Shares of Levi Strauss & Co (LEVI) plummeted 6.81% in pre-market trading on Friday, following the company's third-quarter earnings report released after the market close on Thursday. Despite beating analyst expectations, the stock's sharp decline reflects investor concerns about the impact of tariffs on the company's future performance.
The denim maker reported fiscal Q3 adjusted earnings of $0.34 per share, surpassing the analyst consensus estimate of $0.31. Net revenue for the quarter rose to $1.54 billion, beating expectations of $1.50 billion. Encouraged by strong demand for wide-leg denim bottoms in Europe and the Americas, Levi Strauss raised its full-year organic net revenue growth forecast to about 6%, up from its previous target of 4.5% to 5.5%.
However, the positive results were overshadowed by tariff concerns. The company's outlook assumes U.S. tariffs will remain at 30% for China and 20% for other countries through year-end, which could pressure margins. CFO Harmit Singh noted that the company expects a 70 basis point impact to annual gross margin before tariff mitigation, compared to the previously estimated 50 basis points. Despite efforts to mitigate the impact, including securing about 70% of its holiday inventory ahead of schedule and raising prices modestly, these measures will not fully offset the pressure. The fourth-quarter gross margin is expected to take a 130-basis-point hit due to tariffs.
Additionally, while Levi Strauss raised its full-year adjusted EPS guidance to $1.27-$1.32, the midpoint of this range fell short of the analyst consensus of $1.31. This, combined with the stock's significant year-to-date gain of nearly 42% prior to the earnings release, may have set high expectations that even strong results couldn't satisfy. The pre-market decline suggests that investors are reassessing the stock's valuation in light of broader economic uncertainties and the challenging retail environment.
