Before the Q4 earnings report, Levi Strauss & Co. (NYSE: LEVI) got downgraded among stock analysts, and price target reductions that, honestly, failed to account for the company’s brand power, market position, DTC channels, and the underlying consumer strength that continues to sustain inflation.
The point is that only a few days later, the company reported a great fourth quarter and provided a favorable forecast, sending shares up more than 7% ahead of the opening bell.
The upshot is that analysts’ opinions may be changing, and even if they don’t, this company is an appealing option for income-oriented investors, who don’t want to worry about what they’re buying or how safe the dividend is
Levi Strauss Outperforms in Terms of Profitability.
Levi Strauss experienced a mixed quarter, but it was mixed in a positive sense.
The company reported $1.59 billion in net revenue, a -6.5% decrease that was in line with the consensus estimates, and was accompanied by margin strength.
The margins shrank year on year, but less than predicted, and the relative strength is expected to continue beyond 2023. The top-line results were driven by a shift in the mix, with falling wholesales and rising DTC sales.
The essential conclusion is that revenue remained level on a forex-neutral basis and only became negative when off-shore funds were brought back home.
Within DTC, digital channel sales are dropping post-COVID as shoppers return to shops, but they are still solid and up vs the same period in 2019.
Moving on to the margins, both the gross and operating margins contracted, with the adjusted gross margin falling 300 basis points and the adjusted EBIT margin falling 300.
The lesson is that margin pressure was less feared, resulting in earnings that were down year on year but comfortably ahead of the consensus projections.
Share repurchases helped the adjusted $0.34 surpass the average by $0.04 or 1330 basis points.
The company repurchased another 2.2 million shares in the fourth quarter, bringing the total for the year to 8.7 million, or a 2.2% decrease in YOY share count.
The guidance was also mixed. Revenue growth is predicted in 2023, but margins are expected to be substantially lower for Levi.
The company anticipates revenue growth of 1.5% to 3.0%, with adjusted EPS in the $1.30 to $1.40 range, compared to the $1.45 estimate. The EPS forecast is lower than the consensus figure.
Still, analysts have been slow to change their long-term objectives, and the market (if not the analysts) was expecting far worse.
Regardless of the Downgrades, Levi’s Is a Buy.
Regardless of the pre-release downgrades, Levi’s stock is rated a Moderate Buy.
The consensus price goal remains 20% higher than the current action, and both mood and the price target might easily firm now that the results are in.
In this light, Levi Strauss & Co. may benefit from a tailwind from analysts, propelling stock toward the $20 mark.
The dividend may also be beneficial. At the low end of 2023 forecast, this stock pays 2.9% with a 37% payout ratio.
The balance sheet is also quite healthy, with debt decreasing and remaining low at 1.1X equity, cash reserves increasing, and inventories increasing.
The charts suggest some resistance above $17, which may limit advances in the short term. Price movement may trend sideways at or near present levels in this scenario until something changes in the market, such as a shift in analyst sentiment or an increase in institutional activity.
In any case, this is a fantastic firm, a good stock, a decent deal at 12X earnings, and a nice dividend payer.
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