Levi Strauss is suffering from IPO growing pains

MIAMI, FL - MAY 31: Levi's clothes are seen on the day President Donald Trump placed tariffs on steel and aluminum imports and European Union responded by warning that it would target iconic American brands such as Levi's on May 31, 2018 in Miami, Florida. European Commission President Jean-Claude Juncker said the European Union was prepared to respond to the U.S. tariffs by targeting imports of Harley-Davidson Inc. motorbikes, Levi Strauss & Co. jeans and bourbon whiskey. (Photo by Joe Raedle/Getty Images)

Strauss has had one of the most successful IPOs of the year, but it’s going through a few growing pains as a newly minted public company.

Levi’s reported Tuesday that its profit during the second quarter of 2019 fell 63% from the same period a year ago.

The clothing company blamed that drop on elevated costs from its March IPO, such as underwriting fees to banks. The company missed Wall Street’s estimates, sending its stock down 6% during after hours trading. Heading into Tuesday, Levi’s stock had climbed 9% over the past three months.

Despite falling short of investors’ profit forecasts, Levi’s sales during its previous quarter grew 5% compared with a year prior, including 9% in Europe and 6% in Asia.

Levi’s makes close to half its sales in Europe and Asia. It believes it has a huge growth opportunity in China, which accounts for 20% of the global apparel market — but only 3% of Levi’s revenue.

“Our performance in China was positive, yet remains far from its potential,” CEO Chip Bergh said on a call with analysts Tuesday. “There’s still a lot of heavy lifting to do.”

Sales in Levi’s men’s business grew 6% during the quarter, while its women’s division increased 16%. Levi’s sees an opportunity to grow with women. Women’s sales made up 29% of Levi’s total revenue last year, up from 20% in 2015.

Levi’s got a lift from Coachella in April, too.

“We again dominated Coachella,” Bergh said. In 2018, Beyoncé wore Levi’s cutoff shorts on stage at Coachella, where her performance set the internet on fire.

Bergh said Levi’s cutoff shorts were the “go-to uniform for festival season” and sales jumped 50% during the quarter.

The 166-year-old company, which invented the blue jean, first went public in 1971, but was taken private in 1985.

The company hoped that going public again would help it fund efforts to expand in the United States and overseas, as well as buy up trendy brands.

“We have significant opportunity to grow by expanding beyond our core business,” the company said in a regulatory filing in February. Levi’s wants to “develop leading positions in categories outside of men’s bottoms.”

Levi’s ability to generate sales through its own stores and website, rather than outside retailers, has won over many skeptical retail investors.

Levi’s direct sales at its more than 800 brick-and-mortar stores and its website — which are more profitable for the company than sales through retailers — now make up 35% of its annual revenue. Last quarter, Levi’s direct sales grew 14% compared with a year earlier.

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