Levi Strauss Proves Resilient For Dividend Investors

July 08, 2022 at 09:00 AM EDT

Levi Strauss Is A Good Fit For Dividend Investors

Levi Strauss (NYSE: LEVI) proved the power of omnichannel business and the shift of direct-to-consumer sales once again. The company not only managed to outperform in Q2 but it reaffirmed its guidance which is about the best we can expect for this reporting season. The takeaway is this iconic brand is still firing on all cylinders and delivering results for shareholders. The Q2 results included a hefty increase to the dividend that has the yield above 2.5% and we think it will get increased again.

"Although the operating environment remains dynamic, the diversity of our business is providing the resilience and flexibility needed to drive solid financial results in fiscal year 2022, while progressing us on our path to achieve net revenues of $9 to $10 billion and adjusted EBIT margin of 15% by fiscal year 2027." said Harmit Singh, CFO.

Levi Strauss Beats And Raises, Writes Off Russian Biz

Levi Strauss had a great quarter driven by demand in all geographies and channels, even excluding its former business in Russia. The company reported $1.47 billion in net sales for a gain of 14.8% over last year and last year was a good year too. The revenue beat the Marketbeat.com consensus by 280 basis points as well, and is accompanied by solid margins as well. On a segment basis, DTC grew by 16% led by company-owned stores. Wholesale grew by 15% and Digital put in a strong showing as well. eCommerce sales grew by 3% on top of last year’s 20% gain and grew to 7% of the net while DTC came in at 30% of the net.

Moving on to the margin, the margin news is a little mixed but completely offset by mitigating factors. The gross margin contracted by 90 basis points due to acquisition costs and the full impairment of Russia but the AGM came in flat. Moving down to the operating margin, the operating margin contracted due to the war in Ukraine but on an adjusted basis widened by an equally large amount. This left the GAAP earnings down by 25% versus last year but the adjusted EPS is up more than 25% and $0.06 better than expected and the guidance is favorable too.

The guidance for 2022 revenue and earnings is in-line with the analyst's consensus which isn’t saying much but it implies about 12% of YOY growth. This is huge in a world where the outlook for growth is in serious peril and great news for the dividend. The company just raised the dividend by 20%, in fact, proving the strength of the cash flow. In regard to the balance sheet, the company is carrying a little bit of debt and we do mean a little bit. The leverage ratio of 1.1X is down from 2.0X last year and it may get smaller.

The Analysts Like The Fit Of Levi Strauss

The analysts are bullish on Levi Strauss but the price targets have started coming down. JPMorgan Chase is the first to issue a price target reduction to $22 from $27 compared to the consensus of $30. The consensus is down versus a peak set earlier this year but relatively stable in the last 30 days and up from last year. JPMorgan’s target is about 35% above the current price action, however, and also above a key technical level.

Turning to the chart, the stock looks extended at the current levels and ready for a rebound. The next major point of resistance is at the key level of $19.50 which is coincident with the short-term moving average. If the market can get above that level we see it drifting up into the $22 to $30 range by the end of the year, depending on how economic and earnings data plays out. If not, this stock could be range-bound at these low levels.

Levi Strauss Proves Resilient For Dividend Investors