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Should You Buy the Dip in Levi Strauss Stock?

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Levi Strauss (NYSE:LEVI) stock has been under immense selling pressure since the COVID-19 pandemic halted its growth. Although the stock recovered sharply from its March lows, it’s still trading below its IPO levels. So far, the stock has fallen over 28% this year.

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Levi Strauss stock closed about 4% lower on Tuesday. The stock fell about 4.6% in the after-hours of trade, which reflected a sharp decline in its second-quarter sales. The company reported an adjusted net loss of $192 million in the second quarter. A drastic decrease in sales and inventory and pandemic-related costs took a toll on the stock.

While Levi Strauss’s second-quarter numbers are far from satisfactory, they beat analysts’ top and bottom-line expectations. Investors should note that Levi Strauss has beaten analysts’ expectations in the past two quarters despite a tough operating environment.

With store closures and incremental costs related to the virus, investors knew that Levi Strauss would take a significant hit on its revenues and report a loss.

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What’s next for Levi Strauss?

Levi Strauss’s net revenues fell 62% year-over-year in the second quarter. Temporarily closing company-owned and third-party stores remained a drag. While the drop in sales was significant, the top line will likely show sequential improvement in the future.

About 90% of the company-owned retail locations are open. Meanwhile, Levi Strauss’s e-commerce sales continue to rise. The company has invested heavily to strengthen its omnichannel offerings. Also, the company will leverage its stores as micro-fulfillment centers. Levi Strauss will expand its ship-from-store and curbside pickup capabilities, which should help its growth. The company will also roll out the buy online and pickup in-store facility and explore options for same-day delivery.

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Strengthening the e-commerce offerings will likely drive Levi Strauss’s top line in the coming quarters. The company’s revenues and earnings will likely return to the growth trajectory in 2021, which should drive the stock higher. 

Bottom line

While near-term headwinds could continue to hurt Levi Strauss’s financials, the worst seems to be over. I expect the company’s revenues and earnings to mark a sequential improvement and register stellar growth in 2021. Also, Levi Strauss stock trades at a forward price-to-cash flow ratio of 12.1, which is lower than the industry average of 18.5.

Investors who are willing to hold the stock for at least the next few years should continue to buy the dip in Levi Strauss stock for strong returns.

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