The denim maker earned an adjusted 48 cents a share, with 11 cents of net benefit from refunded tariffs. Its sales outlook moved to the bottom of the prior range on a reported basis and to the top on an organic one.
| LEVI, VFC, GAP, PVH
Levi Strauss beat profit expectations by a wide margin last quarter. A large part of that margin came from the government.
For its fiscal third quarter, which ended , the company reported adjusted earnings of 48 cents a share, against about 36 cents expected. Earnings under generally accepted accounting principles were 43 cents. Net revenue rose 4% to $1.61 billion, or 5% excluding currency and other effects, slightly below the roughly $1.62 billion analysts expected.
The refund
Levi received refunds of tariffs collected under the International Emergency Economic Powers Act. They added 16 cents a share before the company reinvested about 5 cents of it, for a net benefit of 11 cents. Before that reinvestment, the refunds lifted gross and operating margins by about 4.9 percentage points.
Subtracting the 11 cents from the reported 48 leaves about 37 cents, just above the estimate. On that basis the quarter cleared expectations by about a penny rather than by 12 cents. Gross margin was 66.2%, up 4.5 points from a year earlier, and the adjusted operating margin was 15.5%.
The guidance split
The new adjusted earnings range of $1.54 to $1.56 a share replaces $1.46 to $1.52 and lands inside the $1.52 to $1.59 band analysts had projected.
Its revenue outlook moved in two directions at once. On a reported basis, Levi now sees revenue growing about 7%, the low end of the 7% to 7.5% it had guided. Organic growth, which strips out currency and similar effects, is now expected at about 6%, the top of the previous 5.5% to 6% range.
The gap between those two measures has narrowed from about 1.5 percentage points to about 1 point. The company now expects its own business to grow a little faster than before, while the boost from currency and other non-organic factors shrinks.
Channels and regions
The softness is in Levi's own stores and in the U.S. Direct-to-consumer sales rose 2%, with comparable sales roughly flat, while e-commerce grew 10% and wholesale 6%. U.S. revenue fell 1%. Asia rose 5%, or 10% organically, and Europe and the Americas each grew 4%.
"DTC fell short of our internal expectations," said Chief Executive Michelle Gass, who also said the quarter "highlighted the power of our diversified portfolio."
The company raised its quarterly dividend 14% to 16 cents a share and plans a $100 million accelerated share repurchase.
The stock
Shares closed down 4.97% at $19.51 on Wednesday before the report and were about 1% lower at $19.32 in extended trading early Thursday.
Organic Growth and One-Time Benefits
One reading is that the business is stronger than the stock suggests. Organic growth guidance went to the top of its range, international markets and wholesale grew, and margins expanded even before the refunds.
Another reading is that the profit raise leans on a one-time benefit while the company's own stores in its home market weaken. Without refunds the quarter roughly met estimates, U.S. sales fell and comparable store sales were flat.
Fourth-quarter markers
Direct-to-consumer comparable sales and U.S. revenue in the fourth quarter will show whether the softness spreads. Gross margin excluding refunds will show whether the 4.5-point improvement holds without them.