Levi Strauss is considering selling its Dockers business and has reduced its guidance accordingly.

• Levi Strauss reported mixed quarterly earnings and announced plans to sell its Dockers division.
• Despite a 15% decline in sales at Dockers, the denim maker reported strong gains in its namesake brand and Beyond Yoga during the quarter.
• The gross margin of Levi's increased by 4.4 percentage points due to its emphasis on direct selling and lower cotton costs.

The company's sales of new jeans are increasing, but its overall business is being hindered by its Dockers brand, which it is now considering selling off, as announced on Wednesday.

Despite a 5% increase in sales during its fiscal third quarter, which was the largest gain in two years, Levi's brand still experienced flat revenue that fell short of Wall Street's expectations.

Shares of Levi's fell more than 7% in extended trading Wednesday.

Based on a survey of analysts by LSEG, how did the denim-maker perform compared to Wall Street's expectations?

• Earnings per share: 33 cents adjusted vs. 31 cents expected
• Revenue: $1.52 billion vs. $1.55 billion expected

The company's net income for the three-month period ending August 25 was $20.7 million, or 5 cents per share, compared to $9.6 million, or 2 cents per share, in the same period a year ago. Excluding one-time items, Levi's earnings were $132 million, or 33 cents per share.

Sales increased by $11 million to $1.52 billion compared to the previous year's $1.51 billion.

Levi has reaffirmed its full-year adjusted earnings per share guidance of $1.17 to $1.27, which is in line with expectations of $1.25, according to LSEG. The company expects earnings per share to come in at the midpoint of that range.

The company has revised its revenue guidance and now anticipates a 1% increase in sales, which is lower than the previously forecasted range of 1% to 3%. This falls short of the 2.3% growth that analysts had predicted, as stated by LSEG.

Dockers, which is owned by Levi's, would have produced a different set of results if it had not been for Dockers. In 1986, Dockers started the brand to provide consumers with an alternative to denim, specifically khakis.

In the 1990s and 2000s, khakis were a staple in most consumers' wardrobes. However, their popularity has waned in recent years. Levi's attempted to differentiate Dockers, but this resulted in too much overlap with the Levi's brand, which has evolved into a lifestyle brand offering a wide range of products beyond jeans.

In the quarter, Dockers experienced a 15% decline in sales to $73.7 million, while Beyond Yoga, the athleisure brand acquired in 2021, recorded a 19% increase in sales to $32.2 million.

"In recent years, the brand has underperformed. However, we believe that the exit of Dockers will improve the company's overall margins and minimize volatility in top-line growth. Our financial view is that the separation of Dockers and Levi's will allow both companies to operate independently and maximize their value."

Levi's has tapped to lead the sale process.

Levi's is gaining profitability by shifting its focus to direct-to-consumer sales, in addition to Docker's growth.

The gross margin of the company increased by 4.4 percentage points during the quarter, according to Singh, due to the implementation of a direct-selling strategy, lower cotton costs, and the production of high-quality products that did not require discounts to be sold.

Levi's has been focusing on developing its direct selling strategy by establishing its own stores and online platforms, rather than relying on wholesalers. This approach has been beneficial for the brand's profits as it enables higher margins and provides an opportunity to gather customer data.

In the quarter, Levi's direct channel experienced a 10% increase, mainly due to the U.S. market and a 16% rise in e-commerce. Despite accounting for 44% of total revenue, Levi's aims to bring this percentage closer to 55%.

Despite lower sales in the Americas and Asia, Levi's Europe business exceeded expectations with $406.6 million in sales, while StreetAccount estimates were $392 million. In contrast, the Americas sales came in at $757.2 million, below the $789.2 million expected by StreetAccount analysts. Similarly, Levi's saw revenue of $247.1 million in Asia, below the $258 million estimated by StreetAccount.

"Singh stated that China was a hindrance to Levi's business, accounting for only 2% of the company's overall revenue. He attributed this to macroeconomic challenges and execution issues. However, Singh believes that China still has long-term potential and the company has recently changed its leadership in the region."

Sales in the Americas were affected by a cybersecurity breach at one of Levi's largest wholesale customers in Mexico, which slowed shipping times and impacted sales. Additionally, the region is facing some "execution issues," according to Singh.