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Levi Strauss Stock Dips on Lower Profits—Time to Buy?

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On October 9, Levi Strauss & Co. (LEVI) stock was down more than 6% as of the time of this writing. The company posted better-than-expected third-quarter results after the markets closed on October 8. However, its adjusted net income fell 4% YoY (year-over-year), which irked investors. In comparison, the broader markets were up today after yesterday’s sharp decline.

Lower sales in its wholesale business in the Americas adversely affected the company’s adjusted net income. Moreover, last year’s net income benefited by $11 million related to taxes, which also remained a drag.

Levi’s wholesale business was up against tough YoY (year-over-year) comparisons, which affected its sales. Moreover, a planned reduction in shipments to off-price stores and softness in department stores remained a drag.

However, the company’s net revenue improved YoY thanks to the strength in its direct-to-consumer business. Its adjusted EPS came in ahead of analysts’ expectations despite the decline thanks to its revenue growth.

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We expect the company’s fourth-quarter sales to bounce back, which should support its net income as well as its stock. The company is gradually lowering its dependence on its wholesale business. Moreover, it’s shifting its focus to the higher-margin direct-to-consumer business, which is encouraging. Higher pricing is also likely to support its net income growth.

Levi Strauss expects its international business to sustain momentum and report strong sales in the fourth quarter. Moreover, its direct-to-consumer business is likely to drive growth. Also, its wholesale business faces easy YoY comps, indicating less pressure in the quarter.

Levi’s third quarter in detail

Levi Strauss posted net revenue of $1.45 billion in the third quarter, coming in ahead of analysts’ estimate of $1.44 billion. Its net revenue increased 4% YoY. Sales in the company’s direct-to-consumer business rose 12% on a currency-neutral basis. Higher e-commerce sales and the expansion of retail networks supported its sales. Meanwhile, its wholesale business increased 1%, reflecting growth in Asia and Europe offset in part by weakness in the Americas.

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By region, the company’s net revenue in the Americas decreased 3%, reflecting weakness in its wholesale business. However, its direct-to-consumer revenue rose 9% led by strength in its namesake brand. Its net revenue rose 14% in Europe, reflecting balanced growth across both channels. In Asia, its net revenue rose 9%, reflecting strong growth in both the traditional wholesale and direct-to-consumer businesses.

Levi’s gross margins contracted 20 basis points to 53.0%, reflecting adverse currency volatility and product investments. However, growth in its direct-to-consumer business and price increases supported its gross margin rate.

The company’s selling, general, and administrative expense rate showed a 60-basis-point improvement, reflecting a reduction in its incentive compensation expenses. Its adjusted EBIT rose 2% driven by higher revenue. However, its adjusted EBIT margin contracted 20 basis points to 12.2%, reflecting a lower gross margin.

The company posted adjusted EPS of $0.31, coming in ahead of analysts’ expectation of $0.28. However, its EPS fell about 9% on a YoY basis.

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