Levi Strauss (NYSE:LEVI) is among the oldest clothing brands in the world and is almost synonymous with denim jeans.
Shares of LEVI have been somewhat flat since its 2019 IPO, when they initially traded for $22.22. Today, they are still in the low $20 range, despite the gains the broader market has made in the intervening six years.
Things are, however, finally looking up for Levi, and the stock has gained over 27% in the last month alone, so is Levi Strauss stock finally set to pop, or is the business still looking too shaky to attract investors?
Strong Q2 Results Spark Levi Gains
Levi is currently coming off of strong Q2 results that accounted for some of the stock’s recent gains.
During the quarter, net revenues rose 6 percent to a total of $1.4 billion. Though certainly positive, this top-line growth was outpaced by a 37 percent increase in adjusted EPS to $0.22 per share. Management also raised its outlook for FY2025 and is now projecting 1-2 percent net revenue growth and $1.25-$1.30 in adjusted EPS for the year.
Levi is currently on a decent run of revenue growth, with Q2 having been its fifth consecutive quarter of year-over-year revenue increases. Levi’s revenues tanked in 2020, but the business has both recovered the ground it lost and surpassed its pre-pandemic revenue highs. In part, this has been accomplished by focusing more on direct-to-consumer sales, which form a core part of Levi’s current growth strategy.
Net income has been less consistent than revenue, but Levi Strauss has managed to remain in positive territory in terms of trailing 12-month net income for nearly five years.
With adjusted EPS currently trending upward and gross margin improving to 62.6 percent in Q2, it appears that Levi may be back on the right track where its earnings are concerned.
Following a weak 2024, net margin has recovered to 6.4%. In addition, the business has delivered a return on equity of 20.4 percent and a return on invested capital of 13.5 percent over the last 12 months.
Last quarter, management also decided to sell Levi’s Dockers brand for $311 million, with an additional $80 million earn-out possible if the brand performs well after the sale.
The proceeds from the sale will not only add to Levi’s balance sheet but are also expected to benefit shareholders directly. In the Q2 report, management reiterated plans to allocate at least $100 million of the money received from selling Dockers to share repurchases.
Can Levi Keep Growing?
Far from being a temporary trend, Levi’s earnings growth is expected to continue, albeit at a somewhat lower pace going forward. Over the next five years, analysts project EPS growth of about 9.5 percent annually from Levi.
When discussing Levi’s long-term growth prospects, it’s also necessary to look at the strength of the brand and its competitive moat. While other prominent brands have certainly sprung up to challenge it, Levi remains a benchmark brand among consumers.
In part, this fact accounts for the strength of Levi’s direct-to-consumer marketing channel, which saw organic year-over-year sales growth of 10 percent in Q1. This was substantially higher than the organic rate of wholesale growth, which in and of itself was a respectable 7 percent.
Crucially, Levi Strauss has made considerable inroads in building its brand among young consumers. Brands as old as Levi don’t always translate easily to younger generations, especially in the fashion world.
However, a recent report found that 40% of teens named Levi as their preferred brand of jeans, handily beating out the next-closest competitor, American Eagle, at 17 percent.
This level of brand preference could keep Levi growing for some time to come, as it’s clear that the brand has been able to establish a foothold among young consumers.
Has the Market Undervalued Levi?
On the valuation front, LEVI is trading at 21.0x sales, 1.4x earnings, 4.1x book value and 23.4 times operating cash flow.
For reference, the average P/E across the S&P 500 is currently 25.6. These prices may be on the low side for a business with Levi’s brand moat and potential for long-term earnings growth.
Can Levi Stock Double?
The consensus forecast among 13 analysts is that Levi Strauss stock can rise to $23.13 per share before reaching fair value.
Right now, Levi Strauss has many of the features investors often look for in good long-term holdings. The power of Levi’s brand, its success in moving to DTC sales and a reasonable valuation are all positives that could make LEVI stock a good investment.
Furthermore, Levi also offers its shareholders a 2.4% dividend yield at current prices. With a payout ratio of only slightly over 50 percent and several more years of earnings growth expected ahead, LEVI could prove to be a respectable dividend growth stock.
Management also appears keen to keep returning cash to shareholders through share buybacks. The total share repurchase authorization currently stands at $560 million, a rather significant amount considering the fact that Levi’s entire market cap is $8.5 billion. By buying back shares over time while also paying a market-beating dividend yield, Levi will create significant shareholder value over the coming years.
Although there’s a lot to like about Levi Strauss, it seems more likely that the stock could compound gradually over time rather than suddenly soaring upward. Though this may make the stock less attractive for some investors, it’s far from disqualifying for those who are looking for stable growth over long time horizons.
LEVI may not soar in the near future, but the quality of the business and the fact that the stock appears slightly undervalued could make it a decent buy-and-hold stock.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.