Levi Strauss (NYSE: LEVI) exemplifies how iconic branding, sound management, and forward-looking strategy can drive shareholder value. The company struggled with shifting consumer demands, inventory issues, and structural challenges for the last several years but is coming out of the weeds in fantastic shape.
The Q1 results and guidance affirm an outlook for accelerating improvement and profitability, and the market has noticed. The price action from early 2022 until recently coincided with range-bound trading and bottoming, which is confirmed as a complete reversal today. The market surged 10% on the news, breaking above critical resistance to open a door to a sustained rally that could last for years.
“The structural economics of our business improved in Q1 driven by significant gross margin expansion, disciplined expense controls and efficient working capital management,” said Harmit Singh, Chief Financial and Growth Officer of Levi Strauss & Co. “As a result, we are confident in our ability to return the topline to mid-single-digit growth in the second half of this year and are increasing our full-year EPS expectations.”
Levi Strauss Will Pivot Back To Growth Soon
Levi Strauss’ Q1 results are solid on several levels, including the top and bottom lines and guidance. The company reported a YOY decline of 7.7% but outpaced the consensus by 65 BPS and produced a better-than-expected margin. Weakness was in the Wholesale segment, which declined by 18%.
The weakness in wholesales was offset by strength in the DTC segment, which showed strength in all regions. DTC is up 7%, led by 10% in the US. Ex-Russia DTC sales are up double-digits. DTC sales are essential because they are core to the company’s long-term plans. DTC sales amount to 48% of the business and will soon overtake wholesales.
The margin is a mixed bag, but the implications for investors are bullish. The GAAP operating margin was negative because of non-cash impairments related to restructuring. The gross margin widened by 240 basis points to 58.2%, leaving the adjusted net income down but well ahead of the consensus forecast reported by Marketbeat.com. The adjusted EPS is reported as $0.26, a nickel ahead of expectations, and margin strength is expected to persist.
Guidance is good. The company reaffirmed revenue, which expects a sharp pivot back to top-line growth in the back half. The full-year forecast is up 1% to 3%; the news that spurred the market to a 10% gain is the earnings outlook. Levi’s execs upped the target for adjusted earnings to $1.17 to $1.27, a wide range, but above the prior forecast at the low end and the mid-point aligns with consensus and may be cautious.
Levi Strauss is Levered for Success
To say that Levi Strauss is leveraged for success is to say that it carries very little debt, has ample liquidity, and has a fortress balance sheet. The company’s inventory management aided a 30% increase in cash, and leverage is low. Assets, liabilities, and equity are down slightly at the end of Q1 YOY. Still, leverage is low, setting it up to continue its turnaround, invest in growth, pay dividends, and repurchase shares. Long-term debt to equity is 0.5X, while total liabilities are 2X equity.
Levi’s capital returns amounted to $73 million in Q1, or about 71% of adjusted net income. Returns included $48 million for the dividend and $25 for repurchases, with $656 million left under the repurchase authorization. The dividend is worth about 2.5% with shares at the new high, and there is an expectation for long-term growth, if not annually. Regarding repurchases, the share count fell 0.35% YOY at the end of Q1, enough to offset share-based compensation.
Analysts support Levi Strauss Stock
Levi Strauss shares are increasing following the release, aided by analysts' updates. The analysts are maintaining the Moderate Buy rating but raising the price targets. The first revisions exceeded the pre-release consensus of $17, and a new high was set. Telsey Advisory Group set the new high of $24, the second $2 increase they issued last month. Assuming the market follows through on the signals given, this stock should continue to trend higher this year and into the next.
