Reducing prices significantly and decreasing first quarter orders by 25% due to an excessive inventory surge, as reported by Levi's.
Levi's, the iconic denim brand, is bracing for a challenging holiday season as the promotional environment in apparel retail intensifies. This revelation was made during a conference call by Harmit Singh, the company's Chief Financial Officer.
The third quarter results for Levi's showed higher inventory levels, steeper costs, and a tough consumer environment, similar to other retailers and brands. The company experienced a 43% growth in inventory during this period. To clear this excess stock, Levi's has reduced Q1 receipts by 25% and plans to implement heavier markdowns.
The contraction of gross margin by 60 basis points year over year to 56.9% is a concern for Levi's. Net income declined by 11% to $173 million in the third quarter. However, CEO Chip Bergh emphasized the importance of brand integrity and expressed concerns about an overly promotional brand. He assured that Levi's will protect gross margin without being uncompetitive in the marketplace.
Levi's attributed the growth in inventory to three main factors. A third of this growth was due to inflation and a rise from abnormally low inventory levels in 2021. Another third was due to early orders to counter supply chain issues. The final third was due to an increase of goods in transit. No new information about the causes of inventory growth was provided.
In an effort to stay competitive, companies directly competing with Levi's have implemented price reductions recently to reduce their inventories. Gap and American Eagle, both of which have strengthened their denim lines and launched promotional campaigns in the past months aimed at boosting sales, are among them.
Despite the challenges, Levi's digital net revenue grew by 9% and accounted for 21% of net revenue in the third quarter. The company expects inventory levels to normalize by the second quarter of next year.
According to Morgan Stanley analysts, Levi's inventory trouble seems worse than many other retailers. Despite this, Bergh remains optimistic about the future, promising a continued focus on brand integrity and strategic decision-making to navigate the promotional landscape.
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