Levi Strauss (LEVI) stock has three key elements to its growth story: Women, direct-to-consumer, and international sales.
Each factor grew significantly in the first-quarter earnings release, but still appear to have room to grow and remain key areas of investment for the company.
"From a category perspective, LEVI is underpenetrated in both women's and tops, which we view as key to the company's ongoing transformation into a lifestyle business," Morgan Stanley analyst Kimberley Greenberger told clients on Wednesday.
In addition, the analyst said, direct-to-consumer efforts will likely drive most of Levi's revenue growth from here on, while management opens more stores, expands e-commerce further and digs deeper into Asia and Europe.
For that direct-to-consumer push, it could be a pivotal way to avoid pain from the closure of numerous department stores and intermittent bankruptcies, operating without some of its struggling partners.
On the international end, the brand is gaining traction in major markets across Asia and in China at higher selling prices, should it continue to drive margin expansion as well. Margins have remained a sticking point for those perusing the earnings release and could encourage many of the same critics in the long-term.
"While we've made good progress, the future growth opportunity in these [regions] remain significant," Bergh said, hinting at the untapped markets.
For one, fashion is not a constant. While forecasts for the denim market are widely encouraging, a company highly dependent on one specific product runs the risk of it simply going out of style.
As women's jean jackets have suddenly roared to massive popularity, so too could they fall out of favor. That would likely severely limit the upside factor from the women's business and temper the three-pronged growth story management expects.
As athletic-leisure fashion continues to grow and companies like Lululemon (LULU) bear out consumer shifts in sales results, that would not be an entirely unexpected move. At the very least, the demand for the form-fitting bottoms could harm skinny jeans sales.
Real Money's Jim Cramer added that international sales may be no savior, either, given the still nascent nature of the company's expansionary aims.
Maybe the company can be saved overseas, like by China? Not so fast: "China is about 3% of our business," Bergh said on the call. Levi imports more from China than it sells there, he added.
With the U.S. declining, the company will need to expand more rapidly into these markets that can afford its products. That 3% likely won't move the needle, especially while these international markets potentially come into the crosshairs of the ongoing trade war.
Lastly, the DTC push is a bit of a double-edged sword in the near term. While few will argue with the need for an online presence and many more might appreciate the go-it-alone model for brick and mortar, the simple fact is that it costs a great deal to build these capabilities.
Free cash flow has fallen noticeably in the company's public reports post-IPO and the planned opening of tens of stores and capital expenditures on building an omnichannel presence is not going to help that reverse itself.
That's not to mention the advertising costs associated with making consumers aware of the selling points the company is now signaling as key stock stories.
For financially focused investors, this is a significant near-term issue that the multiple for the jeans manufacturer just wasn't registering.
In the end, it may come down to simply getting too hot post-IPO and seeing the valuation rip out of its own comfort zone.
"The mistaken stock price actually has much more to do with the valuation of the stock than the management of the company or their excellent core products," Cramer commented. "Or, to put it in hedge fund speak: What the hell was this thing doing at 22 times earnings with that weakening customer base and the retail market here swimming with the sharks?"For a trade idea on the stock at their currently depressed levels, click here.