Levi Strauss's (NYSE: LEVI) price action is down more than 50% from the 2021 highs through no fault. The boom in pricing and subsequent correction resulted from the pandemic bubble, a bubble that had little impact on the underlying business. The takeaway from the Q3 release is that this business is as steady and stable as they come, cash is flowing, and it is setting up for the next economic upswing, whenever that may come.
That means the dividend remains safe and trading at only 12X its earnings outlook; it presents a value for investors. The stock yields about 3.7%, trading near the multi-year low with little reason to fear.
Levi’s Pulls Back on Solid Results
Levi Strauss’s Q3 results are insufficient to catalyze a rally now but indicate steady, stable business and business above the pre-COVID period. The company’s $1.51 billion in revenue is down YOY and missed the consensus estimate, but the decline of -0.7% is offset by the 2, 3, and 4-year comps, and the miss is slim. Revenue fell short by $40 million or about 250 basis points but is up 0.6% compared to 2021, 42% compared to 2020, and 4% compared to 2019.
DTC led segmentally, with comp store sales and digital contributing to the 14% gain. That was compounded by a 12% increase in Other (including Dockers) and offset by an 8% decline in Wholesale.
The margin news is also tepid but consistent with the comps. The company reported a decline in gross and adjusted margins attributed to deleveraging, acquisition-related expenses, and increased SG&A that cut into the YOY comps. However, the $0.28 adjusted earnings align with the range set in prior years, so the decline and $0.01 miss are not alarming. The salient point is that cash from ops and adjusted earnings can sustain business and dividend payments.
The bottom line is that business has rebounded solidly from the pandemic lows and is stabilizing with a mid-single-digit gain compared to 2019. The price action is down nearly 30% compared to 2019, suggesting a deeply oversold condition in the market.
The Sell-Side is Buying Levi’s
Levi’s analysts have been mixed in their coverage this year, but the data takeaway is bullish. The consensus rating of 10 analysts trended higher to Moderate Buy compared to last year’s Hold, and the price target suggests nothing but an upside for this market. The analysts' low price target, among the most recently set and coming from 2 firms, is $14 and 7.5% above the post-release price action. The consensus target, which aligns with many of the freshest targets, assumes another 7.5% to 15% on top of the low target.
The institutions compound that activity. The institutions own about 28% of the stock and have bought on balance for 5 consecutive quarters. This is consistent with the bottoming action that began in spring 2022. If the institutions continue to buy, the bottom is likely in for this market or will soon be found.
The Technical Outlook: Levi’s Trading at Critical Levels
The bottoming action in Levi’s is compounded by the 2023 price action, which shows a floor near $13. The price action is near that level following the Q3 release, but bottom-fishing is already present. Price action firmed from its lows, suggesting support is still present at this level. If the market follows through on the signal, shares of the stock should continue to trend sideways in Q4. If not, shares of Levi Strauss could fall below $13 and retest support levels set in 2020.
