Levi Strauss: Don’t Put Your Blinders On, This Is A Great Deal (NYSE:LEVI)

A number of fashion brands are currently trading at bargain basement prices. It pays to be choosy, however, as brands that have stood the test of time should continue to resonate with new generations of consumers.

This includes Levi Strauss (NYSE:LEVI), which as seen below, traded as high as $24 during the spring of last year before cratering to $16.84 at present, bringing its forward yield to near 3%. In this article, I highlight why value investors may want to consider this iconic brand for income and growth.

Why LEVI?

Levi Strauss is an iconic American company that has been producing high-quality clothing, particularly denim jeans, for well over 150 years. While the company has faced its share of challenges, it has remained a leader in the denim fashion industry and is one that resonates strong with consumer globally. Notably, the company recently hired a new CEO to take over in 18 months. She comes from Kohl’s (KSS) and Starbucks (SBUX), bringing a wealth of retail and international experience.

Today, Levi Strauss & Co. operates in more than 110 countries and has a diverse product line that’s more than just jeans, and over the trailing 12 months, generated $6.3 billion in total revenue. As shown below, LEVI has had a fairly strong overall revenue growth trajectory since becoming public and has maintained a strong operating margin that currently sits above its pre-pandemic rate.

Meanwhile, LEVI saw respectable top line revenue growth of 7% YoY on a constant currency basis (1% growth including FX) during the third quarter, in spite of inflationary and supply chain considerations. Importantly, the company’s hallmark Levi’s brand grew 6% in constant currency, hitting a 10-year quarterly record.

Importantly, LEVI was able to largely maintain gross margin discipline in spite of commodity inflation, as it was able to pass on higher costs to consumers. This is reflected by gross margin falling by just 60 basis point YoY to 56.9%. As shown below, LEVI scores an overall B grade for profitability, with EBITDA and Net Income margins that sit well above the sector median.

Looking forward, LEVI should benefit globally from a re-opening in China, after abandoning restrictive zero-COVID policies. It also has opportunities to grow through its direct to consumer channel, which saw 8% growth last quarter. This channel has the potential to boost margins, as it cuts out the middle-man. Management expressed progress around nurturing and growing this important channel and around its emerging Beyond Yoga line, which contributed $22 million to net sales last quarter, during the last conference call:

Globally the Levi’s app continue to achieve increased engagement with monthly active users again up double digits, along with 17% growth in revenue. And we made progress in deepening our direct personalized relationships with our consumers via our global loyalty programs, which saw double-digit growth in total members and revenue.

Beyond Yoga launched at 28 colleges across the country as the brand continues to build awareness and reach new consumers. Perhaps most exciting at the end of last month, Beyond Yoga opened its first permanent store located in Santa Monica, showcasing the brand’s full array of category offerings for the first time. While we’re just getting started, we believe there is an attractive long-term opportunity to grow the brand’s presence through retail.

Importantly, LEVI maintains a strong balance sheet with $1.4 billion in total liquidity and a net debt to EBITDA ratio of 1.1x. While its dividend yield of 2.9% isn’t particularly high, it’s well-protected by a 26% payout ratio. I see potential for raises down the line as the global economy and supply chain normalize.

Lastly, I find LEVI to be reasonably attractive at the current price of $16.84 with a forward PE of 11.6. This is considering the overall quality of its brands, emerging DTC channel, and my forward expectations for high single digit to mid-teens annual EPS growth over the long term. Notably, Analysts have a near-term price target of $20, translating to a potential one-year total return of 21%.

Investor Takeaway

Levi Strauss is a classic brand and retail powerhouse in the midst of a transformation. It offers investors exposure to high-quality brands, growing DTC channels and global growth prospects. With an attractive valuation and a well-covered dividend, LEVI appears to be an attractive long-term investment option for potentially strong total returns.