Levi Strauss & Co. (LEVI) hit the market Tuesday after the bell with their first earnings report since coming public only a few weeks ago. The good news for folks who don't care much for technicals is there isn't much in the way of technicals to discuss unless you are a very active trader using short time frames. Right now, I have the technicals boiled down to simply watching the lower end of the existing range ($21.25-$21.50) against the post IPO closing high and intraday high range ($23.50 - $24.25). Until either of these are broken, I don't have a technical inkling to trade the stock.
After reporting earnings of $0.37 on $1.44 billion in revenue, shares are trading higher by 5%, and I'll say after digging into the report, I don't quite understand the excitement. Some might be excited because revenues grew 7% year-over-year. Or maybe it is because last year, Levi reported a loss of five cents. Perhaps, it is the roughly 100 new company-owned stores that are going to open. I think it comes back to the numbers. The $166 million net income after showing a loss last year sounds like the company is ready for big things, but when you break down the number it really isn't that impressive.
From the $166 million, the company received a $99 million increase for the remeasurement of deferred tax assets and another $37 million from undistributed foreign earnings. These came courtesy of the 2017 Tax Cuts and Jobs Act. In the same breath, it should be noted this had a negative impact on 2018. It makes the timing of the IPO somewhat genius in terms of planning. It gives the impression that it's much more impressive than a year ago, but if you lift out the impact of the 2017 Tax Cuts and Jobs Act, the earnings growth is benign.
More number games can be found in how the company words cash versus debt. Here's the exact wording from the PR:
At February 24, 2019, cash and cash equivalents of $622 million and short-term investments of $100 million were complemented by $806 million available under the company's revolving credit facility, resulting in a total liquidity position of approximately $1.5 billion. Net debt at the end of the first quarter of 2019 was $319 million.
Note how the company reports its gross cash and investment numbers, but only its NET debt numbers. By reporting net debt numbers, it creates the perception the company's debt is smaller than what it truly is. The fact is debt exceeds cash and short-term investments. If you read this line too quickly, you might miss that fact.
It's not all bad news though. The slightly tepid guidance for 2019 is impacted by the fact the company won't be able to include Black Friday sales due to the timing of its Fiscal Year. What that might mean is when Levi's reports its fourth quarter, guidance for 2020 could be lifted, especially if the year will include two Black Fridays. It could also mean 2020 Q1 is strong as well. The company has set a dividend of $110 million for the year although if Direct-to-Consumer sales don't accelerate soon I could see this being cut by the end of 2020. It's too early to predict the odds, although I'd say they are low at the moment, so for folks looking for a 1%+ yield on a retail name, LEVI will come for consideration.
With mid-single digit growth, some number trickery on the current earnings report, and the lack of a unique selling proposition, LEVI doesn't draw me in as a must-own retail name. I'd watch for short-term trading opportunities, but, for now, this one will remain in the dirty laundry pile for me.