Is Levi Strauss & Co (LEVI) Poised to Beat Earnings?

US consumer confidence dropped to a four-month low in September, weighed down by persistent worries about higher prices and rising fears of a recession. The Conference Board said its consumer confidence index dropped to 103.0 last month, the lowest reading since May, from an upwardly revised 108.7 in August.

A drop in consumer confidence can create a challenging environment for apparel sales as consumers become more hesitant to spend on non-essential items.

Shares of Levi Strauss & Co. (LEVI) have tumbled 12.8% year-to-date and 25.8% over the past six months to close the last trading session at $13.53. The stock is trading below its 50-day and 200-day moving averages of $14.01 and $15.23, indicating a downtrend.

In this piece, I have discussed why it could be wise to wait for a better entry point in the stock.

As a result of sticky inflation, higher costs, and low sales, LEVI failed to exceed its revenue estimates in the previous quarter. Moreover, the company lowered its guidance for the current year and now expects a modest increase in net revenues of 1.5% to 2.5% compared to previous estimates of 1.5% to 3%.

Its adjusted EPS for the current year is also anticipated to be lower, ranging from $1.10 to $1.20, down from the earlier projection of $1.30 to $1.40.

In addition, in the recent quarter, CEO Chip Bergh announced that LEVI's would reduce prices on approximately six products sold through wholesale channels. This move aimed to attract price-conscious shoppers and includes core denim products like Levi's 502 jeans, which have year-round appeal.

Here’s what could shape LEVI’s performance in the near term:

Mixed Financials

For the fiscal second quarter that ended May 28, 2023, LEVI’s net revenues decreased 9% year-over-year to $1.34 billion. Its adjusted EBIT came in at $32 million. Moreover, the company’s adjusted net income and EPS amounted to $15 million and 0.04.

Mixed Analyst Estimates

For the quarter that ended August 2023, LEVI’s revenue is expected to rise 2% year-over-year to $1.55 billion, but its EPS is likely to come at $0.29, down 28.7% year-over-year.

Moreover, analysts expect LEVI’s revenue to increase 1.5% from the previous-year quarter to $6.26 billion in the fiscal year ending November 2023. However, its EPS is expected to decline 25.4% year-over-year to $1.12 in the same quarter.

Mixed Valuation

In terms of its forward non-GAAP P/E, LEVI is trading at 12.09x, 15.6% lower than the industry average of 14.32x.

However, LEVI’s P/S and P/B multiples of 0.86 and 2.56 are 3.4% and 8.1% higher than the industry averages of 0.83 and 2.07, respectively.

Mixed Profitability

LEVI’s trailing-12-month gross profit and net income margins of 56.70 and 7.12% are higher than the industry averages of 35.41% and 4.40%.

Yet, its trailing-12-month levered FCF margin of 0.42% is 91.8% lower than the 5.10% industry average.

POWR Ratings Reflects Uncertainty

LEVI has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. LEVI has a C grade for Value and Quality, in sync with its mixed valuation multiples and profit margins.

It also has a C for Sentiment, which aligns with its mixed analysts' estimates.

In the C-rated Consumer Goods industry, LEVI is ranked #35.

Beyond what is stated above, one can access additional LEVI ratings for Growth, Stability, and Momentum here.

Bottom Line

The outlook for the upcoming holiday shopping season is mixed. Some retailers are seeing strong consumer demand for holiday items, but there are concerns such as declining credit card spending in September, indicating a potential slowdown in the fourth quarter. Also, Consumer confidence in improved financial situations for the holidays has declined.

LEVI has lowered its annual profit forecast due to higher costs and declining sales in its North American wholesale channels. Moreover, weaker retail traffic in September could translate into lower foot traffic in LEVI's stores or reduced online shopping.

Considering LEVI’s mixed profitability and valuation multiples, it could be wise to wait for a better entry point.

How Does Levi Strauss & Co. (LEVI) Stack Up Against its Peers?

LEVI has an overall POWR Rating of C, which equates to a Neutral rating. Other Consumer Goods stocks with an A (Strong Buy) rating include Kimberly-Clark de México, S. A. B. de C. V. (KCDMY), Acme United Corporation (ACU), and Henkel AG & Co. KGaA ADR (HENKY). For more Buy-rated Consumer Goods stocks set to outperform, click here.

What To Do Next?

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LEVI shares were trading at $13.32 per share on Tuesday afternoon, down $0.21 (-1.55%). Year-to-date, LEVI has declined -12.17%, versus a 11.61% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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