Despite the denim craze, Levi's shares decline 12% due to disappointing sales.

• Wall Street's sales expectations were narrowly missed by Levi Strauss due to the surge in denim popularity.
• Levi's CFO cautioned that consumers have been "generally restrained" and are not spending much on non-essential items.
• The denim company has been striving to decrease its dependence on department stores by establishing its own website and retail locations, but this approach may present unforeseen obstacles.

Despite its popularity among consumers, denim hasn't resulted in a significant increase in sales at .

On Wednesday, the jeans manufacturer reported fiscal second quarter revenue that slightly missed Wall Street's predictions, despite the increasing demand for denim dresses, skirts, and ultra-low-rise baggy pants among shoppers.

Levi's reported better-than-anticipated earnings due to its direct sales to consumers and cost-cutting measures. The company increased its dividend by 8% to 13 cents per share, marking its first increase in six quarters.

Still, shares fell about 12% in extended trading.

Based on a survey of analysts by LSEG, how did Levi's perform during the quarter compared to Wall Street's expectations?

• Earnings per share: 16 cents adjusted vs. 11 cents expected
• Revenue: $1.44 billion vs. $1.45 billion expected

In the three-month period ending May 26, Levi's reported a net income of $18 million, or 4 cents per share, compared to a loss of $1.6 million, or zero cents a share, in the same period a year ago. When excluding one-time items, Levi's earned $66 million, or 16 cents per share.

Despite the sales increase of $100 million, or about 7%, from the previous year, the growth rate is lower due to the comparison being with a weaker sales performance in the previous year.

In the previous fiscal year, sales decreased by 9% due to Levi's change in wholesale shipments from its fiscal second quarter to its fiscal first quarter. This shift resulted in a reduction of approximately $100 million in sales, as previously stated by the company. If we exclude this shift and the departure of Levi's Denizen business, sales would have increased by approximately 1% in the most recent quarter compared to the previous year.

Harmit Singh, the finance chief, attributed the sales miss to unfavorable foreign exchange conditions and weak sales at Docker's. Despite seeing $82.4 million in sales, up 8.6% from $75.8 million in the previous year, it's unclear how sales at Docker's were impacted by the timing of Levi's wholesale orders.

"Singh stated in an interview with CNBC that people are typically cautious and not inclined to make many purchases."

Although Levi's reported a strong earnings beat, it only confirmed its full-year guidance, which was in line with expectations. The company anticipates full-year earnings per share to be between $1.17 and $1.27, which now includes a 5 cent reduction resulting from the implementation of its new distribution and logistics strategy.

Levi's is shifting from a mainly owned-and-operated distribution and logistics network in the U.S. and Europe to one that relies more on third parties.

The company stated that for the remainder of 2024, the implementation of new and old facilities will necessitate parallel operation, leading to a temporary rise in distribution expenses.

Levi's has shifted the responsibility of final mile delivery to third parties by changing its terms with its supplier, resulting in Levi's taking ownership of inventory closer to the point of shipment rather than its eventual destination. As a result, Levi's distribution network, built for a business that primarily sold to wholesalers, needs to change into one that's more focused on selling directly to consumers.

Levi's sales are increasingly coming from its own website and stores.

Overall sales increased by 19%, with direct-to-consumer sales jumping 8% to account for 47% of the total.

Michelle Gass, CEO, stated that our shift to being a DTC-first company is generating positive outcomes globally, increasing my confidence that we will experience rapid, profitable growth for the remainder of the year and beyond.

Wholesale revenue grew 7% during the quarter, but excluding the shift in timing of wholesale orders, sales in the channel decreased 4%. Singh stated that the company has a "conservative" outlook on the channel's growth in the future.

Levi's benefits from having its own direct channels, which results in higher profits, better consumer data, and less dependence on unstable wholesalers such as Macy's and Kohl's, who are losing popularity among consumers.

Direct selling can be more expensive and may come with unexpected challenges that can negatively affect sales and profitability. For instance, if a customer purchases Levi's from Macy's and wants to return them, Macy's usually bears the cost. However, under a direct model, the responsibility, including the cost and logistics, would fall on Levi's.

Retailers who heavily rely on wholesalers for sales may face negative consequences, as exemplified by Nike's experience.

Nike's emphasis on direct sales increased revenue and profits, but some critics claimed that the shift in strategy hindered innovation and eventually resulted in a decline in market share.

The company has admitted to making a mistake when it severed ties with numerous wholesale partners and has since "rectified" the situation.

Read the full earnings release here.