Market trends and reversal signals

Levi Strauss NYSE:LEVI exemplifies how an iconic brand, sound management and a forward-thinking strategy can generate value for shareholders. The company has struggled with changing consumer demands, inventory issues and structural challenges in recent years, but it’s coming out of the weeds in fantastic shape.

The first quarter results and guidance confirm a prospect of accelerating improvement and profitability, and the market has noticed it. Price action since the start of 2022 until recently has coincided with trading within a range and the bottom, which today is confirmed as a complete reversal. The market jumped 10% on the news, breaking above critical resistance and opening the door to a sustained rally that could last for years.

“The structural economics of our business improved in the first quarter thanks to 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 revenue to mid-single digit growth in the second half of this year and are raising our full-year EPS expectations.”

Levi Strauss will soon return to growth

Levi Strauss’ first-quarter results are solid on several levels, including top-line, bottom line and guidance. The company posted a year-over-year decline of 7.7%, but beat consensus by 65 basis points and produced a better-than-expected margin. The weakness was seen in the Wholesale segment, which fell 18%.

Weakness in wholesale was offset by strength in the DTC segment, which showed strength across all regions. DTC is up 7%, led by 10% in the US. DTC sales in Russia are growing by double digits. DTC sales are essential because they are critical to the company’s long-term plans. DTC sales amount to 48% of the business and will soon overtake wholesale.

The margin is mixed, but the implications for investors are bullish. GAAP operating margin was negative due to restructuring-related non-cash impairment charges. Gross margin rose 240 basis points to 58.2%, leaving adjusted net profit down but well above consensus forecasts reported by Marketbeat.com. Adjusted EPS is reported at $0.26, a cent higher than expectations, and margin strength is expected to persist.

The guide is good. The company reaffirmed revenue, which expects a strong return to revenue growth in the second half. Full-year forecasts are up 1% to 3%; the news that pushed the market to a 10% gain is the earnings outlook. Levi’s executives raised their adjusted earnings target from $1.17 to $1.27, a wide range, but above previous forecasts at the low to mid-range, in line with consensus and may be cautious.

Levi Strauss has the lever of success

To say that Levi Strauss is leveraged for success is to say that it has very little debt, has ample liquidity, and has a strong balance sheet. The company’s inventory management has driven a 30% increase in liquidity and leverage is low. Assets, liabilities and equity are down slightly at the end of the first quarter on a year-over-year basis. However, leverage is low, making it suitable 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 totaled $73 million in the first quarter, or about 71% of adjusted net income. Returns included $48 million for the dividend and $25 for buybacks, with $656 million remaining under repurchase authorization. The dividend is worth about 2.5% with the stock at a new high, and there is an expectation of long-term, if not annual, growth. On the buyback side, the share count fell 0.35% year-over-year at the end of the first quarter, enough to offset the stock-based compensation.

Analysts support Levi Strauss Stock

Levi Strauss shares rose after the release, helped by analyst updates. Analysts maintain Moderate Buy rating but raise price targets. Early reviews surpassed the pre-release consensus of $17 and a new high was set. Telsey Advisory Group set a new high of $24, the second $2 increase issued last month. Assuming the market follows the signals provided, this stock should continue to trend upward this year and into next.

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