Investors had low expectations heading into the second-quarter update from Levi Strauss (LEVI 2.57%). The apparel specialist is facing a potential growth hangover ahead and could struggle to pass along higher prices, especially if demand slows down in the second half of 2022. Wall Street is also worried that Levi might be stuck with way too much inventory later in the year and will be forced to take write-down charges against its earnings.
Levi's recent quarterly update eased a few of those concerns but still left many investors unsure about the short-term risks ahead.
Let's take a closer look at three big takeaways from the latest report.
1. Sales trends maintained
Levi's sales trends showed no reversal of the great momentum the business has seen in the past year. Revenue rose 20% after accounting for currency exchange rate swings, marking just a modest slowdown compared to the prior quarter's 26% spike. As they did back in early April, management highlighted solid demand through the selling period that ended in late May. "Our brands are resonating with consumers across geographies, channels and product categories," CEO Chip Bergh said in a press release.
Levi's wasn't immune to the supply chain, pricing, and economic growth pressures that have cropped up in recent weeks, though. CFO Harmit Singh said the operating environment was "dynamic" in explaining challenges like soaring transportation and product costs.
2. Levi's is protecting margins
The good news is that the company had no trouble passing along those rising costs to consumers. Higher prices, reflected in reduced promotion levels and a demand shift toward more expensive products, helped Levi keep gross profit margin steady at 58% of sales. Operating income rose to $145 million from $115 million, after accounting for temporary charges related to the pandemic and the war in Ukraine.
Overall, adjusted earnings improved to $0.29 per share, up 26% year over year. That success gave management plenty of resources it could direct back into the business, but also toward shareholders. The company returned $80 million to its owners, evenly split between dividends and stock repurchases.
3. The new outlook
One potential warning sign is that inventory grew 29% to far outpace the sales increase for the quarter. That boost could expose Levi to write-down charges or falling profitability in future quarters if demand doesn't hold up.
But management's outlook isn't calling for such a growth shortfall. Instead, executives affirmed their forecast of sales gains between 11% and 13% this year as adjusted earnings improve to between $150 per share and $1.56 per share. While most on Wall Street are more worried about the potential for a recession hurting the apparel business, the apparel specialist's latest results suggest that these fears are overblown.
Stock price drop in 2022 presents buying opportunity
Yes, it's possible that consumers will turn away from discretionary purchases like jeans if unemployment jumps and wages start to fall. But Levi should still navigate through any demand pullback to emerge stronger on the other side. In the meantime, investors might consider buying shares of this attractive business, following the 34% decline in the stock price so far in 2022.