Levi Strauss (LEVI) could be an offering an opportune entry point according to some prominent voices on Wall Street.
Shares of the recently IPO'd company are plunging on Wednesday, moving double-digits to the downside in morning trading after reporting less-than-stellar earnings and forecasting a tougher second half ahead on Tuesday evening.
However, many on Wall Street are sticking by the stock and its roadmap for growth given the one-time impairments that tempered Tuesday's earnings results.
The earnings decline largely was blamed on costs linked to its March listing on the New York Stock Exchange. Adjusting for that cost, Levi Strauss earned 17 cents per share, beating the Street consensus forecast of 15 cents per share but still down significantly from the year prior.
"Adjusted diluted EPS for the second quarter of 2019 was $0.17. Let me repeat, $0.17, which is down 21% over prior year," CFO Harmit Singh said. "The EPS decline was greater than adjusted net income decline due to the shares we issued in connection with our IPO."
The underlying results for the quarter were encouraging as well, as both Europe and Asia marked double-digit sales gains as denim fashion picks up in each region. International sales now account for almost 60% of revenue for the company and CEO Chip Bergh told analysts there remains room to run.
Further, both direct-to-consumer and womenswear showed strong improvement from the prior year, indicating key components of Levi's overall post-IPO growth strategy.
"Direct-to-consumer, which for us includes the brick-and-mortar stores and e-commerce sites we operate, grew 14% for the quarter in total and has now grown double digits for 13 consecutive quarters," Bergh said. "Our total women's business grew 16% in the quarter, which was the 16th consecutive quarter of growth in women's, with each of last 10 quarters being double-digit growth."
Given the metrics and the growth factors ahead long term, many on Wall Street see a key opportunity to fit into Levi's stock at a more attractive multiple.
"Levi's reported adjusted 2Q (Mar-May) EPS of $0.17 (or 4 cents above the apples-to-apples Street Consensus at $0.13) with the +5% or $7M Operating Income beat comprised of +9% constant currency revenue growth," J.P. Morgan analyst Matthew Boss said, highlighting the misleading headline figures."Moving forward, we see continued "Beat & Raise" opportunity in the back-half (despite the Black Friday shift) with management's 2H19 guide embedding a -950bps sequential slowdown in average 2/3-year stacks relative to 1H19."
In that context, perhaps the guidance was conservative rather than simply poor. Boss believes the company is only scratching the surface of its key growth focuses at this point and could provide solid returns for investors in coming quarters. He reiterated his "Outperform" outlook moving forward.
"We would recommend buying any weakness on U.S. wholesale concerns given that this is a rare liquidity event for a stock still with such a small float," Evercore ISI analyst Omar Saad said even more bullishly. "With the company just scratching the surface on digital marketing and finding unique ways to introduce the brand to a wider audience, this American "Brandsformation" story should continue to resonate globally and support outsized top and bottom-line growth."
Given the ability for the company to continue building that story and accelerate key opportunities in DTC, international expansion, particularly in China, and in womenswear, there is a great deal of room to grow revenue even if department stores and one-time charges might obscure that view.For a look at what the charts are touting for entry points, click here.