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Levi Strauss: Strong Products Never Go Out of Fashion

By Lawrence Rothman, CFA – Apr 11, 2020 at 12:35PM

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While the company may experience some bumps in the short term, its strong brand recognition should carry the day.

Levi Strauss (LEVI -4.25%), after remaining a private company for more than three decades, became public once again with an initial public offering (IPO) in March 2019. The company has been around for 167 years, surviving everything thrown at it. Aside from this impressive longevity, Levi Strauss has several other things going for it that should reward patient shareholders.

The coronavirus pandemic and its economic effects are a big unknown. With people staying home and unemployment rolls climbing by the millions over the last few weeks, Levi Strauss' short-term results will inevitably suffer. The recently-enacted $2 trillion stimulus package is an effort to thwart the downturn, but nobody knows how quickly the economy will recover.

Management is confident the company will emerge from the current crisis stronger than ever. And in these difficult times, investors may find comfort in a tried-and-true company like Levi Strauss. 

Several stacks of rolled-up jeans.

Image source: Getty Images.

It starts with the products

Many people are familiar with Levi Strauss' products. Better still, they like them. Its popular brands are sold in over 50,000 retail locations. In fact, Levi's jeanswear has the biggest market share in the world.

The Levi's brand, accounting for 87% of last year's sales, generates most of the company's top line. This includes the classic Levi's 501 and 511 slim (the company's best-selling men's jeans for the last five years). Levi Strauss has also placed a greater emphasis on selling jeans to women, and sales have grown at a compound annual rate of 13% for the last five years. This helped boost the share of women's products from 20% of revenue in fiscal 2015 to 31% last year.

Levi Strauss' well-known casual brand, Dockers, has fallen from 8% of the company's fiscal 2017 sales down to 6% last year, but it is known for its quality and durability.

Before the coronavirus spread from China, the company's results were strong. In the first quarter of fiscal 2020, sales reached $1.5 billion: up 6% year over year after stripping out the effects of exchange-rate fluctuations. Closing stores in China for about half the quarter cost about $20 million in sales.

Since mid-March, Levi Strauss has closed company-operated and franchised stores across Europe and North America. It does sell some merchandise directly to consumers via its websites, but that only accounts for 5% of revenue. Levi Strauss also sells to third-party retailers, so customers can buy goods online from those companies.

Through strong brands and continuing product development, there is no doubt in my mind that the company's sales growth will resume.

International presence

There is also no doubt COVID-19 will sting. And management, like others across the retail sector, withdrew its guidance due to the uncertainty.

Fortunately for Levi Strauss, it sells its products across the globe, which should help as different regions open for business and recover economically at different rates. Last year, the Americas generated 53% of the company's sales while Europe and Asia represented the remaining balance. Europe and Asia were also responsible for 45% of its GAAP operating income.

While waiting for conditions to improve, management is cutting costs and capital expenditures, which is a prudent move.

Balance-sheet buffer

Levi Strauss' balance sheet is in decent shape, which will also help it get through this rough patch. It ended the first quarter with $957.5 million in cash and short-term investments, along with $1 billion in debt (39% debt/total capital).

The shares, like a good pair of jeans, are a comfortable fit. A strong global brand will allow Levi Strauss to prosper, although the timing is unclear. While jean styles go in and out of fashion, shareholders who stick with this tried-and-true company are likely to feel good eventually.

Lawrence Rothman, CFA 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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