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3 Reasons to Be Optimistic About Levi Strauss Stock

By John Ballard – Feb 9, 2020 at 10:40AM

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These three reasons explain why the stock is starting to rebound.

Levi Strauss (LEVI -4.25%) delivered a fourth-quarter earnings report in late January that was mostly within investors' expectations. The stock price was little changed following the news, but over the last three months, the shares have rebounded about 15% off their recent lows. 

Investors have been laser-focused on Levi's weak-performing U.S. wholesale business, which has been a heavy anchor weighing on revenue growth in recent quarters. That segment reported another decline of 4% in the fourth quarter in the Americas region; although adjusting for a few abnormal factors, U.S. wholesale revenue was flat year over year. 

Despite that, there were three areas that stood out signaling that the No. 1 jeans brand is starting to turn a corner. 

A smartphone with the new Levi's app displayed.

Levi's new app could ignite digital revenue growth. Image source: Levi Strauss.

1. Signs of brand strength

Since 2015, when the company relaunched the women's jeans business, Levi's been gradually building into a leading lifestyle brand in retail. Good examples of this are the recent collaborations Levi's has made with numerous brands, like the Google-branded trucker jacket, and the 2018 launch of the Levi's x Jordan collection with Nike. "In 2019, these collaborations delivered over 12 billion impressions globally, equating to roughly $100 million in media value," Levi Strauss CEO Charles Bergh said during the fourth-quarter call. 

Bergh added, "Collaborations continue to generate brand heat as well as drive traffic in sales. And looking forward to 2020, you can expect to see the Levi's brand come to light with many more exciting, unexpected and innovative collaborations in the pipeline." 

While these collaborations represent small runs of limited-edition merchandise, which don't really move the needle for a company that generates $5.7 billion in annual revenue, the success of these partnerships reveals healthy demand for everything Levi's. 

Another signpost that points to better days ahead for the top jeans maker is improving gross profit performance.

2. Higher gross margin

Levi's said gross margin increased 110 basis points year over year to 54.3% in the fourth quarter. Levi's gross margin has been trending higher over the past five years, reflecting the progress management is making to position Levi's as a premium lifestyle brand and drive higher full-price sales. 

"On the back of a healthier inventory position and a stronger brand globally, about half the gross margin expansion reflected lower sales to the off-price channel, with the remainder primarily driven by the price increases we have taken, higher direct-to-consumer and international growth," as CFO Harmit Singh explained. 

3. Long growth runway in international, women's, and digital

During the call, Bergh spoke to the key areas that are driving growth right now: "Our growth internationally was broad-based, with Europe growing 13% and Asia, 10%. Direct-to-consumer grew 10%, and within that, e-commerce grew 18%, and women's and tops were particularly strong, each up 14% for the year." 

One noteworthy item Bergh mentioned was that Levi's continues to gain market share in women's denim, including in the U.S. where Levi's has "overtaken the No. 2 position." 

Bergh also discussed the new Levi's app and loyalty program in the U.S. market, allowing customers to access "curated editorial and brand content." It appears Levi Strauss is attempting to follow the huge success of Nike's SNKRS app to allow customers to purchase "premium products," like those made in collaboration with other brands, exclusively from within the new app. 

Clearly, management is seeing strong results from the app internally, because they are now planning to launch it beyond the U.S., which could spark Levi's international and direct-to-consumer growth

International is almost 60% of Levi's business, followed by the direct-to-consumer channel at 40%, and the women's category is nearly a third of total revenue (there is some overlap in these categories). 

"In all of these areas, they remain a long runway for growth," Bergh said.

John Ballard owns shares of Levi Strauss. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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