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Levi Strauss (LEVI) is trading lower after a mixed fiscal Q3 report, as softer direct-to-consumer (DTC) trends and a sizable tariff-refund benefit overshadowed an otherwise solid quarter. Adjusted EPS of $0.48 exceeded expectations, while revenue increased 4% yr/yr to $1.61 bln, slightly below expectations. However, $0.11 of EPS came from tariff refunds, making the underlying earnings performance less impressive than the headline beat suggests.

• DTC was the main disappointment, with organic growth slowing to just 2% from 8% in Q2, while comparable sales were flat. Softer traffic in the U.S. and Europe weighed on results, contrasting with continued strength in wholesale, which grew 6%.
• Management acknowledged that its back-to-school campaign missed a shift in consumer preferences, focusing on loose-fitting denim as demand increasingly favored low-rise styles. Levi's has since adjusted its marketing and merchandising, with U.S. DTC returning to positive growth in September. European trends also improved as temperatures cooled, and management expects global DTC growth to return to mid-single digits in Q4.
• Margins improved considerably, although tariff refunds provided much of the lift. Gross margin expanded 450 bps to 66.2%, with refunds contributing 370 bps after reinvestments. Excluding this benefit, gross margin still expanded 80 bps, helped by lower product costs, although elevated distribution expenses remained a headwind.
• The broader business remained healthy, with international revenue growing 8% organically, led by double-digit growth in Asia, including a 13% increase in China. Tops also grew 7%, supporting Levi's efforts to expand beyond denim bottoms and build a more diversified lifestyle business.

Briefing.com Analyst Insight

The DTC slowdown is particularly important given how central the channel is to Levi's strategy of driving higher margins and more consistent growth. While the company raised FY26 adjusted EPS guidance to $1.54-1.56 from $1.46-1.52, much of that increase reflects the net tariff benefit rather than a comparable improvement in underlying earnings expectations. Still, strength in wholesale and international markets suggests the weakness is more of an execution issue than a broader demand problem. With DTC trends already improving in September, the focus now shifts to whether Levi's can sustain that recovery through fiscal Q4 and into the broader holiday shopping season.