Levi Strauss & Co.'s (LEVI 3.57%) stock tumbled 12% on Oct. 7 following its third-quarter earnings report. For the quarter that ended on Aug. 22, the denim apparel maker's revenue rose 1% year over year (and grew 7% in constant currency terms) to $1.52 billion, but missed analysts' expectations by $80 million. Its adjusted net income declined 18% to $161 million, or $0.40 per share, which still cleared the consensus forecast by $0.03.
For the full year, Levi Strauss expects its revenue to rise 6.7% to 7% on a reported basis and 11.5% to 12% in constant currency terms. Analysts had expected its revenue to rise 11% on a reported basis. It expects its full-year adjusted earnings per share (EPS) to land between $1.44 and $1.49, which would represent a 2% decline to 1% growth from 2021. Analysts had expected its adjusted EPS to increase about 5%.
Image source: Getty Images.
Like many other apparel retailers, Levi Strauss blamed that slowdown on inflation and supply chain disruptions. But has Levi's stock also gotten too cheap to ignore after tumbling more than 40% this year?
Reviewing Levi Strauss' core business
Levi Strauss is best-known for its namesake denim jeans, but it also sells casual and dress pants, tops, shorts, skirts, jackets, accessories, and footwear. It owns four main brands: Levi's, Signature by Levi Strauss & Co., Dockers, and Denizen. It generated 95% its revenue from its Levi brands in fiscal 2021 (ended in November), and the remaining sliver from its other brands. Levi's products are sold in about 50,000 retail locations across 110 countries, but that total includes all of its retail partners and franchisees.
On its own, Levi Strauss operated 1,043 company-owned stores and 600 company-owned shop-in-shops in 38 countries at the end of the third quarter. That's up from 905 company-owned stores in 32 countries at the end of fiscal 2019. That expansion makes it one of the few brick-and-mortar apparel retailers that actually continued to open new stores through the pandemic.
In fiscal 2021, the company generated 25% of revenue from its company-owned stores and another 8% from its e-commerce websites. The rest mainly came from its retail partners and franchisees. In terms of regions, Levi's namesake brand generated 54% of its revenue in the Americas, 31% in Europe, and 15% in Asia. Over the past year, a rising dollar has significantly reduced its overseas revenue -- which can be seen in the wide gap between its reported and constant currency numbers.
How fast is Levi Strauss growing?
Levi Strauss initially went public in 1971, but it was taken private by the founder's descendants in 1985. It went public again in early 2019, and it faced its first major test as the COVID-19 pandemic started in 2020. But as those headwinds waned, its revenue growth accelerated while its adjusted gross and EBIT (earnings before interest and taxes) margins expanded.
Unfortunately, its revenue growth decelerated again in the first nine months of fiscal 2022 as it grappled with the war in Ukraine, inflation, supply chain disruptions, and a soaring dollar. The company expects all those headwinds to cause its revenue to decline year over year (in both reported and constant currency terms) in the fourth quarter.
|
Period |
9M 2022 |
FY 2021 |
FY 2020 |
FY 2019 |
|---|---|---|---|---|
|
Revenue growth (YOY) |
12% |
29% |
(23%) |
3% |
|
Adjusted gross margin |
58.2% |
57.9% |
54.4% |
53.8% |
|
Adjusted EBIT margin |
12.5% |
12.4% |
4.1% |
10.6% |
Data source: Levi Strauss & Co. YOY = year over year.
Levi's adjusted gross margins have also declined sequentially over the past two quarters due to higher production costs, increased markdowns, and currency headwinds -- and the company expects its full-year gross margin to decline "slightly" in comparison to fiscal 2021. It also expects its adjusted EBIT margin to decline to about 11.7% for the full year as it expands its direct-to-consumer channels, but that would still come in above its pre-pandemic levels.
Over the long term, Levi Strauss believes it can generate up to $10 billion in revenue by fiscal 2027 -- which would represent a compound annual growth rate of 9.5% from its $5.8 billion of revenue in fiscal 2021 -- with an adjusted EBIT margin of 15%. It plans to achieve that growth by tripling its e-commerce sales and nearly doubling its sales of women's looks and tops, as well as ramping up its investments in its digital channels and data-crunching analytics capabilities.
Is Levi's stock worth buying right now?
Levi Strauss is in better shape than other struggling retailers like Gap and American Eagle Outfitters. Its low forward price-to-earnings ratio of 10 and its high forward yield of 3% could also limit its downside potential. However, I think there are better dividend-paying stocks to buy right now, while other apparel retailers like Lululemon might look more compelling to growth-oriented investors. Therefore, I wouldn't rush to buy Levi's stock in this unforgiving market for apparel stocks.
