Is LEVI A Good Stock To Buy Now?

On April 8, the world’s most famous denim jeans designer posted fiscal first-quarter results, showing revenues that beat Wall Street estimates amid continuing store closures due to the pandemic. Following the quarterly results, the company’s stock gained 5%, recording an all times high of $25.71, which was soon bettered in the next few trading sessions. The company is aggressively expanding its business in many locations worldwide, strengthening its partnerships with both local and international vendors, anticipating the apparel industry to make significant strides in 2021 from the lows seen during the pandemic. As consumer spending increases, especially among Generation Z and millennials, and as the vaccine rollout progresses and customer demand returns, Levi Strauss & Co. (LEVI) is optimistic that the company will emerge as a stronger company capable of driving long-term, consistent growth. 

The business

Levi Strauss & Co. is the world’s largest maker of jeans wear, headquartered in San Francisco, and notably popular for its denim jeans under the brand Levi’s. The company also sells other apparel and accessory items for women, men, and children, and it licenses the manufacture of novelty items. It designs its clothing under four brands which are being sold in America, Europe, and Asia-Pacific regions in 50,000 retail locations in 110 countries.

The four brands of the company are Levi’s, Dockers, Denizen, and Signature by Levi’s Strauss & Co. Levi Strauss’s brand focuses on the classic American style and effortless cool theme, which reflects the pioneering spirit that evolves with every generation. Dockers represent authority in khaki pants. This brand, which has long been at the forefront of the casual movement, offers high-quality items for special occasions. Denizen epitomizes unlimited self-expression and optimism for people all over the world. Signature by Levi’s Strauss & Co. brings heritage to everyone, with authentic styles that are designed to last. The brands that have driven the company to profitability for the past years have exceeded the expectations of the company during the pandemic as well.

Levi Strauss was able to increase its revenue and profit forecast for the Q1 of 2021, assuming the global pandemic would not worsen. In an interview with CNBC, the CFO of Levi’s Strauss & Co. Harmit Singh said that the company expects revenue to revert to pre-pandemic levels by the fourth quarter of this year.

Source: Statista

The Denim Market Is Poised to Expand in Tandem with Apparel Industry’s Growth

As the global economic recovery is finding a tailwind, the value of the global apparel market is expected to exponentially grow from $1.5 trillion in 2020 to approximately $2.25 trillion by 2025, indicating that the demand for clothes and shoes is accelerating. The largest apparel market the United States, followed by China, and Japan.

In the United States alone, the jeans market is valued at a staggering $187 billion from womenswear sales and $86 billion from menswear sales. Apart from these apparel categories, another category that has contributed to this growth is sports apparel, which had a value of $185.2 billion at the year ended.

Shifting our focus to how this industry growth is fuelling the growth of Levi’s, Denim has grown in popularity among every type of clothing item, propelling the demand for Levi’s famous denim jeans. Statista projects the demand to expand at a 4.8% annual rate between 2020 – 2025, reaching $2,006.4 billion, owing to strong growth in the Asia-Pacific region. On top of that, favorable demographics in Asia, the accelerated urbanization, and a change in the global economic power base are driving the global apparel market’s growth as well.


Denim market value worldwide from 2013 to 2023, by product type. Source: Statista

The figure above illustrates the global denim market size from 2013 – 2023, broken down by product category. The global market value of denim in 2019 was $90 billion and is forecast to reach $105 billion by 2023. Denim jeans have so far proven to be the most desirable commodity in the apparel industry, and the demand for all denim clothing types has increased. Levi Strauss holds the highest brand share in the denim jeans market, with a turnover of more than $5.7 billion in revenue in 2019. Moreover, Technavio, a market research company, has been tracking the denim jeans market and expects it to expand at a CAGR of more than 5% through 2024.

Recent developments

Levi Strauss’s goal is to expand its locations in the U.S. and overseas by striking new partnerships with its existing business partners. Last October, the company announced that it is extending its partnership with Target to make the Levi’s Red Tab collection available in 500 Target stores by the Fall of this year. Target added Levi’s clothing to 140 locations in the U.S. last year, which was a meaningful addition to the company’s existing inventory of over 1,800 stores in the U.S.

In addition to expansion in the U.S., Levi Strauss’s brand Denizen is experiencing success overseas against its biggest rival, Uniqlo. Levi Strauss credited Asian wholesale partners with the popularity of its value line, Denizen. Customers such as Amazon Japan and retailer Mac House too have aided the growth of Denizen collection of late. With growing sales, Levi Strauss will aim to reinforce these alliances this year as well.

Furthermore, I think the company’s strong balance sheet position is extremely helpful in creating a platform for the company to aggressively invest for the future. The company’s net sales dropped 13% to $1.3 billion in Q1 2021 but exceeded analyst revenue forecasts for $1.25 billion. The below is the company’s guidance for H1 2021.

  • Net revenues growth of 25%.
  • The adjusted EPS estimate was raised from $0.41 to $0.42.
  • The dividend was increased to $0.06 per share for Q2.

“We are very pleased to have exceeded our revenue, margins, and EPS expectations during the quarter,” said Harmit Singh, the CFO of Levi Strauss & Co. “Our outlook going forward has improved based on the strong demand signals we are seeing in the marketplace,” he added.

Takeaway

The U.S. denim market is heavily consolidated with well-known brands like Levi accounting for a considerable portion of the overall market. With positive performance, Levi will be able to continue to dominate the denim jeans market and possibly become the undisputed leader in the global denim jeans industry. Many analysts have raised the price target for Levi Strauss’s stock following the first-quarter reports, including JP Morgan, who raised the price target to $29 from $24, indicating a positive outlook for Levi Strauss & Co. The stock, arguably, has a long runway for growth even from the recent highs because of the expected growth in earnings.

Disclosure: The author does not own any shares mentioned in this article.

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Sulakshi Madawala