Levi Strauss' Q3 2025 Earnings Call: Contradictions Emerge on Gross Margins, Tariffs, and Distribution Costs

The above is the analysis of the conflicting points in this earnings call

Date of Call: October 9, 2025

Financials Results

• Revenue: Net revenue up 7% year over year; growth evenly split between DTC and wholesale, with International contributing ~75% of growth and U.S. ~25%.
• EPS: $0.34 adjusted diluted EPS, ahead of expectations.
• Gross Margin: 61.7%, up 110 bps YOY (record), more than offsetting ~80 bps tariff headwinds; ~50 bps FX tailwind.
• Operating Margin: 11.8% adjusted EBIT margin, ahead of expectations.

Guidance:

• Q4 organic revenue +~1%; reported -~3% (53rd week and noncomparable items).
• Q4 gross margin -~100 bps (tariffs ~80 bps); adjusted EBIT margin 12.4%-12.6%; tax rate low-20s; EPS $0.36-$0.38.
• FY25 reported revenue +~3%; organic +~6%; gross margin +100 bps YOY; SG&A ~50% of sales; adjusted EBIT margin 11.4%-11.6%; tax ~23%; EPS $1.27-$1.32.
• Tariffs assumed: 30% China, ~20% RoW; FY gross-margin headwind ~20 bps after mitigation; Q4 EPS impact ~$0.03.

Business Commentary:

* Revenue and Earnings Growth: - Levi Strauss & Co. reported net revenue growth of 7% in Q3, with international markets contributing 75% to this growth. - The growth was driven by strong performance across all segments, including DTC and wholesale channels, as well as in key markets like Asia.

• DTC and Direct-to-Consumer Strategy:
• Global direct-to-consumer sales were up 9%, driven by strong comp growth and higher UPT, AUR, and full-price selling.

• This is attributed to increased focus on DTC-first strategy, improved store productivity, and expansion of the denim lifestyle assortment.

• Gross Margin Expansion:

• Levi Strauss & Co. achieved a record gross margin of 61.7%, expanding 110 basis points compared to the prior year.

• The expansion was driven by a shift towards higher-margin DTC, international, and women's categories, as well as targeted pricing actions and full-price selling.

• International Market Expansion:

• The International segment accelerated growth, with Asia up 12% and double-digit growth in key markets like India, Japan, Korea, and Turkey.
• This was due to expanded DTC presence and strategic investments in markets like Japan and India, where the brand is gaining traction.

Sentiment Analysis:

• Management reported results exceeding expectations and raised full-year revenue and EPS guidance. Q3 was the fourth consecutive quarter of high single-digit organic growth; gross margin hit a record 61.7% (+110 bps YOY). DTC grew 9% and wholesale 5%; U.S. up 3% and International up 9%. CFO emphasized strong momentum and prudent Q4 guidance despite tariff headwinds.

Q&A:

• Question from Laurent Vasilescu (BNP Paribas Exane): What are you seeing in Europe (promotionality, prebooks), and can you unpack Q4 gross margin down 100 bps and 53rd week impacts?
  Response: Europe grew 3% with acceleration exiting Q3; DTC +4%, wholesale +2%; spring prebooks up mid‑single digits; OM +80 bps. Q4 GM down mainly from tariffs and lapping the 53rd week; underlying trends remain solid.

• Question from Matthew Boss (JPMorgan): Describe momentum entering holiday, denim-category trends, and any Sept/Oct demand changes.
  Response: No change in demand; guidance is prudently conservative. Denim is accelerating globally, Levi’s is gaining share, and unit growth plus head‑to‑toe assortment supports a strong holiday setup.

• Question from Irwin Boruchow (Wells Fargo Securities): Update on SG&A/distribution costs and timing; path to 15% EBIT margin?
  Response: Distribution costs (~7% of sales) elevated due to e‑comm reclass and parallel DCs, which should wind down by end of Q1’26. Path to ~15% EBIT from ~200 bps gross‑margin expansion and ~200 bps SG&A leverage, partly offset by ~50 bps ad reinvestment.

• Question from Paul Kearney (Barclays): What drove wholesale growth—new doors vs. like-for-like—and how are retailer inventories into holiday?
  Response: Growth is primarily from existing partners on fashion fits, women’s, and lifestyle; added Western wear doors (Boot Barn, Cavender’s). Wholesale up 5% in Q3 and expected slightly positive for the year.

• Question from Oliver Chen (TD Cowen): Americas outlook and wholesale sustainability; how do partnerships align with SKU rationalization?
  Response: U.S. DTC remains strong; U.S. wholesale expected down in Q4 on tough compare/53rd week; long‑term both channels healthy. SKU count down ~15% YOY; 40% of SKUs globally common (vs <10% two years ago); SKU productivity up ~20%.

• Question from Oliver Chen (TD Cowen): Any gross-margin comparisons to consider looking into next year?
  Response: Tailwinds include targeted pricing, mix shift (DTC/International/Women’s), higher full‑price sell‑through, and product‑cost benefits (SKU simplification, cotton); tariffs remain the key headwind.

• Question from Jay Sole (UBS): Was Q3 pricing in response to tariffs, any demand resistance, and plans for Q4?
  Response: Modest U.S. sell‑in price increases in Q3 produced no demand impact. Focus remains on innovation-led pricing and lower promotions; Blue Tab premium line is performing; broader global pricing to be detailed with FY26 guidance.

• Question from Tracy Kogan (Citi): Did consumers show resistance to higher prices, and how do U.S. wholesale sell-ins compare to sell-outs?
  Response: No pullback from customers or consumers; sell‑throughs are broadly consistent with sell‑ins, supporting a strong FY25 finish and momentum into FY26.