Love Levi's the pants. Hate Levi's the the stock. I wear Levi's on the weekends. They look great. Investors are wearing Levi's, the stock, and after last evening's earnings report they are dressed for a lack of success.
Levi Strauss & Co. (LEVI) came public on March 21st with much fanfare, the first big deal of the year, right before the debacle that was Lyft (LYFT) , the driving ecosystem that turned out to be a cab company.
Levi's, the company, is storied. It's been kicking around since 1853. Given that long history and the terrific management - Chip Bergh is a seasoned CEO - I understand why it immediately went to a premium from its $17 pricing. The stock opened at $22.22 and closed at $23.66, giving it a 22 price to earnings multiple, a nice premium to the rest of the apparel group.
The first quarter since they came public justified the premium. They did a real good job.
This quarter? The market had decided: it was a bomb, not a thermonuclear bomb, more of a napalm loaded canister, scalding those who own it.
Is the market right? The headlines say it was a better than expected quarterly report. The headlines say that the company had a slight boost in forecast.
But the market wasn't buying it.
Because of the customers in the U.S. that's why.
It looks like America is overrun with denim right now. The stuff is coming out of the ears of the stores. The U.S., Levi's largest market was up 1% but it had a 2% DECLINE in U.S. wholesale, perhaps their most important channel. As Harmit Singh, their thoughtful CFO explained on the call: "The US wholesale decline was attributable to the impact of the bankruptcies and door closures that some of our customers have experienced over the last year as well as a decline in discounted sales to the off-price channel."
In other words, some of their customers are going out of business pretty rapidly or closing stores - think J.C. Penney (JCP) , which still has about $11 billion in sales to lose.
Worse, the company says they expect "the second half growth to moderate relative to the first half, particularly in the United States." Oops, as bad as it is, you ain't seen nothing yet, including perhaps a bad back to school season and a negative holiday season. Again their language: "Additionally we anticipate that pressure in the wholesale channel will adversely impact us by roughly 200 basis points in the second half due to the bankruptcies and door closures since a year ago, the overall softening, U.S. wholesale environment and the lower off price channel sales." Oddly they say that this bad news reflects our "healthier inventory position."
Wow, how terrible would the numbers be if they had an unhealthy inventory position?
All of this for a company with better than expected earnings and forecast!
Maybe the company can be saved by overseas, like China. Not so fast:"China is about 3% of our business," Bergh said on the call. They import more from China than they sell there.
Now to be sure, the weakening of their wholesalers isn't their fault. When the company came public it was difficult to tell how ugly their customers would have it.
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. 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?
The company did itself no favors though in not telegraphing some of this weakness or indicating how it can battle the customer weakness. And while, candidly, you could say I am pulling a hard quote but here it is. After talking about how well e-commerce is doing and how their own stores are doing well, "so we do have a strategy."
Ultimately, the fault is in the stars and, I think themselves. Shakespearean tragedy, not a history, not a comedy.
Bottom line: this stock should be much lower, maybe back to where it came public. That's what the 10% decline reflects.
And it's a metaphor for what awaits retail now that we are in a market where there is Amazon (AMZN) , Walmart (WMT) , Target (TGT) , Costco (COST) , and that's about all. They have pricing power. They have clout. The rest are hurting. That's bad for Levi's. In fact, it's bad for everyone who sells to retail and you've now been given fair warning of what awaits you.