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Why Levi Strauss Stock Dropped 13% in May

By John Ballard – Updated Jun 7, 2019 at 2:07PM

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Investors are concerned about jeans sales following the trade dispute with Mexico.

What happened

Shares of Levi Strauss (LEVI -0.42%) lost 13.3% in value last month, according to data provided by S&P Global Market Intelligence.

The denim specialist went public in March and has been experiencing growth on the top line as demand for the iconic brand's denim remains firm around the world. However, investors got a little queasy about near-term prospects when the Trump administration threatened a 5% tariff on Mexican imports in late May -- although negotiations between the U.S. and Mexico are ongoing.

A stack of ripped blue jeans.

IMAGE SOURCE: LEVI STRAUSS.

So what

Mexico is one of the largest suppliers of apparel and footwear, particularly jeans. Levi says that 15% to 20% of its imports come from China and Mexico -- two countries in the crosshairs of the trade war.

Now what

In a statement, Levi Strauss explained that while it opposes the tariff, the company has already taken steps to adjust for the "negative impacts of these kinds of policies." The company also stated, "We do not anticipate this new proposed tariff will have a material impact on our business."

It appears Levi Strauss has seen these trade disputes coming for a while. To mitigate the potential higher costs of imports, the company spent the last two years "proactively managing down sourcing" from China and Mexico. The company believes tariffs on imports from these two countries will have a "negligible" impact on Levi's business performance in fiscal 2019 and that it can "substantially mitigate any impact in fiscal 2020 and beyond."

Levi disclosed that if the tariffs were left unmitigated, the company would experience a 10-basis-point decline in gross margin in fiscal 2019 and a 50-basis-point impact in fiscal 2020. This doesn't seem like much in the grand scheme of things, given that Levi's trailing-12-month gross margin was 53.7%.

All in all, it seems the sell-off might have been unjustified.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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