Levi Strauss & Co. warned of a margin squeeze this year, sending its shares down 16% in morning trade as it would have to give higher discounts than anticipated while simultaneously coping with increasing costs.

The business said its full-year gross margin would be down roughly 50 basis points from 57.5% a year earlier despite exceeding quarterly results projections and maintaining its yearly revenue and profit prediction.

Prior to this, Levi had projected margins to increase by 20 to 30 basis points.

Levi has been unable to safeguard its margins from rising freight, labor, and cotton expenses as well as ongoing supply chain issues, despite several price increases on its products.

Levi has also been compelled to follow its competitors in stepping up discounts and promotions to move products off the shelves, further reducing margins. Its adjusted gross margin for the first quarter dropped by 360 basis points to 55.8%.

“Deliberate actions that we took to reduce inventories in the U.S., coupled with more promotional environment resulted in greater-than-expected pressure on gross margin,” said Chief Financial and Growth Officer Harmit Singh.

Levi’s promotions increased by 1,500 basis points in December, according to UBS analysts.

Levi has had trouble luring budget-conscious customers despite increasing promotions, particularly for its Signature and Denizen brands, which are particularly feeling the strain.

“The lower-end consumer is making hard choices and either trading down or just not buying denim,” Chief Executive Officer Chip Bergh said on a post-earnings call.

Levi exceeded expectations with its adjusted profit of 34 cents per share and revenue of $1.69 billion.

The cautious perspective, however, is “still not necessarily appreciated by the street,” according to Jessica Ramirez, senior analyst at Jane Hali and Associates.

(Adapted from FashionNerwork.com)