Levi Strauss & Co. (LEVI +4.47%) hasn't been a hot growth stock like other apparel brands in recent years, but investors may want to keep this top denim brand on their watch lists. Levi's business is recovering well from the pandemic. Analysts currently expect revenue to increase 29% this year, and growing digital sales are playing a role.
E-commerce made up only 4% of total revenue a few years ago, but it's ramping up. In the fiscal second quarter, e-commerce sales grew 42% year over year and helped deliver a record gross margin for the company.
At just 9% of total revenue, Levi's e-commerce business is significantly under-penetrated compared to other retailers and represents a big growth catalyst over the next several years. Here's how management is turning Levi Strauss into a digital sales machine.
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An accelerating digital transformation
Like other retailers during the pandemic, Levi Strauss might have turned a corner with its digital business. E-commerce growth remained strong even as physical stores reopened in the most recent quarter, and management is capitalizing on the momentum. The company recently opened its first owned and operated fulfillment center in Nevada that will handle orders for wholesale, retail, and most importantly, e-commerce.
The extra fulfillment capacity should further boost digital growth and margins, which could lead to higher earnings growth. "Over time, we expect to increasingly leverage our own [distribution centers] to fulfill e-commerce orders, which will drive more agility and inventory positioning, reduce lead times and accelerate expansion of e-commerce margins," CEO Chip Bergh said on the second-quarter earnings call.
The denim category appears to be well behind non-denim brands in e-commerce, which makes up less than 10% of revenue at both Levi Strauss and Kontoor Brands, the maker of Wrangler jeans. Meanwhile, digital sales at American Eagle Outfitters comprise 35% of total revenue, while athletic apparel brand Lululemon Athletica generates 41% of its revenue from e-commerce.
Levi should catch up over the next decade. It is making better use of artificial intelligence and automating certain processes behind the scenes to quicken its step in a fast-moving digital world. "We're using digital data and AI to dramatically improve the consumer experience and deepen connections leveraging every touch point to better connect and engage our fans," Bergh noted.
The company recently received more than 100 million views in the first six weeks after launching its global TikTok channel. Its mobile app saw a 20% increase in downloads in the second quarter compared to the first quarter. These data points show there is momentum on its side.
Levi Strauss is also expanding its omnichannel capabilities. It reported growing demand for ship-from-store offerings, which the company is starting to expand internationally across Europe. The company experienced an increase in units per transaction after it launched a buy online, pickup in store program on its website as well.
Growing denim demand
Total direct-to-consumer sales, which includes both brick-and-mortar and digital sales, made up 23% of Levi's business in the last quarter. As the company continues to invest to push that percentage higher, it's worth noting that it has a tailwind at its back. The denim market is expected to grow from $21.8 billion in 2020 to over $26 billion in 2026.
Levi Strauss is one of the top apparel brands in the world, which positions it well to capture market share. With the stock trading at a below-average price-to-earnings ratio of 19.7 times fiscal 2021 earnings estimates, this is an under-the-radar retail stock that could outperform the broad market as it closes the digital gap with the rest of the apparel industry.
