This article first appeared on GuruFocus.
Levi Strauss & Co. (LEVI, Financials) shares fell almost 7% in premarket trade on Friday.The denim maker said that new tariffs would affect fourth-quarter margins, even as it raised its full-year profit outlook.
The San Francisco-based garment manufacturer said that higher import costs from places like Bangladesh, Cambodia, and Pakistan, which have high tariffs under current U.S. trade policies, will cut gross margins by 130 basis points.
The estimate shows how changing U.S. trade regulations could affect global supply chains, especially for retailers who do a lot of business in places that don’t have free trade. Levi’s said it got around 70% of their holiday stock early and hiked some prices to make up for the tariff hit.
Investors were more worried about the impact on margins, even while sales were going up and younger buyers were still buying baggy and loose-fitting clothes. Barclays analysts called the outlook cautious, while Morgan Stanley said the guidance meant that the holiday quarter will be weaker since it would be harder to compare to the same quarter last year.
Levi’s stock has gone up approximately 40% this year because they have better control over their inventories and more full-price sales. Its forward price-to-earnings ratio is about 17, which is lower than Ralph Lauren’s 20.6 and higher than American Eagle Outfitters’ 11.4.
The company’s next big test will be how it deals with tariffs throughout the holiday season while keeping prices high and demand strong.
