Levi Strauss & Co. (LEVI, Financial) manufactures and sells jeans and other apparel and related accessories for men, women and children on a global basis. Top brands include Levi's, Dockers, Signature by Levi Strauss & Co. and Denizen. The company also operates approximately 3,100 brand-dedicated stores and shop-in-shops.
Founded in 1853, the company created blue jean work pants in 1873 to support miners in the California Gold Rush. It is still headquartered in San Francisco. Revenue this year is expected to be $6.4 billion and the current market capitalization is $5.6 billion.
Business snapshot
Today, the company’s products are sold in over 50,000 retail locations in 110 countries, with the Americas representing about half of the global business. Europe represents about 30% of total sales and Asia makes up 14%. Around 65% of apparel products are men’s products, while women and children make up the remaining 35%. Its product mix is composed of 75% jeans, pants or shorts, 20% tops and 5% footwear. The Levi’s brand accounts for roughly 87% of all sales.
The majority of the company’s products are made in international markets in various developing countries such as India, Vietnam, Sri Lanka and Indonesia due to the availability of low-cost labor and raw materials. However, some styles under the "Levi's Premium" and "Levi's Vintage Clothing" lines are manufactured in the U.S.
Financial review
Last week, the company reported third-quarter financial results for the period ending August 2022. Reported net revenue was $1.5 billion, which was an increase of 7% on a constant currency basis compared to the prior-year period that was primarily driven by the Dockers and Levi’s brands. The gross margin was 60 basis points lower than the prior year and the operating margin came in at 12.4%, which was down from 14.8% in the year-ago quarter.
Margins were negatively affected by weaker end market demand in certain regions, the stronger dollar, higher input cost inflation and elevated levels of discounting. Demin sales industry wide were down in the mid-single-digit range in the third quarter, which was a significant drop from earlier periods.
Cash on the balance sheet stood at $499 million and short-term investments were $101 million compared to total debt of $963 million. Total liquidity stood at $1.4 billion when taking into consideration availability on outstanding credit lines. The leverage ratio was 1.1 times compared to 1.6 times at the end of the third quarter of fiscal 2021.
Levi Strauss returned $74 million to shareholders during the quarter, which was comprised of dividend payments of $48 million and share repurchases of $26 million.
In a statement, Chief Financial Officer Harmit Singh commented on these operating challenges.
"We have taken swift and decisive action to successfully navigate the dynamic operating environment," he said. "We are controlling discretionary spending, while maintaining our commitment to invest strategically to capitalize on our long-term growth opportunities. The strength of our brands around the globe, our diversified business model and our proven operational excellence give us confidence in our ability to manage though the industry’s near-term challenges, while achieving our long-term growth and value-creation objectives.”
Valuation
Due to these operating challenges, the company lowered its fiscal 2022 guidance, which now calls for new revenue growth between 11.5% and 12.% on a constant currency basis and adjusted earnings per share between $1.44 and $1.49.
Current analyst consensus earnings per share estimates for the fiscal year ending November 2022 are $1.47 and for the next fiscal year, the estimate is roughly flat at $1.45. The stock is selling at 9.7 times this year's earnings estimates and the enterprise value/Ebitda ratio is approximately 8.2.
The GuruFocus discounted cash flow calculator creates a value of approximately $18, or 21% above todays' price. The calculator used a conservative long-term growth rate of 5% and a discount rate of 10%.
The company pays an annualized dividend of 48 cents, which equates to an above-average dividend yield of 3%.
Guru and insider trades
Gurus who have reduced their positions in Levi Strauss recently include Joel Greenblatt (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates, while Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies were among those who boosted their holdings.
The CEO of the company, Charles Bergh, owns approximately 1.37 million shares.
Conclusion
Despite near-term headwinds and challenges, the long-term prospects for Levi Strauss still look attractive. The global apparel addressable market is approximately $1.6 trillion, while the jeans market subset of that is roughly $100 billion. The market is expected to grow at a compound annual rate of 6%, which is primarily driven by developing and emerging markets. The company has about a 6% market share of the jeans segment currently.
The company also has an ambitious growth plan to deliver annual shareholder returns in the 9% to 10% range. This is expected to be driven by 5% top-line growth, 1% to 2% of operating cost synergies and margin improvement, 1% to 2% from tax and interest expense leverage and dividend yield in the 1% to 2% range. With the stock currently yielding 3%, investors today already have a head start on the 9% to 10% shareholder return target.
