Why Levis Strauss shares fell today

Levi Strauss (LEVITES -7.41%) Shares were down 7% by 11:55 ET this morning after the company reported mixed earnings last night.

Analysts had expected the company to earn $0.31 per share adjusted for one-time items, and Levi beat that estimate, reporting adjusted earnings 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 risen 2%). The good news is that the company improved its gross profit margin by 440 basis points to 60%.

The bad news is that despite this expansion in gross profit margin, Levi’s actual earnings, calculated according to generally accepted accounting principles (GAAP), were just $0.05 per share — far less than the adjusted profit of 0 .33 USD.

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

Is Levi’s stock a buy?

The problem is that that improvement will only be relative. According to management’s latest guidance, Levi Strauss hopes to produce sales growth of “around 1%” only by the end of the year. On the earnings side, the company provided only one other 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 analysts’ forecasts for $1.25 per share in earnings. And when you consider Levi’s straight OVER earnings forecasts by $0.02 per share in Q3, this kind of engagement means Q4 will miss forecasts by as much as $0.05 per share.

In short, Levi’s stock, which costs 16 times even its own adjusted earnings and shows little to no growth, only promised to follow a weak performance in Q3 with a clear miss in Q4.

No wonder investors are upset.