By Granth Vanaik and Katherine Masters

(Reuters) -Levi Strauss & Co cut its annual profit forecast on Thursday, in a sign that higher costs were weighing on the denim clothing maker’s margins as it struggles with falling sales at its wholesale channels in North America.

Shares of the company fell about 6% in extended trading, as it joined peer American Eagle Outfitters in predicting a weak outlook for consumer spending.

Levi’s net revenues for the second quarter that ended May 28 declined by 9%, its steepest quarterly drop since the first quarter of 2021, according to Refinitiv data.

Chief Executive Officer Chip Bergh said in a post-earnings call that the company would cut prices on roughly six products sold in wholesale channels, such as retailers Macy’s and Nordstrom, in a bid to boost sales among more “price-sensitive” shoppers.

Those items will include core denim products like Levi’s 502 jeans, which can sell across seasons.

Consumers are cutting spending on pricier discretionary items, including apparel, as the cost of living rises in the U.S., and the price reductions would make the company’s rates more comparable with similar items from competitors, according to Bergh.

“We’re competing now for other dollars that are being spent out of the consumer’s wallet, and that moderate income consumer is having to make some tough choices,” he said.

Levi’s now expects adjusted profit to be between $1.10 and $1.20 per share for 2023, compared to its prior forecast of $1.30 to $1.40. Adjusted gross margin is predicted to contract approximately 90 basis points from prior year’s 57.6% compared to the 50 basis points decline previously anticipated.

The annual reported net revenue is expected to increase 1.5% to 2.5% from a year earlier, the apparel maker said, narrowing its previous forecast range of 1.5% to 3%.

Inventory backlog created supply chain challenges in Levi’s U.S. distribution centers, resulting in its inability to fulfill demand, Bergh added.

Revenue in the company’s higher-margin direct-to-consumer channel increased 13% for the second quarter, while its wholesale channel posted a 22% decline as wholesalers tightened their inventories in North America and Europe.

Sales in Americas declined 22%, while those in Europe fell 2%.

Decline in U.S. wholesale revenues is likely the beginning of a trend for the rest of 2023 that will induce Levi’s to increase promotions and cut prices, crimping gross margins and slowing revenue growth as a result, said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.

The apparel maker posted a net loss of $1.6 million for the second quarter, compared with a net income of $49.7 million a year earlier.

(Reporting by Granth Vanaik in Bengaluru and Kate Masters in New York; Editing by Shweta Agarwal and Muralikumar Anantharaman)

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