Levi Strauss (LEVI 3.65%) shareholders are in for a volatile trading week. The jeans specialist will close out its fiscal 2021 with an earnings report on Wednesday, Jan. 26, and that announcement should be packed with fresh data about its growth opportunity in the next year.
The stock price has dropped in the weeks leading up to this report as Wall Street worries about slowing growth and Levi's ability to pass along higher prices as inflation surges. But the company might start shifting that sour sentiment with some stronger operating metrics heading into 2022.
Let's take a closer look.
Image source: Getty Images.
The revenue trends
Levi entered Q4 with solid momentum. Sales jumped 41% compared to the pandemic-pressured year-ago period and were up 3% compared to the same time in 2019. Investors were initially pleased with the news that the apparel specialist is back to setting sales records, in part thanks to booming demand in its digital channels.
"We delivered a strong quarter," CEO Chip Bergh said in an early October press release, "with revenue growth versus pre-pandemic 2019 levels. The big question this week is whether Levi was able to build on that positive momentum. The company is aiming to boost sales by 21% in Q4, which would translate into accelerating growth compared to two years ago. Yet that forecast might prove too aggressive after the omicron variant pressured customer traffic and worsened labor shortages.
Paying more for jeans
Soaring inflation will show up in this week's report, and investors will be keenly focused on how well Levi's did in passing along those higher costs. The news has been good so far on that score. In fact, gross profit margin through the nine months ended in late August improved to 58% of sales compared to 54% a year earlier.
LEVI Gross Profit Margin data by YCharts
Executives said in October that they believe Levi's has enough pricing power to maintain those gains. Confirmation of that success will show up in steady or rising gross profit margins and solid earnings growth. Most investors who follow the stock are looking for per-share earnings to roughly double in Q4 to $0.40.
Looking ahead to 2022
The stock's movement will most closely be tied to the official 2022 outlook that management issues on Wednesday. Heading into the report, most investors are looking for sales to rise by roughly 10% compared to 2021's expected 30% increase. Earnings are projected to improve to $1.53 per share from about $1.44 per share.
Levi's has some attractive growth avenues ahead as it expands to new geographies and widens its portfolio into athleisure apparel. While there are faster-growing, more profitable rivals, including Lululemon Athletica (LULU 2.64%), this stock is valued at a discount of about two times sales compared to seven times sales for the athleisure giant.
Long-term returns for holding Levi Strauss shares will depend a lot on how well the company follows Lululemon's blockbuster growth-and-profitability playbook. The good news is that, with sales setting records again in fiscal 2021, the company has some growth momentum in that journey.
