Can this hot stock keep rising?
Clothing Manufacturers and Retailers Levi Strauss (NYSE:LEVI) has been a hot stock of late, up about 12% this week and 28% year-to-date, to about $21 per share.
The maker of Levi’s jeans and other apparel reported its first-quarter earnings this week, and the results were better than expected. Going forward, the company is expected to continue its strong performance, boosting investor confidence. Let’s take a look at why Levi Strauss is up and whether it is a good buy.
promote growth
Levi Strauss was one of the first companies to report first-quarter earnings results, but the quarter ended on February 25, a month earlier than its first-quarter results, which begin next week. Levi Strauss may not be a bellwether for other retailers, as the latest quarter also includes December holidays.
Nonetheless, investors should be pleased to see that the company topped earnings and revenue estimates in its first fiscal quarter. It may have gotten a bit of a rebound due to the exposure it got from Beyoncé’s new song called “Levii’s Jeans,” but let’s just focus on the numbers.
Levi Strauss’ revenue was $1.56 billion, down 8% year-over-year, but better than expectations of $1.55 billion. Two factors limited the company’s profits. One is that wholesale shipments shifted from the second quarter of 2023 to the first quarter, resulting in worse year-over-year numbers in the first quarter of 2024. For the other, the company’s decision to exit its lower-priced Denizen brand took a hit to its bottom line. Otherwise, Levi Strauss’s profits would have been roughly flat.
Revenues from our wholesale business, which sells through third parties, decreased 19% year-over-year and would still have declined 9% without the transition in the first quarter of 2023. However, direct-to-consumer (DTC) sales are up 7% overall, and the 10% of U.S. DTC sales now account for a record 48% of Levi’s sales.
Ultimately, the company posted a net loss of $11 million, down from net income of $115 million a year ago. Adjusted net income was $103 million, or 26 cents per share, down 24% from the year before. However, the result beat market expectations of 21 cents per share. Notably, Levi Strauss’ cost of goods sold decreased 13% to $651 million, resulting in a 240 basis point increase in gross margin to 58.2%.
Increasing DTC sales and reducing costs are key components of a productivity initiative the company launched in January called Project FUEL. The multi-year strategy is designed to drive DTC revenues and generate profitable growth through cost reduction, operational optimization and process redesign.
Levi’s expects to achieve $100 million in cost savings through the plan in fiscal 2024, which includes a 10% to 15% workforce reduction in the first half of the year. But the savings hurt the company’s bottom line, adding $116 million in restructuring costs in the first quarter.
an optimistic outlook
Productivity initiatives have already begun to bear fruit, and the company expects to continue through fiscal 2024 and beyond. In addition to cutting costs, Levi Strauss reduced inventory by 14% in the quarter.
For the fiscal second quarter, the company expects net revenue growth to be in the high single digits and adjusted EPS for the second quarter to be about 10 cents, up 150% year-over-year.
For the full fiscal year, Levi Strauss expects revenue to increase 1% to 3%, with a mid-single-digit gain in the second half. The company raised its fiscal 2024 adjusted earnings guidance to $1.17 to $1.27 per share, up from its previous forecast of $1.15 to $1.25 per share, based on productivity improvements. Adjusted EPS was $1.10 per share at the end of fiscal 2023, representing a 6% increase at the low end. At the high end, guidance is better than analysts expected.
The company’s gross margin is also expected to be 150 basis points higher by year-end from its current level of 58.2%, management said in its first-quarter earnings call.
Is it a purchase?
Levi Strauss also improved its liquidity by increasing cash in the first quarter from $399 million at the end of the fourth quarter to $517 million and increasing free cash flow to $214 million from a deficit of $271 million in the previous quarter.
The stock has a forward P/E ratio of 17, which is reasonable. Levi Strauss also received numerous target price upgrades after posting earnings and updated outlook.
The company’s health looks pretty good, but after already seeing a 28% gain, I’m not sure how much higher it will go given its solid but muted growth potential. It all depends on how Levi Strauss continues to execute his plans. It might be wise to keep an eye on it to see if it calms down a bit before considering it.
disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.
