Levi Strauss (NYSE: LEVI) stock is down 16% as it reveals entirely reasonable profits - even if a little below last reporting periods. That's not what has caused the stock slide, rather the build up of inventory has. This is a significant problem for a premium retailer for there's no really obvious way out of it. This is something that will require delicate management and even that may or may not be successful.
We saw this with Hennes & Mauritz, H&M, a couple of years back. A significant build up of stock that had been paid for but which couldn't be shifted at full price through the stores. Once this became known it rather crashed H&M shares simply because, as above, there's no easy way out. It's not the specific problem of having paid for the stock that now sits in the warehouse which is the problem. The price difference between factory gate and retail is so large that carrying excess stock in that purely financial sense isn't a grand problem.
Levi Strauss stock price from
NASDAQThe problem is what does the retailer do next? One answer is to discount the stock and shift it at lower prices. This kills margins of course - that's what all the talk of problems over “
promotions” is about. But even that's not the real problem here.
It's a usual assumption that a
retailer like Levi Strauss is - roughly, as best it can - efficiently exploiting its market segment. Roughly the number of people who will buy the brand do so. So, if their desires, their demand, is now met by highly discounted prices to shift the stock then this substitutes for the full price stock they're now not going to buy. So promotions do double damage, both lower margins on what does sell and also zero margins on what now doesn't happen.
Add to this the whole point of a premium brand like Levi's jeans. Wearing them is a statement of being the sort of person who pays well to wear Levi's. Primark and many others will sell a pair of jeans for $10 - the Levi's label signifies the ability and taste to pay $50 to $100 instead. But if Levi's are now discounted to $20 or whatever to shift the excess stock then that brand is damaged. Shifting stock by significantly discounting prices can permanently damage the entire brand and premium pricing proposition.
It took H&M some years to finagle its way out of this problem. The 16% fall in LEVI is symbol of worries that it might take that long here.
Levi Strauss stock price from NASDAQ