Shares of the iconic apparel company Levi Strauss (NYSE:LEVI) are down over 16% in the past few days after the company experienced a revenue miss in Q2. It seems LEVI has been grappling with increased distribution and marketing costs, leading to an outlook for revenue and earnings below expectations. Yet, there is a very apparent silver lining: the company exceeded earnings per share expectations, prompting management to raise gross margin projections while anticipating revenue growth in the latter half of the year.
The stock is fairly valued, but no clear short-term catalyst exists to increase the share price at the moment. Still, there is much to like about the company, such as the recent 8% increase in its dividend, and long-term investors may want to consider this a possible buy-on-the-dip opportunity.
Levi’s Embraces DTC
Levi Strauss & Co. is a prominent global jeanswear and casual clothing brand. The company has been experiencing solid growth in various categories, largely attributed to the increased popularity of denim.
In 2024, LEVI embraced a multi-year strategic plan called “Project Fuel.” This involves a pivotal shift towards the Direct-to-Consumer (DTC) first model, enhancing its global operations alongside its go-to-market strategies. A key part of this strategy is prioritizing higher-margin products, which is expected to significantly improve the company’s profitability.
Also, the business aims to boost retail productivity in the U.S. through labor allocation, sales effectiveness, and inventory management. Levi’s also aims to consolidate its operations across North and South Europe into a single cluster while maintaining localized teams.
Early results have been mostly positive. The DTC sector, which includes online and store sales, recently reported a 16% increase in 501 jeans sales, a 20% increase in tops, a 40% rise in women’s Western shirts, and a 21% upsurge in loose-fit sales across all channels.
Levi’s Recent Financial Results & Outlook
The company recently published Q2 2024 results. Reported revenue fell slightly short of expectations, hitting $1.44 billion instead of the projected $1.45 billion. Significant growth was observed in the Americas, with net revenues increasing by 17% on a reported basis. In Europe, numbers decreased by 2% on both reported and constant-currency basis. However, it was a sequential improvement over Q1. Asia remained consistent with the previous year on a reported basis but showed a 6% increase on a constant-currency basis. The Direct-to-Consumer (DTC) net revenues increased by 8% on a reported basis and 11% on a constant-currency basis, with a notable 19% growth in e-commerce revenues.
The company’s gross margin increased to 60.5% from the 58.7% recorded in Q2 2023, while net income rose to $18 million, in contrast to a previous net loss of $2 million. This helped earnings per share of $0.16 outperform analysts’ estimates for EPS of $0.11.
The company finished the quarter with cash and cash equivalents of $641 million and total liquidity of $1.4 billion. During the quarter, the company returned around $65 million to its shareholders, a 36% increase from the previous year, in the form of dividends, which amounted to $48 million or $0.12 per share, and stock repurchases of $17 million. Moreover, the company announced an 8% dividend increase, now at $0.13 per share.
Regarding fiscal 2024 guidance, management reaffirmed that reported net revenues are anticipated to rise by 1% to 3% year-over-year. The adjusted diluted EPS is forecasted to be within the $1.17 to $1.27 range, with the midpoint falling below the consensus expectation of $1.27.
What Is the Price Target for LEVI Stock?
Analysts following the company have mostly been constructive about the stock. For instance, Bank of America analyst Christopher Nardone recently raised the price target on the shares from $19 to $22 while maintaining a Hold rating. He noted that direct-to-consumer (DTC) sales show promising growth, with optimism for the second half of the year, tempered by existing market challenges.
Overall, Levi Strauss & Co. is rated a Moderate Buy based on the combined recommendations and price targets assigned by 12 analysts over the past few months. The average price target for LEVI stock is $23.10, representing a potential upside of 19.81% from current levels.
The stock has been on an upward trend and is up 18% year-to-date despite the recent pullback. The shares trade toward the middle of their 52-week price range of $12.15 – $24.34 and appear to be fully valued, with a P/S ratio of 1.25x, slightly above the Apparel Manufacturing industry average of 0.95x. The stock’s technical indicators are mixed. The stock shows ongoing negative price momentum by trading below the 20-day and 50-day moving averages but also looks oversold with an RSI of 24.98.
LEVI in Summary
Levi’s has faced a downturn in share price following the recent revenue miss in Q2. Nonetheless, the company’s strategic transition, via Project Fuel, towards a Direct-to-Consumer (DTC) model looks promising. The company’s diligent management of working capital, focus on higher-margin products, and an 8% dividend increase signal good tidings for long-term investors.
However, the absence of a clear near-term catalyst for share price acceleration and the current valuation suggests cautious optimism. A turn in price momentum may provide a brief window for a buy-on-the-dip opportunity.
