While you’re going to see some ugliness, there’s good news here: Levi Strauss (NYSE:LEVI) can eventually recover. Nevertheless, LEVI stock could fall more before said recovery.
Every investment idea ultimately has a payoff in mind. Do you buy it because it will rise in value, hold it for the yield that it generates, or sell it because the cons outweigh the pros? For Levi Strauss, the answer is somewhat complicated. In the long run, I’m optimistic about the discretionary consumer giant, which specializes in jeans and other apparel. However, in the meantime, I believe LEVI stock is a Hold. Thus, I’m neutral on the stock.
Let’s break it down simply. The best analogy for LEVI stock that I can think of is the concept of counting cards in a Blackjack game. I heard in a movie that the house commands a 1.5% advantage. Let’s go with it. Essentially, the point of counting cards is to determine probabilities. When the phase in the game favors the house, you bet small. When it favors you, you bet big.
And that’s all I’m saying regarding LEVI stock. Yes, I believe in the underlying brand advantage. However, the phase in the market arguably doesn’t favor the apparel stalwart. When it does, we’ll have a different discussion.
LEVI Stock Tanks Following Disappointing Guidance
Let’s get into the bad news first and explain why LEVI stock has been in the spotlight. As TipRanks reporter Vince Condarcuri mentioned, shares tumbled badly after Levi Strauss revealed its results for the second quarter of Fiscal Year 2024. However, the actual print wasn’t necessarily awful. Rather, the guidance disappointed, along with a revenue miss.
As Condarcuri stated, “Adjusted earnings per share came in at $0.16, which beat analysts’ consensus estimate of $0.11 per LEVI share.” Further, he said, “Sales increased 7.5% year-over-year, with revenue hitting $1.44 billion. However, this was lower than the $1.451 billion that analysts were looking for and likely led to the share price’s collapse.”
In my opinion, the biggest contributor to the erosion of LEVI stock was the guidance. Condarcuri wrote, “management now expects revenue growth and adjusted earnings per share for FY 2024 to be in the ranges of 1% to 3% and $1.17 to $1.27, respectively. For reference, analysts were expecting 2.7% in revenue growth along with an adjusted EPS of $1.27.”
While the hit against expectations doesn’t seem like much, consider that the underlying business of LEVI stock has been around for a while. Public records show that the business was founded in 1853. It features a market capitalization of over $9 billion. It’s no longer a hot growth player, so missing guidance by a percentage or two really matters.
What’s more, the imbalanced economic recovery should help LEVI stock. Though many households are struggling with high inflation and elevated borrowing costs, the labor market has been robust. Yes, many nuances exist regarding the latter point. However, here’s the point: your average worker may not have enough to afford big homes in California, but he or she certainly can afford quality apparel from Levi Strauss.
Unfortunately, what the latest financial results suggest is that the company is struggling against a relatively favorable economic backdrop. So, LEVI stock has struggled.
Levi’s Has a Brand Advantage, But Not Right Now
Still, the big drop in LEVI stock raises the obvious question: isn’t the stock now offered at an attractive multiple? If Levi Strauss commands a strong brand advantage, shouldn’t its fall of 16.2% last week be a reason to buy?
Ordinarily, the Blackjack player – using the above analogy – might believe that the advantage has swung away from the house. Right now, LEVI stock trades at 1.26x trailing-year revenue. That’s a relative discount to the multiple seen during the three months ended May 31, when it shot up to 1.59x. However, between Fiscal Q2 2023 and Q2 2024, the average multiple sat around 1.09x.
In other words, the market readily supported LEVI stock around 1x sales, give or take a little. Based on current (disclosed) realities, it completely rejected 1.59x. Chances are, it’s going to reject 1.26x as well because it’s still high relative to levels seen in the past 52 weeks.
As for the brand advantage, there’s no question that Levi Strauss is a premier name in the consumer discretionary space. Honestly, it’s a living piece of American history. Unfortunately, even here, weaknesses exist.
Consumer research data shows that in the 12 months ending Q1 2024, Levi Strauss carried a market share of 5.46%. In the 12 months ending Q2 2024, this market share declined ever so slightly to 5.3%. It’s a small difference, yes, but the time frame is equally short. Apparently, consumers are struggling to pay the premium that Levi Strauss products command.
Over time, Levi’s should bounce back – that’s the confidence that a brand covering centuries enjoys. However, the speculator’s hand is currently relatively weak compared to the house advantage.
Is Levi Strauss Stock a Buy, According to Analysts?
Turning to Wall Street, LEVI stock has a Moderate Buy consensus rating based on six Buys, six Holds, and zero Sell ratings. The average LEVI stock price target is $23.10, implying 19.81% upside potential.
The Takeaway: Wait for Your Hand at LEVI Stock
Undeniably, Levi Strauss represents one of the biggest and most recognizable brands in the broader consumer discretionary space. Over the long run, its fortunes should change for the better. For now, however, investors should consider waiting. Fundamentally, the company is losing industry share, which means that the market may not be able to support the relatively high valuation of LEVI stock. I believe you should wait for all the bad news to be baked in and then reconsider the narrative.
