Levi Strauss‘s profits are growing more than Wall Street expected despite higher costs from tariffs, thanks to targeted price increases and a shift away from wholesalers, the company said Thursday as it reported fiscal third quarter results. 

During the quarter, Levi’s gross margin grew 1.1 percentage points to 61.7%, up from 60.6% in the year-ago period and better than the 60.7% analysts had expected, according to StreetAccount. 

In an interview with CNBC, CEO Michelle Gass said the company has started to raise the price of some of its jeans and clothes and will hike more prices in the U.S. and other markets next year.

“As we’ve been taking these targeted actions, we’ve not seen an impact to demand. We’ll of course, stay very, very close to that but … we’re taking a surgical, thoughtful approach on any pricing,” said Gass. “We know that we’re a brand that is known for great quality and value. We don’t take that for granted. We know we have to earn that every day.” 

Finance chief Harmit Singh added demand is “really strong” and most of the company’s revenue growth is not coming from price increases.

Price hikes are helping Levi’s margins, but the company is also discounting less and selling more through its own website and stores instead of wholesalers, which comes at a higher margin. 

The denim maker said its strong results led it to raise its full-year outlook, but added it’s still taking a “prudent” and “conservative” look at the rest of the year as it navigates ongoing macroeconomic volatility, Singh said. 

Here’s how Levi’s performed during the quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Earnings per share: 34 cents adjusted vs. 31 cents expected
• Revenue: $1.54 billion vs. $1.50 billion expected

Though Levi’s posted better-than-expected results, shares dropped more than 6% in extended trading. Its stock had climbed about 42% this year through Thursday’s close.

The company’s reported net income for the three-month period that ended Aug. 31 was $218 million, or 55 cents per share, compared with $20.7 million, or 5 cents per share, a year earlier. Excluding one-time items related to impairment and restructuring charges, among other expenses, Levi posted adjusted earnings of 34 cents per share. 

Sales rose to $1.54 billion, up 7% from $1.44 billion a year earlier.

Levi’s is now expecting its full year sales to rise 3%, up from its prior guidance of between 1% and 2% growth, far exceeding expectations of a 2.9% decline, according to LSEG. 

It’s expecting its full year adjusted earnings per share to be between $1.27 and $1.32, up from a prior range of between $1.25 and $1.30. At the high end, the outlook is in line with Wall Street estimates of $1.31 per share, according to LSEG. 

The jeans company said it’s expecting its operating margin to be between 11.4% and 11.6%, which is also in line with expectations of 11.6%, according to StreetAccount. It’s now expecting its gross margin to rise by 1 percentage point, which is the outlook Levi’s delivered earlier this year before it factored tariffs into its forecast. At the time, its guidance didn’t reflect any tariff impact. The following quarter, it cut its gross margin guidance by 0.2 percentage points because of the new duties. 

Now, Levi’s is returning to that original outlook, as long as U.S. tariffs on imports from China remain at 30% and rest-of-world duties stay at 20% for the remainder of the year. 

Under the direction of Gass, Levi’s has been working to grow its direct sales, expand beyond jeans and win over more female shoppers – strategies that helped the business grow both its top and bottom lines. 

During the quarter, direct-to-consumer revenue, or sales from Levi’s website and stores, grew 11%, driven by strength in the U.S. market, while women’s was up 9%. Levi’s is benefiting from strong momentum in the denim category, but the company is growing its assortment outside of just jeans, which gives it a hedge if fashion trends change.

Other types of clothes beyond denim bottoms, including tops, now make up nearly 40% of the business. The company’s efforts to sell more tops is also resonating with consumers, as that category was up 9% during the quarter.

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Levi Strauss raised its full-year guidance Thursday and said it’s working to absorb some of the costs it’s facing from higher tariffs, but that could change as President Donald Trump’s trade policy evolves. 

The denim maker doesn’t disclose its key manufacturing hubs, but much of its supply comes from Southeast Asia. Many countries in the region have been targeted by Trump’s so-called reciprocal tariff plan. 

Levi’s is currently expecting its full-year adjusted earnings to be between $1.25 and $1.30 per share, up from a prior forecast of between $1.20 and $1.25 and better than the $1.23 analysts had expected, according to LSEG. However, that forecast only assumes a 30% tariff on China, where Levi’s manufactures about 1% of its products, and a 10% tariff on the rest of the world, which could change as Trump negotiates trade deals with key manufacturing regions. 

