A tale of two shoppers

As it turns out, denim really never goes out of style.

Yesterday, Levi Strauss reported stronger-than-expected second-quarter earnings as resilient consumer demand continued to fuel growth. Its pivot into a direct-to-consumer business is going well: DTC sales rose 11%, with more than half of the company’s revenue now coming from its own stores and website.

The clothing giant is also doubling down on premium denim: Sales of its high-end Blue Tab collection (which can retail for upward of $300 per pair of jeans) jumped 40% this quarter. While it remains a small portion of Levi Strauss’ overall revenue mix for now, CEO Michelle Gass said premium denim could become a $200 million business.

Despite the strong quarter and raising guidance, Levi’s failed to meet investors’ high expectations. Shares fell over 5% yesterday and another 2.22% today.

A tougher sell

Not every company is finding shoppers quite so willing to open their wallets.

PepsiCo painted a much weaker picture. While the consumer goods company beat revenue estimates and reiterated its full-year guidance, it missed earnings expectations. More importantly, weakness persisted across its two main businesses in North America, where food volumes were flat and beverage volumes fell 4%, extending a multiyear slowdown as consumers continue pushing back against higher prices.

“I think the consumer is worse than what we had anticipated, and it’s driven mainly by gas prices,” CEO Ramon Laguarta said on the earnings call.

Unlike Levi’s, which is finding success by selling more premium products, PepsiCo is trying to win back more price-sensitive shoppers. The company cut prices by as much as 15% on products including Lay’s, Doritos, Tostitos, and Cheetos earlier this year, but the latest results suggest the strategy has yet to meaningfully revive demand. Shares sank 3.25% today.

Setting the stage

Levi’s and PepsiCo are among the first companies to report this earnings season, offering an early read on the health of the US consumer. Their businesses certainly paint a picture of how things are going in our K-shaped economy: Levi Strauss has shoppers buying $300 jeans, while PepsiCo is still struggling to get consumers to buy a bag of Doritos.

More broadly, analysts expect S&P 500 companies to grow earnings by roughly 24% this quarter—down from about 30% last quarter—with profits on track to top $700 billion, per LSEG. Much of that growth is expected to come from tech and financials, which together are projected to generate roughly $456 billion in profits. While banks are benefiting from record dealmaking, AI earnings growth is expected to moderate after several quarters of blockbuster results fueled by massive infrastructure spending.

That puts even more pressure on AI leaders to deliver: Nvidia and Micron alone are expected to account for roughly 40% of the S&P 500’s earnings growth this quarter. Maybe they could take a page out of Levi Strauss’ playbook and roll out some high-end bell bottom jeans.—SY