Investors weren't thrilled with the latest earnings update out of Levi Strauss (LEVI 0.19%). The apparel specialist met management's sales targets in a tough selling environment, but Wall Street was looking for more.
The stock's decline following the report added to a tough year for shareholders. Levi shares are down 14% so far in 2023 compared to a 15% increase in the S&P 500. Let's take a look at whether that downturn represents a compelling value for investors seeking market-beating returns.
The latest results
Sales trends weren't as bad as they might seem at a glance. Sure, revenue dropped 9% after having risen by 9% in the prior quarter. But this result was right in line with management's outlook. It also included a one-time negative impact from Levi's transition to a new enterprise resource planning platform. Adjust for that slump, and sales would have fallen by just around 2% in the period.
There were other bright spots, including strong direct-to-consumer sales and healthy demand in markets outside of the United States. These successes helped overcome weakness in the U.S. segment after a much stronger pandemic period. "We achieved our Q2 expectations across key metrics," CFO Harmit Singh said in a press release.
Tough profit trends
The news wasn't as good regarding profits and inventory. Levi's operating profit margin fell to below 1% from over 5% a year ago. The drop was powered by higher advertising spending, management said, and it reduced adjusted profits to just $15 million from $117 million a year ago. Net loss landed at $2 million compared to a profit of $50 million last year.
LEVI Operating Margin (TTM) data by YCharts
Executives said inventory is still an issue that will need to be worked through over the next few quarters. Inventory was up 18% despite the slight sales decline. That's an improvement over the 33% inventory spike the company posted in the prior quarter, but it still points to more profit challenges ahead.
The outlook and price
Levi lowered both its revenue and earnings forecasts for the year, but only modestly. Sales are now expected to grow by between 1.5% and 2.5% versus the prior guidance of between 1.5% and 3%. Similarly, earnings will likely land between $1.10 and $1.20 per share compared to the prior range of $1.30 to $1.40 per share.
The stock price has dropped significantly to reflect Wall Street's judgment that it may be a year or longer before Levi is back to reporting strong sales and sustainable earnings. You can buy the stock for less than 1 times annual sales, which is near the lowest valuation in a decade.
Yet most investors will not see that price as a clear value today. Levi isn't in a good inventory position in the core U.S. market, and it is currently generating net losses. As a result, investors are better off following successful retailers like Nike and Lululemon, which are both growing sales at a double-digit rate today. In contrast, Levi stock is simply worth watching for now.
