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Levi Strauss (LEVI -8%) is sharply lower despite reporting modest EPS upside with its Q3 (Aug) results last night. However, the denim icon posted revenue growth of just 0.4% yr/yr to $1.52 bln, which was a bit light. Also, it lowered its FY24 revenue outlook to +1% from +1-3% and it said FY24 adjusted EPS is now looking to come in at the middle of prior guidance, which is a bit below analyst expectations.

• Besides earnings, the other big news was LEVI announcing it will conduct a review of strategic alternatives for its Dockers brand, which may include a sale. Dockers is more of a khaki brand and it has been struggling. In Q3, sales of Dockers decreased -15% r/yr and -13% CC. Recall that LEVI also recently announced plans to exit its Denizen fashion line. It's clear that the new CEO, Michelle Gass, wants to focus on its namesake and higher margin Levi's brand and its Beyond Yoga athletic brand.
• Turning to the Q3 results, there were some good things. The Levi's brand was up 5% globally, which was the best quarterly growth for Levi's in two years. The company says it's seeing meaningful, positive momentum of the Levi's brand globally. And it believes that will accelerate in Q4 (Nov), fueled by its new Beyoncé campaign and product innovation.
• Its Levi's brand continues to gain market share as it's the #1 women's denim brand in the US. Its Levi's women's business remains robust, growing 11%, reflecting double-digit growth in both bottoms and tops. It also is maintaining its leadership in the men's US jeans category, where it holds a dominant position. Levi's market share for men's is twice that of its closest competitor. Levi's also continues to gain share among high income consumers supported by its efforts to elevate the brand.
• Also, LEVI is focusing much more on becoming a DTC (Direct-to-Consumer) brand and DTC sales were up 12% in Q3. Other positives were the US continuing to see positive growth and Europe (its highest margin geography) returned to growth. Margins were another bright spot as gross margin jumped to a record 60.0% from 55.6%, primarily driven by lower product costs, the continued shift to DTC and higher full price sales. That caused adjusted EBIT margin to increase to 11.6% from 9.1% last year.
• The problem areas were its Dockers brand and its Levi's Signature line declined in the quarter. However, LEVI says the latter was largely a timing issue and it expects it to return to growth in Q4. China and Mexico wholesale were also problem areas, and is partly why LEVI lowered its outlook. As a result of these headwinds, LEVI is expecting mid-single digit revenue growth for Q4.

Overall, this quarter was a letdown for investors. There was a lot of excitement around the new CEO hire in January 2024. We suspect that investors are a bit frustrated that the turnaround is taking longer than expected. Selling the struggling Dockers brand seems like a good idea. With fewer people working in offices, khakis seem to be generating less demand. It's clear that the company really wants to pare down its brands and focus on Levi's and Beyond Yoga. Also, the company is making a push to elevate the Levi's brand and focus on full price sales. Levi's is also excited about its recently launched ad campaign with Beyoncé.