Continuing with coverage of stocks relevant to this holiday travel and shopping season we are in currently, today’s research note cover’s a longstanding brand in the retail clothing space, Levi Strauss & Co. (NYSE:LEVI), the parent company behind the “Levi’s jeans” brand.
Quick facts about this US-headquartered company are that their roots go back to 1853 when they created the first “jeans”, their stock trades on the NYSE, and their clothing is reportedly sold in 50,000 retail locations across 110 countries.
This article uses a 9-point scoring matrix that holistically considers multiple angles of the stock, with an emphasis on cashflow potential for investors and fundamental trends from the key accounting statements publicly available such as the balance sheet and income statements, as well as a future-looking outlook on this stock.
Based on the score total in the score matrix above, this stock is getting a rating of buy.
In comparing my rating to the consensus rating on Seeking Alpha, I am agreeing with the consensus from SA analysts and Wall Street on this stock:
Dividend Income Growth
This section uses dividend growth data to explores the 10 year dividend income growth for a hypothetical investor owning 100 shares, to determine whether this stock is a great dividend income opportunity.
Looking at the dividend 10 year growth chart above, if my portfolio had bought 100 shares in 2013 it would have made $0 in dividend income on this stock until about 2019 when the annual dividend was $0.15/share ($15 annual dividend income).
This grew to $0.44 annual dividends in 2022 ($44 dividend income), a growth of +193% in 4 years.
Should they continue with this growth trajectory, which is yet to be seen, another growth of 193% by 2026 would mean +$128 in annual dividend income.
For this reason, I would call it a buy in this category, on the basis of proven prior dividend growth of over 100% in 4 years, a history of regular payouts, and their capacity to return capital back to shareholders as evidenced by their recent dividend hike announced:
The company declared a dividend of $0.12 per share, totaling approximately $48 million. The dividend is payable in cash on November 9, 2023 to the holders of record of Class A common stock and Class B common stock at the close of business October 26, 2023.
Dividend Yield vs Peers
This section uses dividend yield data to compare the trailing dividend yield vs 3 similar peers in the same sector, to determine if this stock presents the most competitive dividend yield on capital invested.
In the above chart I compare the trailing dividend yield of Levi’s of 3.53% vs two key peers in the retail clothing/apparel space who also trade on the NYSE, Capri Holdings (CPRI) and PVH (PVH).
Of the two peers, Capri does not pay a dividend and the yield for PVH is near 0%.
In this case, I am calling another buy for Levis with a +3.5% trailing dividend yield (3.13% forward yield), on the basis of it being more competitive than two key peers and being above 3%, the goal here being to get the best return on my potential capital invested in this stock.
This section explores this company’s revenue growth trends over the last year, using data from the income statement.
The company saw top-line sales in the quarter ending August of $1.51B, vs $1.51B in Aug 2022, or practically flat YoY growth.
Further, from their most recent quarterly comments on FY2023 guidance, the company stated that “reported net revenues are expected flat to up 1% year-over-year.”
After digging further, it seems the strength going forward might been in their direct-to-consumer and e-commerce segments (via their e-commerce site Levi.com), since they have a chain of their own stores and also selling via their website, in addition to wholesaling their branded clothing to other retailers who sell them.
For instance, their Americas region:
DTC net revenues increased 12% on a reported basis..
driven by company-operated mainline and outlet stores and e-commerce. Wholesale net revenues decreased 12%.
A similar scenario happened in their Europe region, while in Asia they grew in both DTC as well as wholesaling.
Since the outlook is for flat-to-positive growth, and I believe this holiday season could be a good one for retailers in general (consider a story by Euronews this week about increasing retail sales in the Eurozone after a 3-month decline), I will call this one a buy when it comes to revenue growth potential.
This section explores this company’s earnings (net income) growth trends over the last year, using data from the income statement.
We can see that net income fell to $9.6MM in the quarter ending August vs +$172MM in Aug 2022, a 94% YoY decline.
Further, we can see that since August 2022 the earnings have been on a declining trend, even posting a net loss in May 2023.
One factor that sticks out is the rise in interest expenses on debt, which jumped to $11.5MM this August vs $7.7MM in Aug 2022, a 49% increase, and a 161% increase vs the quarter ending May 2022.
In addition, the company gave some more insight in its quarterly comments as to other factors which seemed to be one-time or short-term issues only:
The increase in expenses was primarily driven by a $19 million pension settlement loss and foreign currency transaction losses reflecting the impact of rate fluctuations on foreign denominated balances.
