What happened
Shares of Levi Strauss (LEVI +1.78%) gained 12.7% in value last month, according to data provided by S&P Global Market Intelligence. The stock rebounded following a sharp drop in August, when trade tensions between the U.S. and China kicked into high gear.
Investors have been concerned over two issues facing the jeans maker this year. One has been retail store closures, which have pressured the wholesale channel (two-thirds of Levi's business). The second issue has been tariffs on Chinese imports. But management is actively working to mitigate both problems.
Image source: Levi Strauss.
So what
Even with lower growth from the wholesale business, the company still posted 5% growth in the last quarter, driven by strong sales overseas and higher e-commerce sales. Imports from China make up less than 8% of Levi's sourcing, and management is working to reduce this reliance to the very low single digits by fiscal 2020.
Also helping investor confidence was the company's announcement last month that it was raising the fourth-quarter dividend by 7% to $0.15 per share. This gives the stock a generous dividend yield of 3.17%. The dividend is payable on Oct. 17 to shareholders of record on Oct. 5. The payout increase is a sign of management's confidence in the company's ability to grow profits.
Now what
Management is calling for full-year revenue growth adjusted for currency changes to come in at the high end of the mid-single-digit range. Adjusted operating margin should also be up by 10 basis points.
Consumers are expected to spend more on denim in the next few years, so Levi's has the advantage of operating in an industry that should see rising demand for its iconic jeans styles. Additionally, the direct-to-consumer business, including company-owned stores and e-commerce, should see double-digit growth, which could offset the weakness from the wholesale business.
In the short term, investors should watch the wholesale performance, because the stock will likely react to how the company is handling that headwind. Levi Strauss will report its third-quarter earnings on Tuesday after the market close.
