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  1. Home
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Good Old Levi's Jeans Still Fit (in Your Portfolio)

Here's why Levi Strauss is poised to pocket the rewards of the reopening -- even as everyone has their eyes on travel and services spending.
By BRAD GINESIN
Apr 19, 2022 | 01:00 PM EDT
Stocks quotes in this article: LEVI

The stock market is in no mood to hear the consumer might be strong for anything other than travel, hotels, and dining out. Recession and stagflation pervade the narrative. So does talk of soaring commodity costs and supply chain bottlenecks. But in spite of this, we can spot buying opportunities related to retail -- if we know where to look.

One such place is Levi Strauss (LEVI) . The apparel maker reported solid earnings two weeks ago. Levi's earnings and guidance were good, and the stock is cheap. But the market is not apt to reward such positive news in retail right now. Patient value investors, however, could stitch together a good investment.

Levi Strauss & Co. started as a dry goods company in 1853 and began manufacturing denim overalls in the 1870s. It went public for a second time via a 2019 initial public offering. Pandemic-related business disruptions have obscured the last two years and muddled the perceived growth trajectory. The company's business outlook is strong, and it's executing a solid growth plan. With pandemic's side effects easing, apparel sales will likely be robust as people return to their pre-Covid lifestyles. During the pandemic, the brunt of the demand pull forward was concentrated in home goods and certain electronics, not in apparel.

In Levi's latest quarter, sales were up 22% year-over-year, with record gross margins. The leading denim producer saw broad strength in most categories and geographies. Unit sales were back to pre-pandemic levels with revenues 11% higher, owing to price increases. Thus far, the company has been able to pass along costs; they increased retail prices by 10% to mitigate cost pressures and inflation in inputs with no impact on demand.

Levi is finding success in direct-to-consumer initiatives, contributing to margin improvements. Next-generation brick-and-mortar stores have produced impressive results, too. Plus, an expanded digital presence, accounting for a quarter of revenue, has seen increased traffic and conversions. Levi's Docker brand has also seen solid growth, led by a younger shoppers buying online.

Levi has had an initial 500-store display with Target since 2019 that is now rolling out to an additional 300 stores, thanks to its success. This will make up two in five Target locations. Levi expects to add more than 60 styles for men and women as it expands this retail offering.

The apparel maker is still innovating, and the company is focused on sustainability, using more organic cotton, post-consumer recycled cotton, and creating garments designed to be recycled. Management is also concentrating growth initiatives on under-penetrated international markets and women's clothing.

Wall Street gives Levi Strauss little credit for growth, however, with a forward price-to-earnings multiple around 12. If supply constraints hadn't limited sales, the multiple would be closer to 11. The dividend yield is just above 2% and a $200 million stock buyback was completed last quarter.

Understandably, Wall Street is focused on the dollar's strength, potential consumer weakness, cost inflation, rising interest rates, and fallout from the war in Ukraine. Yet, Levi's earnings showed resilience in this environment, so there's an opportunity to buy this iconic brand at an attractive valuation under $19 before the next potential catalyst, Investor Day on June 1.

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At the time of publication, Ginesin was long LEVI. 

TAGS: Investing | Stocks | Apparel | Retail

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