Clothing manufacturer and retailer Levi Strauss (NYSE:LEVI) has been a hot stock as of late, rising some 12% this week and 28% 12 months to this point (YTD) to around $21 per share.
The maker of Levi’s jeans and other forms of apparel released its first-quarter earnings results this week, and the outcomes were higher than expected. Looking ahead, the corporate sees its strong performance continuing, which boosted investor confidence. Let’s take a have a look at why Levi Strauss is up and if it’s a great buy.
Fueling growth
Levi Strauss is considered one of the primary corporations to post its first-quarter earnings results, but its quarter ended Feb. 25, a month sooner than the outcomes we’ll start seeing next week for Q1. The most recent quarter also includes the vacation month of December, so Levi Strauss is probably not a bellwether for other retailers.
Nonetheless, investors must be pleased that the corporate beat earnings and revenue estimates in its first fiscal quarter. It’d even have gotten a little bit of a bounce from the exposure it’s getting from a recent Beyonce song called “Levii’s Jeans,” but let’s keep on with the numbers.
Levi Strauss’ revenue fell 8% 12 months over 12 months to $1.56 billion, nevertheless it got here in higher than the $1.55 billion estimate. Two aspects limited the corporate’s revenue. One was a shift in wholesale shipments from the second quarter to the primary quarter of 2023, which made the year-over-year numbers in Q1 2024 look worse. The opposite was a revenue hit from the corporate’s decision to exit its lower-priced Denizen brand. Levi Strauss’ revenue would have been roughly flat otherwise.
Revenue through its wholesale business, which is selling through third parties, was down 19% 12 months over 12 months and would have still been down 9% without the Q1 2023 shift. Nevertheless, direct-to-consumer (DTC) sales jumped 7% overall and 10% within the U.S. DTC now accounts for a record 48% of Levi’s revenue.
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On the underside line, the corporate had a net lack of $11 million, down from net income of $115 million a 12 months ago. Adjusted net income was $103 million or 26 cents per share, down 24% 12 months over 12 months. Nevertheless, this result beat the consensus estimate of 21 cents per share. Of note, Levi Strauss was able to cut back its cost of products sold by 13% to $651 million, improving its gross margin by 240 basis points to 58.2%.
The expansion in DTC sales and expense reductions are key components of a productivity initiative the corporate rolled out in January called Project FUEL. The multi-year strategy is designed to fuel DTC revenue and generate profitable growth by reducing costs, optimizing operations and redesigning processes.
Levi’s anticipates $100 million in cost savings from this plan in fiscal 2024, which incorporates a ten% to fifteen% workforce reduction in the primary half of the 12 months. Nevertheless, the savings also added $116 million in restructuring expenses in the primary quarter, which hurt the corporate’s bottom line.
An optimistic outlook
The productivity initiative has already began to bear fruit, and the corporate expects it to proceed through fiscal 2024 and beyond. Along with the fee savings, Levi Strauss reduced its inventory by 14% within the quarter.
For the second fiscal quarter, the corporate expects net revenue growth to be up within the high single digits, with adjusted EPS anticipated to be about 10 cents in Q2, up 150% 12 months over 12 months.
For the complete fiscal 12 months, Levi Strauss expects revenue to be up by 1% to three% with gains within the mid-single digits within the second half of the 12 months. Based on its productivity improvements, the corporate raised its adjusted earnings guidance for fiscal 2024 to between $1.17 and $1.27 per share, up from the previous projection of $1.15 to $1.25 per share. The adjusted EPS was $1.10 per share at the top of fiscal 2023, so it’s a 6% increase on the low end. On the high end, the guidance is best than analysts had predicted.
The corporate’s gross margin can be estimated to be up one other 150 basis points at the top of the 12 months from its 58.2% level now, management said on the Q1 earnings call.
Is it a buy?
Levi Strauss also improved its liquidity by increasing its money to $517 million in Q1, in comparison with $399 million at the top of its Q4, and boosting its free money flow to $214 million from a $271 million deficit the previous quarter.
The stock has a forward P/E ratio of 17, which is affordable. Levi Strauss also received a slew of price-target upgrades after posting earnings and its updated outlook.
The corporate looks to be in pretty good condition, but after a 28% run-up already, I’m undecided how much higher it should go, given its solid-but-muted growth potential. It is going to all depend upon how Levi Strauss continues to execute on its plan. It might be smart to control it to see if it settles down a bit before considering it.
Disclaimer: All investments involve risk. On no account should this text be taken as investment advice or constitute responsibility for investment gains or losses. The knowledge on this report mustn’t be relied upon for investment decisions. All investors must conduct their very own due diligence and seek the advice of their very own investment advisors in making trading decisions.