Levi Strauss & Co. store at the Woodbury Common Premium Outlets in Central Valley, New York
The Levi Strauss & Co. label is seen on clothes in a store at the Woodbury Common Premium Outlets in Central Valley, New York, U.S., February 15, 2022. Reuters

Levi Strauss & Co is expected to report a fall in quarterly sales for the first time in six quarters, as penny-pinched shoppers shift away from pricier jeans to more formal clothing and non-denim styles. "While macro pressures have not impacted all apparel categories equally, denim has been a category feeling the brunt of a change in consumer spending patterns," Citigroup analysts said in a note.

Coresight Research analyst Sunny Zheng expects the U.S. jeans market to decline slightly this year. Euromonitor also estimates the market will grow a modest 3.8% between 2022 and 2027, after a 12.5% expansion over the last five years. Clothing retailers American Eagle Outfitters and Abercrombie and Fitch also recently noted that shoppers were buying more cargo pants and corduroys as they refresh their wardrobes with more non-denim bottoms.

THE CONTEXT

With the United States on the edge of a recession, shoppers, pressured by high inflation, are spending less on discretionary items like clothing, with the denim category, in particular, set for a slowdown following a demand surge in 2021.

A pair of Levi 501 Stretch Skinny Women's Jeans currently costs $108. It was priced at $98 in Nov. 2019, according to Coresight's Zheng.

While Levi's benefited from the need for people to renew their wardrobe post lockdown, "the strength in terms of the customer needing to go back to denim and replenish will be much lower now," Jane Hali & Associates analyst Jessica Ramirez said.

Single- and double-pleat trousers are growing in popularity, and consumers are preferring more wider leg and trouser-like silhouettes, said Halie LeSavage, fashion commerce editor at Harper's Bazaar.

Analysts also expect Levi's gross margins to come under pressure from higher inventory levels, increased promotions and a stronger dollar, even as its jeans became more expensive.

THE FUNDAMENTALS

** Levi Strauss is expected to report fourth-quarter sales of $1.57 billion, a 6.6% drop from a year earlier, according to analysts polled by Refinitiv

** Q4 profit per share is expected to come in at 29 cents

** The jeans maker is set to report its Q4 earnings on Jan. 25 after markets close

WALL STREET SENTIMENT

** Shares of Levi Strauss have declined more than 21% in the last 12 months

** The current average rating of 13 analysts on Levi's stock is "buy", with seven analysts rating it "buy" or higher - Refinitiv

** The median price target is $18.50, with at least four brokerages trimming their PTs since the beginning of Jan.