After a mixed Q2 earnings report and hike in its quarterly dividend, shares of Levi Strauss (NYSE:LEVI) continue to lose ground and are now looking at a record-setting drop in the stock, cutting through supports at its 50- and 100-day moving averages like a hot knife through butter.
The 17% drop in the share price comes despite a beat on earnings, an 8% improvement in sales, and 180 basis point expansion in its gross margin to a record 60.5%.
The reaction seems to be generated by the disconnect between what the company is saying about demand for denim and what they are projecting for FY24. Investors were clearly disappointed that the company left revenue guidance unchanged, of which the bottom-line was below the Street’s consensus, and included a 5-cent charge from higher logistics costs and increased spending on marketing.
Wall Street was expecting better.
The accelerated popularity of western wear — thanks to Beyoncé and Yellowstone – and the CEO’s own admission that “denim product beyond bottoms is selling like crazy,” set investors up for a more significant upside in FY24 sales. And the run-up in the stock (+40% YTD vs +15% for the S&P 500) is evidence of Levi’s popularity among consumers and investors.
Even accounting for the dramatic run-up in the stock this year, the consensus among most analysts is that the post-earnings sell-off brings the share price closer to a reasonable valuation.
“Levi did demonstrate strength in their DTC channel, a key strategic priority for the company..and increasing profitability, a sign that Project Fuel is progressing as intended,” Seeking Alpha author Justin Purohit said.
Purohit downgraded his rating to Neutral from Buy as the sell-off now leaves shares “adequately priced.”
The sentiment was echoed by BofA Securities, which also gives Levi’s (LEVI) a Neutral rating and raised its price target to $22, more closely aligned to its current share price.
“Our Neutral rating reflects our belief that LEVI is well positioned to benefit from structural margin improvements over the longer term, but near-term challenges such as a slowdown in denim demand keeps the risk/reward balance,” the bank said in Thursday’s research note.
Morgan Stanley maintained its Equalweight rating as “LEVI is in early innings of DTC, international, and under penetrated category growth which present runways for margin expansion and EPS growth [long-term].”
Regardless of the performance of the stock, Levi CEO Michelle Gass paints a very upbeat outlook for the future thanks to the popularity of denim. In the DTC channel, which includes on-line sales and Levi store sales, Gass said the 501 jeans had a 16% increase, tops were up 20%, women’s Western shirts were up 40%, and loose fit sales were up 21% across all channels. Gass added that as a result of the popularity of loose fit, the company is launching a new baggy fit line for women this summer, and a relaxed fit for men called the 555 jeans.
Leaning into its gains in the DTC channel, Gass said during the company’s earnings call, “Our transformational pivot to operating as a DTC First company is reaching a tipping point with accelerating sales momentum and an improvement in margins.”