Levi Strauss (NYSE:LEVI) is experiencing an “accelerated recovery” across its business, CEO Chip Bergh noted in the fiscal second-quarter earnings report delivered earlier this month.
The stock price seems to reflect that sentiment as it is up 8.9% in the last month and 33% year to date. But could it be headed higher?
Excellent business performance
Levi’s business is recovering nicely from the collapse in revenue and profits it endured during the pandemic. In the most recently reported quarter, which ended May 30, revenue increased 156% year over year. However, the company had a particularly easy comparison — most U.S. clothing stores were closed for much of the year-ago quarter during the early COVID-19 lockdowns. Levi’s revenue was down by just 3% from its fiscal Q2 2019 total.
Bergh attributed the company’s better-than-expected performance to strong demand for looser fit denim styles that it launched pre-pandemic. These baggier styles now account for nearly half of both men’s and women’s bottom assortments.
Levi’s has the right styles to drive top-line growth, and it’s also seeing improving results on the bottom line. Through the first half of its fiscal 2021, Levi’s flipped from a year-ago loss of $210 million to a profit of $207 million. For that, investors can credit Levi’s record-high gross margin of 58.8%.
Chief Financial Officer Harmit Singh called the company’s margin gains “structural and sustainable.” Growth in Levi’s higher-margin e-commerce business accelerated from the previous quarter to a rate of 42% year over year. E-commerce now makes up 8% of total revenue compared to 5% before the pandemic.
Management said that gross margins are also improving due to higher full-price sell-through and a higher sales mix of denim bottoms. Levi’s is on pace to improve its adjusted operating margin from its current 9% to a high of 12% in fiscal 2022. That would certainly lead to strong growth in earnings per share and could fuel a rising stock price.
Are investors’ expectations too low?
In the wake of the latest quarterly report, analysts are already raising their earnings estimates for Levi’s. The consensus estimate is for EPS of $1.31 in fiscal 2021, $1.50 in fiscal 2022, and $1.69 in fiscal 2023. But those forecasts may go up if consumers continue to scoop up new Levi’s styles, particularly through its e-commerce channels.
“We’re investing in leading technology and expanding our fulfillment capabilities,” Bergh said on the earnings call, referencing the new distribution center the company just opened in Nevada.
The stock price currently sits at $26.66, giving it a price-to-sales ratio of 2.12 — higher than its valuation two years ago. But the rapidly expanding e-commerce business and improving profitability make Levi Strauss a fundamentally different business than it was before the pandemic.
After a pullback since the earnings report, Levi’s now trades at a forward price-to-earnings ratio of 19.7, which looks appealing for a company expected to post double-digit percentage gains in earnings annually over the next three years.
Rising commodities costs could pose a problem for the company in the near term, but management believes the company can raise prices to offset these higher expenses, and given the strong demand Levi’s is experiencing right now, they’re probably right.
For these reasons, Levi’s is a solid retail stock to buy at current levels.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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