Levi Strauss shows resilience for dividend investors

Levi Strauss is a good choice for dividend investors

Levi Strauss (NYSE: LEVI) proved once again the power of omnichannel commerce and the shift from direct-to-consumer sales. The company not only managed to outperform in the second quarter, but reaffirmed its guidance, which is about the best we can expect for this reporting season. The takeaway is that this iconic brand is still running on all cylinders and Give results for shareholders. The second quarter results included a strong increase in the dividend yielding over 2.5% and we believe it will increase again.

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“While the operating environment remains dynamic, the diversity of our businesses provides the resilience and flexibility to deliver strong financial results in fiscal year 2022, while moving us forward on the path to net revenue. $9-10 billion and an adjusted EBIT margin of 15% by FY2027,” said Harmit Singh, Chief Financial Officer.

Levi Strauss beats and raises, writes off Russian business

Levi Strauss had a great trimester driven by demand across all geographies and channels, even excluding its former business in Russia. The company reported net revenue of $1.47 billion, a 14.8% gain over last year and last year was also a good year. Revenue also beat Marketbeat.com’s consensus by 280 basis points and also comes with strong margins. On a segment basis, DTC grew 16%, driven by directly owned stores. Wholesale grew by 15% and digital also showed a strong performance. E-commerce sales increased 3% on top of last year’s 20% gain and reached 7% of net, while DTC reached 30% of net.

Moving on to the margin, the news on the margin is a bit mixed but completely offset by mitigating factors. Gross margin contracted by 90 basis points due to acquisition costs and the full depreciation of Russia, but GA was nil. With regard to operating margin, operating margin contracted due to the war in Ukraine, but on an adjusted basis, it widened by an equally significant amount. That left GAAP earnings down 25% from a year ago, but Adjusted EPS is up more than 25% and $0.06 better than expected and guidance is also favourable.

Revenue and earnings forecasts for 2022 are in line with the analyst’s consensus, which doesn’t say much, but implies around 12% year-over-year growth. This is huge in a world where growth prospects are seriously threatened and it is excellent news for the dividend. The company just increased the dividend by 20%, actually proving the strength of cash flow. Regarding the balance sheet, the company is a bit leveraged and we mean a bit. The leverage ratio of 1.1X is down from 2.0X last year and it could go down.

Analysts love Levi Strauss’ cut

The analysts are optimistic on Levi Strauss but the price targets started to drop. JPMorgan Chase is the first to issue a price cut target at $22 down from $27 against the consensus of $30. Consensus is down from a fixed peak earlier this year but relatively stable over the past 30 days and more since last year. However, JPMorgan’s target is around 35% above the current price action, and also above a key technical level.

As for the chart, the stock looks extended at current levels and ready for a rebound. The next major resistance point lies at the key $19.50 level, which coincides with the short-term moving average. If the market can break above that level, we see it drifting into the $22-$30 range by the end of the year, depending on how economic data and earnings evolve. Otherwise, this stock could be limited to these low levels.

Levi Strauss

Article by Thomas Hughes, market beat

Updated

Robert D. Coleman