Why Levis Strauss Stock Dropped Today

Levi Strauss (NYSE: LEVI) stock tumbled 7% through 11:55 a.m. ET this morning after the company reported mixed earnings last night.

Analysts expected the company to earn $0.31 per share, adjusted for one-time items, and Levi beat that guess, reporting an adjusted profit of $0.33 per share in the fiscal third quarter, ended Aug. 25. However, the Street also wanted to see $1.55 billion in quarterly sales, and the most Levi could muster was $1.52 billion.

Levi Strauss' Q3 earnings

In fact, the company failed to grow its revenue at all in Q3 (although in "constant currency" management says sales should have grown 2%). The good news is the company did improve its gross profit margin by 440 basis points to 60%.

The bad news is that despite this gross profit margin expansion, Levi's actual earnings as calculated according to generally accepted accounting principles (GAAP) were a mere $0.05 per share -- much less than its $0.33 adjusted profit.

Despite flat sales and weak profits, CEO Michelle Gass insisted "the underlying fundamentals of our business are getting stronger," while CFO Harmit Singh said Levi will "accelerate revenue and profitability" in Q4.

Is Levi stock a buy?

Problem is, that improvement will be only relative. According to management's latest guidance, Levi Strauss only hopes to produce "approximately 1%" sales growth through the end of the year. As for earnings, the company gave only another adjusted figure -- $1.17 to $1.27 per share in pro forma profit.

At the midpoint of that range ($1.22 per share), this would still miss analyst forecasts for $1.25 per share in earnings. And when you consider that Levi's just outperformed earnings forecasts by $0.02 per share in Q3, this kind of implies that Q4 is going to miss forecasts by as much as $0.05 per share.

Long story short, Levi's stock, which costs 16 times even its own adjusted earnings and is showing little or no growth, just promised to follow up a weak Q3 performance with a clear miss in Q4.

No wonder investors are upset.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.