Buy Levi Strauss Stock ‘Only’ If You Will Hold until 2022

So far, Levi Strauss (NYSE:LEVI) stock has corrected significantly this year. The stock has fallen by about 37.7%. Unparalleled demand erosion due to the COVID-19 outbreak took a toll on the stock. The weak economic outlook, rising unemployment rate, and an expected decline in consumer spending don’t look congenial for apparel companies, including Levi Strauss.

However, the stock rose by more than 26% in the last two trading days due to investors’ optimism surrounding the company’s results for the first quarter of fiscal 2020. The company didn’t disappoint either. Levi Strauss reported stronger-than-expected first-quarter results after the markets closed on April 7.

Q1 snapshot

Levi Strauss posted revenues of $1,501 million in the first quarter—up about 5% YoY (year-over-year). Notably, the revenues beat analysts’ estimate of $1,474 million despite store closures and reduced traffic due to the COVID-19 outbreak in China. The company’s strong top-line growth was due to continued strength in its direct-to-consumer business led by the digital channel. The company marked 13% (constant currency basis) growth in its direct-to-consumer net revenues. The wholesale business marked 1% growth (constant currency basis). However, the wholesale segment remained challenged in the Americas.

Levi Strauss had an impressive gross margin performance. In the first quarter, the company’s gross margin increased by 110 basis points to 55.7%. Higher pricing and increased sales in the direct-to-consumer segment cushioned the margins. Despite higher gross margins, the adjusted EBIT margin fell by 180 basis points to 12.6%, which reflected the impact of COVID-19 and higher advertising expenses.

The company posted an adjusted EPS of $0.40, which beat analysts’ estimate of $0.35 and increased by about 5% YoY.

What to expect from Levi Strauss stock

While Levi Strauss’s first-quarter numbers were impressive, the near-term outlook looks grim. The pandemic will likely have a significant impact on the company’s financials. Less traffic, lower demand, and the economic slowdown will likely limit the upside in Levi Strauss stock. Although the company didn’t issue any guidance, analysts expect a high-single-digit decline in the top line in fiscal 2020. Meanwhile, analysts’ consensus estimate indicates more than a 20% decline in the bottom line.

The current price levels are an excellent entry point for investors who are willing to hold the stock until at least 2022. Levi Strauss has strong brand loyalty. Also, the direct-to-consumer business and digital sales will likely drive meaningful growth in the long run. Investors should note that Levi Strauss has enough liquidity to sail through the current turmoil. The company has a cash balance of about $0.9 billion. Meanwhile, the total available liquidity was $1.8 billion at the end of the first quarter. While we don’t know how long the pandemic will hurt businesses around the world, sales and earnings could gradually recover later in the year or the next year.