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Levi's Is Still A Comfortable Fit For Growth Portfolios Levi's survived the pandemic because of the strength of its brand, its direct-to-consumer business, and specifically e-commerce. The Q3 results prove the power of its brand is still working and...

By Thomas Hughes

This story originally appeared on MarketBeat

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Levi's Demonstrates The Power Of Brand

Levi's (NYSE: LEVI) survived the pandemic because of the strength of its brand, its direct-to-consumer business, and specifically e-commerce. The Q3 results prove the power of its brand is still working and have the stock set up to retest the recently set highs near $30. Not only were the results strong but they were stronger than expected and led to a new buyback program that should help support share prices over the next 6 to 12 months.

The buyback is worth $200 million or about 2% of the market cap and we think this is only the first authorization investors should expect. In our view, the company's efforts to capitalize on its brand, re-engage the market through direct-to-consumer sales, and grow into non-traditional high-growth markets will continue to drive revenue growth, earnings growth, free cash flow, and future share buybacks.

Levi Strauss Reclaims Pre-Pandemic Business Level

Levi Strauss had a phenomenal quarter in light of the fact many of its DTC locations and other locations where its products are sold were closed because of the pandemic. The company reported $1.50 billion in consolidated revenue which is good for a gain of 41.5% over last year, 3% over 2019, and beat the consensus by 135 basis points. Sales were driven by a 45% gain in wholesale sales that were compounded by a 34% increase in DTC sales and a 10% increase in revenue through digital channels. The 10% gain in digital channels is on top of last year's 76% gain and accounted for 20% of the net.

Moving down, Levi Strauss was able to post significant margin expansion at both the gross and operating levels. Margin gains are due to the leverage of fixed cost, internal efforts to control costs, the shift to DTC e-commerce, and price hikes to battle inflation. The adjusted gross margin came in at 57.5% or up 390 basis points over last year and 450 basis points over 2019. At the operating level, the margin came in at 14.8% which is nearly double the 2020 rate and 260 basis points better than 2019. On the bottom line, the GAAP earnings of $0.47 beat by $0.12, and the adjusted earnings of $0.48 beat by $0.11.

Turning to the guidance, the company is expecting Q4 revenue to grow 20% to 21% versus last year or 6% to 7% versus 2019. This is an acceleration from Q3 and is expected to drive full-year earnings in the range of $1.43 to $1.45 compared to the consensus estimate of $1.34 and we see upside risk in the numbers. Levi's recently acquired Beyond Yoga and we expect to see cost synergies begin to take effect as soon as the fourth quarter.

The Analysts See 25% Upside For Levi Strauss

There has yet to be any analyst activity in Levi Strauss following the Q3 report but we expect it to be vigorous when it begins. The last earnings report was similarly strong and sparked a significant round of price target increases, upgrades, and initiated coverage. As it stands, the Marketbeat.com consensus price target of $32.91 assumes 25% upside in the stock and we think that is a low estimate. The high price target of $40 is more in line with our outlook and the technical picture. The analysts rate this stock a strong buy.

Technically speaking, the post-release price action confirms support at the 150-day moving average and the 30-day moving average as well as the uptrend that began in the middle of 2020. While there are still some resistance targets to overcome in the near term, we view the price action as bullish and a continuation signal of the underlying uptrend. Assuming price action is able to get above the $30 level we see it rising another $14 up to the $44 range.

Levis Is Still A Comfortable Fit For Growth Portfolios

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