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How Levi Strauss Stock Can Survive COVID-19 Pressure

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Apr. 13 2020, Published 11:44 a.m. ET

Levi Strauss (NYSE:LEVI) stock hasn’t been spared amid the coronavirus. The pandemic has caused mayhem in broader equity markets. The coronavirus epidemic has eroded the health and wealth of the people across the globe. Overall, COVID-19 has left companies in distress. Companies are struggling to grow amid a weak economy, rising unemployment, and a decline in consumer spending. The scenario doesn’t look favorable for consumers, retailers, or apparel companies like Levi Strauss.

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So far, Levis Strauss stock has fallen by over 28% this year amid demand destruction due to the COVID-19 outbreak. Notably, the stock has fallen by more than the broader markets. On a year-to-date basis, the S&P 500 has fallen by around 13.6% as of April 9. Levi Strauss stock is trading at a 43.8% discount from its 52-week high level. At Thursday’s closing price of $13.78, the company’s market value was $5.5 billion.

Despite the headwinds, Levi Strauss CEO Chip Bergh is confident that the company will overcome the COVID-19 crisis.

Levis’ strong Q1 results

As expected, Levi Strauss beat its earnings and revenue estimates in the first quarter of fiscal 2020. The company reported its results on April 7. Notably, the company’s first-quarter results escaped the negative effects of the deadly coronavirus.

The adjusted EPS of $0.40 increased by about 5% YoY (year-over-year) in the February-ending quarter. The company’s higher revenues, gross margins, and lower tax rate helped its earnings growth. However, the negative effects of COVID-19 and the higher share count hurt the earnings.

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Levi Strauss’s revenues of $1.5 billion also grew by about 5% YoY in the first quarter. The revenues grew by 6% on a constant currency basis. The company’s top line was driven by continued strength in its direct-to-consumer business. Levi Strauss delivered 13% revenue growth on a constant currency basis in its direct-to-consumer business. The growth was led by the digital channel. The wholesale business managed to post 1% YoY growth on a constant currency basis. Notably, the business faced challenges in the Americas region. Levi Strauss’s revenues also suffered due to continued unrest in Hong Kong and COVID-19.

Strong revenues, particularly in the direct-to-consumer segment, and higher pricing helped fuel the company’s gross margins in the quarter. Levi Strauss’s gross margin increased by 110 basis points to 55.7%. However, the adjusted EBIT margin declined in the quarter by 180 basis points to 12.6% due to higher advertising expenses.

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What’s ahead for Levi Strauss stock?

Levi Strauss doesn’t expect a bright outlook in the near term amid the pandemic risk. The company had to close many stores in the US, Europe, India, and other countries amid the lockdown. Store closures will likely hurt the company’s second-quarter earnings and cash flows. The apparel company also lowered its financial guidance for fiscal 2020 due to the uncertainty related to COVID-19.

Levi Strauss will likely face lower demand for its products due to less traffic in its stores, which would pull back the stock. Analysts expect a high-single-digit decline in the company’s revenues. They expect a decline of over 20% in the company’s earnings for fiscal 2020.

Will the company survive COVID-19?

Currently, consumer confidence is at an all-time low. However, Bergh is confident about Levi’s future. He’s focused and believes that the company will survive the COVID-19 crisis. In an interview with Yahoo Finance, he said, “We had a lot of momentum going into this. We are very, very focused on taking the steps we need to take to make sure we come out of it stronger.”

Bergh has been Levi’s CEO for nine years. He has handled hard times in the past. Levi Strauss has been in the apparel industry for over 167 years. As a result, the company has strong brand loyalty. The direct-to-consumer business will likely drive the company’s revenue growth ahead.

The company will focus on strengthening its balance sheet. Levi Strauss will ensure that it has sufficient cash flows to act as a cushion. At the end of the first quarter, the company had a cash balance of about $0.9 billion, while the total available liquidity was $1.8 billion. Last week, Levi Strauss announced that it will furlough its US store workers to save costs.

The company has suspended its share buyback program. Levi Strauss will also reconsider its dividend payments for the remaining year due to COVID-19. The company already announced a 16% year-over-year higher dividend to its shareholders in the first half of 2020.

Investors should buy the dip at current levels and hold the stock until at least 2022. The company’s sales and earnings could recover gradually after the COVID-19 dust settles.

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