and has not set a deadline or definitive timetable for its completion.
Sales of Dockers saw a 15% decline in the third quarter. The brand contributed about 5% to the reported quarter's total revenue of $1.52 billion, which missed analysts' estimates of $1.55 billion.
But Levi's sales are seeing a boost from its direct-to-consumer channel push with the segment posting a 10% jump in sales, driven by strong demand for women's clothing, particularly denim dresses and jumpsuits, sold mostly at full prices.
Levi said it expects fourth-quarter revenue to grow in the mid-single-digit percentage range, compared to estimates of a 7.36% growth owing to weakness in Dockers and a pullback in consumer spending in China.
The company, which gets most of its products into the USs through the East Coast from Asia, said it had made alternate plans to ensure shipments arrived in time for the winter season.
The US East and Gulf Coast ports are currently in a strike that has entered its second day and halted shipments.
Levi said it had shifted routes to the US West Coast, prioritised certain ports and switched to air freight.