In an interview with CNBC, Levi’s finance chief, Harmit Singh, said most of Levi’s sourcing is from countries like Pakistan, Bangladesh and Indonesia. Trump in recent days threatened Bangladesh and Indonesia with duties of more than 30%. It’s unclear how much of Levi’s products are sourced from those regions, and 60% of Levi’s business is outside of the U.S. 

For now, Levi’s said it’s planning to absorb what it can. As policy currently stands, it anticipates tariffs will only impact the business by $25 million to $30 million for the rest of the year, or 2 to 3 cents on earnings per share. 

“We are doing our part. We are absorbing some of the costs. What helps is that our business is so strong,” said CEO Michelle Gass. “We have been pulling back on promotions anyway, that’s leading to more full-price selling, and some of our new innovation, our new fits, we’re pricing at a premium, and they’re buying. So all of those things help us navigate this time of having the tariff headwind.” 

When asked by an analyst if Levi’s should have raised its guidance during such an uncertain time for the economy, Singh said the company expects its consumer to keep spending.

“Given that we’ve had three quarters of high single-digit growth, we see the momentum continuing, because the consumer … is generally resilient and a continued fan of the brand,” he said.

Beyond tariffs, Levi’s delivered fiscal second-quarter earnings that beat expectations on the top and bottom lines. Here’s how the jeans company did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Earnings per share: 22 cents adjusted vs. 13 cents expected
• Revenue: $1.45 billion vs. $1.37 billion expected

Levi’s shares rose about 8% in extended trading.

The company’s reported net income for the three-month period that ended June 1 was $67 million, or 17 cents per share, compared with $18 million, or 4 cents per share, a year earlier. Excluding one-time charges related to restructuring and impairment expenses, among other costs, Levi posted earnings per share of 22 cents. 

Sales rose to $1.45 billion, up about 6% from $1.36 billion a year earlier. 

Given strong demand, Levi’s hiked its full-year revenue guidance and now expects sales to rise between 1% and 2%, up from previous guidance of down 1% to 2%. That range is well ahead of expectations. Analysts had anticipated revenue to decline by 5.2%, according to LSEG. 

Levi’s did cut its gross margin guidance by 0.2 percentage point, and now expects gross margin to grow by 0.8 percentage point because of the impact tariffs are having on profits. 

For its current quarter, Levi expects sales to be up between 3% and 4%, well ahead of expectations of a 4.6% decline, according to LSEG. It projects earnings per share to be between 28 cents and 30 cents, roughly in line with expectations of 30 cents, according to LSEG.

Since Gass took over as the retailer’s CEO, she’s worked to cut off underperforming parts of the business. In May, the company announced it would sell its Dockers brand to Authentic Brands Group.

She’s also worked to drive direct sales to consumers, focused on e-commerce and stores rather than wholesale partners like Macy’s and Kohl’s, because it comes with higher margins and gives the company better insights into its customers. 

“We are operating with greater rigor and discipline and really infusing the entire company with a [direct-to-consumer] first mindset,” said Gass on a call with analysts. “Our owned and operated channels represent over half of our business, and they continue to deliver consistent, healthy comps alongside improving profitability.”

While e-commerce comes with better data insights into shoppers, it can be a costly and complex channel to operate and it’s tough for some companies to make money from digital sales. That was true for Levi’s too, but online sales are now profitable because it’s able to leverage its costs better through scale, Singh told analysts.

During the quarter, Levi’s gross margin reached what it called a record 62.6%, driven by fewer markdowns, lower product costs and 11% growth in direct sales. 

Levi’s, which has long catered to a male shopper, is also trying to win over female consumers and expand from a denim company to one known for a wide range of apparel. During the quarter, it saw wins from those efforts, with revenue for women’s apparel up 14% and sales of tops up 16%. Levi’s women’s category is the retailer’s “highest gross margin business,” said Singh.

“The consumer is definitely responding and voting for this direction. So as we look ahead, we’re confident,” Gass told CNBC. “We know that there’s uncertainty in the world right now, but the consumer is proving quite resilient for Levi’s.” 

At the core of Levi’s strategy is ensuring it’s still relevant with consumers. A recent partnership with Beyonce has helped the company stay top of mind with shoppers, especially as the singer continues her Cowboy Carter tour.

In May, the company launched a limited-edition drop of Beyonce x Levi’s T-shirts, the first product to come from the collaboration.

It also started a partnership with Nike, which went live Thursday on Levi’s website and some of its stores. The collection includes a denim-inspired take on the Air Max 95.

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