Levi Strauss lowers profit outlook due to increased costs and wary consumers.

By Granth Vanaik

(Reuters) -Levi Strauss & Co cut its annual profit forecast on Thursday, in a sign that higher costs were weighing on the maker of denim clothing’s margins as it struggles with falling sales at its wholesale channel in North America.

Shares of the company fell about 6% in extended trading, as it joined peer American Eagle Outfitters on weak consumer spending outlook.

Customers are turning more cautious on spending on pricier discretionary items, including apparel, as the cost of living rises in the U.S.

“Macro effects of higher inflation in a slowing U.S. economy have put increased pressure on the price-sensitive consumer,” Chief Executive Officer Chip Bergh said in a post-earnings call.

Levi’s now expects adjusted profit to be between $1.10 and $1.20 per share for 2023, compared to its prior forecast of $1.30 to $1.40.

The annual reported net revenue is expected to increase 1.5% to 2.5% from a year earlier, the apparel maker said, narrowing its previous forecast range of 1.5% to 3%.

Inventory backlog created supply chain challenges in Levi’s U.S. distribution centers, resulting in its inability to fulfill demand, Bergh added.

Revenue in the company’s higher-margin direct-to-consumer channel increased 13% for the second quarter, while its wholesale channel, which includes sales to retailers like Target and Nordstrom, posted a 22% decline as wholesalers tightened their inventories in North America and Europe.

Sales in Americas declined 22%, while that in Europe fell 2%.

Decline in U.S. wholesale revenues is likely beginning of a trend for rest of 2023 that will induce Levi’s to increase promotions and cut prices, thus crimping gross margins and slowing revenue growth, said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.

The apparel maker, however, disclosed plans of making “very selective price reductions” in its wholesale channel for lower-income consumers.

It posted a net loss of $1.6 million for the quarter ended May 28, compared with a net income of $49.7 million a year earlier.

(Reporting by Granth Vanaik in Bengaluru; Editing by Shweta Agarwal)

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