Levi Strauss & Co. (NYSE: LEVI) is a stock that we believe can provide good returns for investors’ shareholders. The company is a market leader in the denim apparel industry and recent financial performance has shown that management has been executing its strategic objectives. We believe the current valuation is attractive given the strong fundamentals and as such we recommend “BUY” this stock.
Levi Strauss & Co. is a world leader in denim clothing and designs and markets men’s, women’s and children’s jeans, casual wear and related accessories under numerous brand names. Brands include Levi’s, Dockers, Signature by Levi Strauss & Co.™, Denizen and Beyond Yoga. Products are sold internationally in more than 110 countries worldwide through a combination of retail chains, department stores, online sites and more than 3,000 retail stores. So far this year, Levi Strauss & Co. stock price performance has significantly underperformed the broader markets. The company’s stock price decreased -34.12% compared to the S&P 500’s -22.53% decline.
Levi Strauss & Co. reported its Second Quarter Earnings in July and results were generally strong. Year-over-year revenue increased 15% in the second quarter of 2022 compared to the second quarter of 2021 and, when adjusted for constant currency, year-over-year revenue growth was 20%. Notably, a higher percentage of its net income was made up of digital channels, demonstrating the company’s growing digital penetration. The bottom line showed strong results on an adjusted basis, as the company reported an adjusted diluted EPS of $0.29 in the second quarter of 2022, compared to $0.23 in the second quarter of 2021. Without adjustments, the company’s net income actually decreased year over year, from $65 million in Q2 2021 compared to $50 million in Q2 2022. Overall, the company continues to follow a consistent growth path in line with its historical performance.
Strong brand performance
Levi Strauss & Co. brands remain market leaders in all major segments. The company’s core product line of Men’s Jeans is a market share leader globally and is a market share leader in major markets including the US, UK, France, Spain and more. The company has also grown at the fastest rate in 2021, as the company was the largest market share winner in 2021. We believe that the long history of the Levi’s brand and the company’s continued execution of modern and timeless designs provide significant brand moats for the business to move forward.
Focus on shareholder returns
The company has embarked on a growth plan that is led by revenue growth, margin expansion and shareholder-friendly policies to provide a return for shareholders of 9-10% per annum. Such plans to increase shareholder value should be good news for investors. The company paid a quarterly dividend of $0.12, representing a dividend yield of 2.81% on an annualized basis. This dividend yield is 66% higher than the S&P 500 dividend yield of 1.69%. In addition to a decent dividend yield, the company has also recently started a $750 million buyback program. We believe that such shareholder-friendly policies will help support the share price and provide reasonable returns for shareholders during economic uncertainties.
We believe that Levi Strauss & Co. is attractively valued based on historical levels, as its PE ratio now stands at around 11.45x. We believe the valuation is attractive for a business with a strong growth history and a company that has continued to maintain strong market position and improving financial metrics. As the company faces any economic challenges, we believe the current valuation leaves ample room for multiple expansion in line with its historical P/E 15x average which translates to approximately 40% upside from current levels.
Downside risks are considerable given that the company operates in the consumer discretionary industry. the recent CPI printout has significantly raised expectations of continued rate increases, and such monetary policy could significantly affect consumption in the US and abroad. US consumption is already slowing down, and the impact of further rate hikes could further depress consumer confidence. However, the company’s fundamentals are strong and we believe the company is well prepared to weather a downturn. First, the company has a cash balance of $602 million, which is roughly 10% of its market capitalization. In addition, the company’s current dividend payout rate is around ~24.27% which is very low. We believe that such a low payout ratio enhances the company’s financial flexibility, and we believe that even in an earnings downturn, the company will be able to continue to maintain its dividend levels.
We believe that Levi Strauss & Co. is an attractive value stock that can provide strong returns for shareholders during an uncertain economic environment. The company has strong brand positions and its financial fundamentals are solid. While macroeconomic risks remain, which many companies in the industry face, we believe that Levi Strauss & Co. has the ability to weather a recession and come out of it a stronger company.