Another item of relevance to mention is the impact of acquiring Beyond Yoga which caused a short-term charge:
Operating margin of 2.3% was down from 13.1% in Q3 2022 as a result of higher SG&A expenses and an impairment charge of $90.2 million related to the Beyond Yoga® acquisition..
So, I will call this stock a hold when it comes to net income, not because of the one-time charges mentioned but the declining earnings trend and expected continued impact of high interest costs in the current rate environment. At the same time, it has bounced back from its net loss and has shown profitability in 4 of the last 5 quarters, as well as meeting or beating earnings estimates in the last four quarters.
Equity Positive Growth
This section explores this company’s equity (book value) growth trends over the last year, using data from the balance sheet.
The good news here is that total equity grew to $1.94B in August vs $1.82B in Aug 2022, a +6.5% YoY growth.
In addition, they showed an improvement trend in equity in each quarter since August 2022, driven by decreases in both current liabilities as well as total liabilities while total assets declined slightly.
In the current environment of high cost of debt financing, it is relevant to mention also that their total debt went up to $1.00B in August vs $963MM in Aug 2022, which is a less than 4% growth in long-term debt.
For this reason I will call it a buy in this category, on the basis of positive equity growth trends and only slight increase in debt, as this positions the company with a strong balance sheet going into 2024.
Share Price vs Moving Average
This section explores the current share price compared to the 200-day simple moving average, to decide if it currently presents a buy, hold, or sell opportunity.
From the chart above we can gather that the share price (as of market close on Friday Dec 8th) of $15.03 is just around 2.7% above the 200-day simple moving average (orange line).
This is far below the highs around February, but a rebound from the autumn lows.
In this case I will call it a hold rather than a buy on the basis of a much better buying opportunity already passed this fall, flat revenue growth and declining earnings growth, offset by a the positive of proven dividend income growth up until now.
This section uses valuation data to explore the forward P/E ratio and whether it presents an undervalued opportunity.
We can see that the forward GAAP-based P/E ratio of 20.98 is +24% above the sector average.
What I think is driving this multiple, when tying back to financials already discussed and share price, is the spike in share price above the 200-day moving average combined with a significant (94%) decline in earnings in the last quarter reported.
Hence, I will call this overvalued because the market is driving up the price far above their autumn lows while earnings are not rising.
At a multiple of nearly 21x earnings, I would not consider this a buy right now but more of a hold.
Valuation: Price-to-Book Value
This section uses valuation data to explore the forward P/B ratio and whether it presents an undervalued opportunity.
What we can gather is that the forward GAAP-based P/B ratio of 3.03 is +23% above the sector average.
When tying back to the financials and share price, what I think is driving this elevated multiple is the spike in share price while equity has only grown less than 7%.
I will call this a hold because although equity has risen it has not done so at the pace of the share price increasing, which has gone up about $2/share since its October lows (see YChart I provided) or around a +15% price growth. ($13/share to $15 a share).
This section identifies a key risk to consider about this company and what its probability and impact could be to the business.
Because this is a consumer product business and therefore impacted by consumer spending and recessions, the key downside or upside risk I want to discuss is the risk of a recession.
No recession and continued consumer spending on apparel could provide upside potential to revenue, while a significant recession could cause severe downside with sales plunging, as fewer people for example may buy unnecessary apparel items and may just keep wearing the same jeans.
The data shows that there is no explicit recession anytime soon. According to a Dec. 8th article in Fortune magazine, this is helped by drops in unemployment:
U.S. employers added a solid 199,000 jobs in November while the unemployment rate fell, signaling a robust labor market that appears set to achieve the elusive “soft landing” of cooling pandemic-era inflation while avoiding a recession.
In addition, yesterday’s interview on CNBC with Goldman Sachs’ economist Jan Hatzius also added confidence, particularly when considering the rising trend in wages which provides more income to spend.
According to Hatzius:
The risk of recession, in my view, is quite low.
So, I will call this stock a buy in this category of risk on the basis of a low recession risk probability and therefore a low business impact right now.
To summarize, I am modestly bullish on this stock today.
Positives include dividend income growth, above-average dividend yield (+3.5%), growth in equity, and lower risk of recession for now which should help consumer retail.
Headwinds include overvaluation (P/E, P/B ratios), flat revenue growth and earnings declines, and a share price +15% above its autumn lows and trending above the moving average.
This being an established, longstanding apparel brand globally recognized could be an addition to a portfolio if I wanted to add retail-sector stocks for diversification, and to grab that +3.5% dividend yield, for the dividend income opportunity.