Levi Strauss & Co. (NYSE:LEVI) has been a resurgent model over the previous variety of years, following a profitable 2019 IPO. Denim is again in a giant approach as Technology Z is embracing the style of the 80’s and 90’s. The corporate leads the denim trade in 18-30 market share, giving them nice potential for the following 5 years as they enhance pockets share. The corporate is executing effectively with an elevated direct to client mannequin, improved e-commerce gross sales and returning capital to shareholders. The inventory has potential for an explosive transfer increased as soon as the sector turns, and those that are affected person will probably be effectively rewarded. We’re persevering with to see first rate earnings from attire manufacturers amid very troublesome 2022 comparisons. Clients proceed to spend and refresh wardrobes though at a slower tempo than in 2022. Diving into the 2nd quarter outcomes simply launched reveals that continued stable efficiency, however the inventory is down 7.5% afterhours on lowered earnings steerage. Whereas further 2023 dangers of scholar mortgage funds and a weakening job market loom, the inventory is buying and selling at a really low a number of that makes it an excellent purchase candidate for long run targeted buyers. Mixed with the current discount in value, LEVI is a purchase the dip candidate beneath $13 with these Q2 outcomes.
Strong Q2 even with slower client spending
Levi put collectively a disappointing second quarter, however not with out its vivid spots. Revenues got here in at $1.34 Billion, down 9% over the prior yr at fixed forex as the corporate moved wholesale gross sales of $100m ahead to Q1. This was because of including a brand new ERP system which might trigger points in implementation. Asia was a constructive standout with 27% development at fixed forex. China is a long run development driver and the reopening of the financial system was a constructive profit right here. Nonetheless, at $262 million which is extra decrease than Europe or North America plus forex headwinds, Asia wasn’t in a position to transfer the needle sufficient. Europe fared effectively in Q2 because it was down 2% at fixed forex, and truly up 1% when eradicating Russian gross sales. Europe is going through even worse inflation than the US and did not have the identical enhance in financial savings charges because the US within the pandemic. LEVI after all left Russia since 2022 Q2 with the corporate pulling out of the area for the reason that battle started. North American gross sales have been down 22% however that was because of Q1 pull ahead as DTC was nonetheless up a stable 6% within the continent. Concern about weak point on this area is probably going the large cause for the after hours drop, because it has led to a small steerage lower from 1.5-3 to 1.5-2.5% income development.
General the gross margin efficiency was spectacular with 58.7% margins doing fairly effectively and up yr over yr. A part of that is the upper DTC gross sales and decrease wholesale gross sales within the quarter. Additionally margins have been boosted by value will increase in some areas and fewer air freight used to maneuver product globally. Beneath you possibly can see margins have flattened out in current quarters and the corporate is now in a position to develop these once more as freight comes again to 2019 ranges. The opposite constructive on margin was affordable promotional exercise – an excellent signal of a powerful demand setting. Inventories are nonetheless elevated at $1.31B however are down $97 million since This fall and will enhance all through 2023. Administration has stock matching the gross sales development charge by the top of 2023, that means 2024 will not have any promotional overhang from gross sales to clear stale product.
Working earnings is crucial factor long run and that has seen stress in 2023 because of increased prices. Working earnings was simply $9.9 million down from $76.2 million final yr. Whereas this drop is important, the pull ahead of gross sales in Q1 explains a few of the weak point right here. Long run earnings will probably be profit from direct to client revenues protecting margins excessive and growing scale permitting SG&A to grow to be a decrease portion of revenues. 2024 is anticipated to have over 10% earnings development with the inventory buying and selling at 10x that may be a discount even in a sector like client discretionary.
As you possibly can see above the inventory has seen development return to low single digits after a powerful pandemic bump. The inventory has stable margins which have the power to maneuver up long run. The inventory is buying and selling at 10.5 instances trailing earnings, a worth inventory degree though the corporate has vital secular development potential. That is beneath the broader retail a number of of 12.1x earnings, regardless of LEVI being a premium model with excessive finish margins. The approaching return of scholar mortgage funds in October 2023 will probably be a headwind, however the inventory is priced for this. The market is simply anticipating 2.5% income development this yr, a degree that ought to be very beatable with solely This fall seeing mortgage headwinds. XRT which is the broad retail ETF is up 7% yr to this point, making a rebound in LEVI inventory seemingly because the steerage now components in a extra pessimistic outlook and the shares have rerated decrease. LEVI administration has been a bit sluggish shopping for again shares with no repurchases in Q2 regardless of $471 million in money readily available. Search for buyers to stress administration on this concern with the inventory buying and selling at the same a number of it did in March 2020 with the world in chaos.
Purchase the dip after Q2 earnings
Levi’s is buying and selling at 10.5x earnings with a premium model, stable margins and has underperformed up to now this yr with a decrease than -10% yr to this point return. At underneath 10x ahead earnings, the inventory is buying and selling simply above it 2020 and 2022 trough multiples even within the current robust market. Administration remains to be assured of a income development and earnings development in 2024 which ought to help the inventory right here. The inventory ought to see reversion to the imply, with a mid-teens a number of for LEVI a good value on this excessive charge setting. A 15x a number of with the decreased EPS steerage of $1.15 for 2023 has the inventory buying and selling again at $17 per share – a degree it held by means of all of 2021 and 2022. As a long run maintain the corporate pays a stable 3.4% yield at this degree with potential to develop it in the long run. The corporate has hit a lull for 2023, however these with a long run outlook could be sensible to contemplate LEVI earlier than the market strikes again into the identify. Margins proceed to carry robust, and the corporate will come out of this era stronger because the core demographics proceed to flock to denim.