Earnings preview: Costs likely to hurt Levi Strauss (LEVI) in Q3

Denim specialist Levi Strauss & Co. (NYSE: LEVI) is set to release its third-quarter earnings results on Tuesday, October 8, after the market closes. The bottom line is likely to be hurt by higher costs and expenses. The company depends on a group of key wholesale customers for a significant portion of its revenue, which is expected to increase from last year.

The company will incur costs associated with the expansion and performance of its DTC business, including increased investment in new and existing company-operated stores. The company had 78 more company-operated stores at the end of the second quarter of 2019 than it did last year.

The margins will be impacted by significant costs associated with the high fixed-cost structure, a substantial expansion in company-operated stores, and a fall or poor performance of stores. However, the company believes in its ability to grow its retail channel that depends on the availability and cost of real estate.

Investors predict that the company will be benefited from its omnichannel approach and by diversifying to focus on new products. The company is increasing investment in developing its brand and focus on expanding its footprint in the emerging markets, including China. Apart from this, the focus on additional women’s products is likely to support growth in the long term.

Levi Strauss has struggled in the initial public offering due to concerns from weak Q2 performance and short-term growth prospects. The market analysts believe that the company could experience a discounted long-term growth prospects, specific emerging markets ability, and a cultural shift in the future.

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Analysts expect the company to report earnings of $0.28 per share on revenue of $1.44 billion for the third quarter. For the second quarter, Levi Strauss reported weaker-than-expected earnings as it was negatively impacted by the costs associated with the initial public offering in March.

For fiscal 2019, the company expects net revenues to grow at the high end of the mid-single-digit range. The adjusted EBIT margin is expected to be slightly up in the range of 10 basis points. The capital expenditures are anticipated to be $190 million to $200 million. Levi Strauss plans to open around 100 new company-operated stores by the end of the year.

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