Tariff refunds of roughly $80 million lifted Levi Strauss & Co.'s Q3 profitability, contributing 370 basis points of a 450-basis-point gross margin expansion to 66.2%. Net income still fell nearly 23% to about $169 million, the company told analysts on Wednesday.

The refunds arrived in a quarter that exposed weakness in the denim maker's direct-to-consumer push. DTC net revenues rose just 2% year over year, with comparable sales flat. The quarter coincided with Levi's first net revenue miss in two years, according to Wells Fargo.

Wholesale delivered instead, growing 6% with gains in all segments and particular strength in Europe and Asia. Overall net revenues rose 4% to $1.6 billion.

How is Levi's spending the tariff windfall?

The company is plowing roughly three-quarters of the refunds back into the business, Chief Financial Officer Harmit Singh said. The money funds what he described as "incremental marketing to drive demand, enhanced supply chain capabilities to improve competitiveness over time and sharper value for consumers during key holiday promotional moments."

About $25 million was spent during Q3, and about $35 million is slated for Q4. Singh said the $80 million received in Q3 represented almost all of what the company expects in total.

"Our view is, the tariff refunds were timely," Singh said. U.S. distribution costs remain higher than expected, he added.

The spending comes as research cited by Retail Dive shows DTC margins often trail wholesale margins because brands must shoulder marketing costs themselves; with wholesale, retail partners absorb much of that expense and effort.

What went wrong with back-to-school?

Traffic and demand for back-to-school came in weaker than expected, in part because Levi's over-emphasized loose fits just as U.S. consumers turned to low-rise ones, CEO Michelle Gass said.

"The good news is the team got after it very quickly, and we sharpened our focus," she said. Loose styles remain "an important business" and "big volume driver," she added.

Europe's brutally hot summer also depressed DTC sales. Gass said trends reversed with the weather: "When the temperature started cooling and weather moderated, we saw the trends come back."

She pointed to a rebound already underway. "In Europe right now, DTC quarter-to-date, the trends are very robust, very positive and robust. So you should feel good about that," Gass said. "The other thing worth mentioning in Europe is that we had an incredible wholesale business. So suffice it to say, like I said, the brand is very healthy there."

Levi's DTC sales are already recovering since the Q3 slump, aided by a concerted marketing effort. The question for Q4 is whether the remaining $35 million in refund-funded investment can convert that recovery into holiday-season demand.