Company Overview: An apparel company, Levi Strauss & Co. (NYSE: LEVI) is engaged in designing and selling its products under the Levi's, Dockers, Signature by Levi Strauss & Co. and Denizen brands. The company’s products consist of jeans, tops, jackets skirts, casual footwear, and related accessories for men, women, and children. The company manages its business in three geographic segments namely the Americas, Europe, and Asia. Its products are marketed in greater than 110 countries across the globe via chain retailers, department stores, online sites, and around 3,000 retail stores and shop-in-shops.

LEVI Details

Geographical Diversification & Adoption of New Technologies Aid LEVI: Levi Strauss & Co. (NYSE: LEVI) is one of the leading branded apparel companies and is a global leader in the jeans segment. The company designs and distributes jeans, casual wear and related accessories for men, women, and children under the Levi's®, Dockers®, Signature by Levi Strauss & Co.™, and Denizen® brands. Based on distribution channels, the company categorizes its revenue into two segments, namely wholesale and direct-to-consumer (DTC).

The company remains on track to execute its strategies by delivering profitable growth despite an uncertain environment led by COVID-19 outbreak. The company also made significant progress toward becoming a top worldwide lifestyle brand. In achieving this goal, the company has also transformed its business, diversified across various channels, groups and geographies, along with adopting new technologies and processes and foreseeing consumer preferences. The year 2019 was a historic year for the company with revenues increasing 3% year over year on a reported basis and 6% on a constant currency basis. Despite facing several challenges, the company’s adjusted EBIT went up 8% and adjusted net income soared 14% year over year. During the year, the company also paid $114 million in dividends, depicting a rise of 27% on pcp.

Looking at the past performance over the period FY15-FY19, LEVI’s total revenue, diluted earnings per share, adjusted EBIT and shareholders dividend witnessed a growing trend. With right people, right strategies and proposals in place, the company stands to deliver profit, and growth in 2020 and beyond. In the days ahead, the company’s recognized expertise, along with its successful track record and geographic diversity are expected to drive operational and financial efficacy in the everchanging corporate environment.

Past Performance (Source: Company Reports)

The company has carved a niche for itself in the Apparel industry by gaining immense diversification benefits, both across products and geographies. LEVI’s business diversification has been accomplished by fortifying its regional performance, which over the years has grown to claim a greater share of the company’s total revenues. The company’s international growth was broad-based, with Europe and Asia growing 13% and 10%, respectively, year over year in 2019. During the period, the company’s direct-to-consumer business grew 10%, depicting its fourth consecutive year of double-digit growth across its direct-to-consumer, women’s, and tops businesses. The company stands to benefit from a diversified business on a global basis, with international business accounting for ~60% of total revenues. By underscoring more on diversification across geographies, channels and categories, the company stands to benefit in the long-term by sustaining top-line and bottom-line growth and retaining robust operational results.

3QFY20 Key Highlights: During the third quarter of fiscal 2020, the company posted a profit, after seeing a loss in the last reported quarter. LEVI’s adjusted earnings for 3QFY20 came in at 8 cents per share. Remarkable profits from its e-commerce business, combined with strategic implementation, drove the quarterly performance. Nevertheless, quarterly earnings were down as compared to 31 cents reported in the year-ago period. In 3QFY20, the company reported net revenues of $1,063.1 million, down 27% on a reported basis and 26% on a constant-currency basis on a year over year basis. COVID-19 led pandemic, which resulted in lower traffic and shutdown of the company-controlled and third-party retail locations impacted the top-line results. Adjusted gross profit during the quarter stood at $569.5 million, down 25.7% year over year. However, adjusted gross margin expanded 60 basis points year over year and came in at 53.6% in 3QFY20, which excluded pandemic-related charges. The company’s cost-cutting initiatives during the quarter was fruitful, which led to a decline of 17.8% in selling, general and administrative expenses. Adjusted EBIT came in at $84.2 million, down 52.3% year over year.

3QFY20 Results (Source: Company Reports)

Digging Into 3QFY20 Details: The company remains focussed on digital schemes. The global digital revenues (consisting of e-commerce sites and the online business) skyrocketed 50% in 3QFY20 from the prior corresponding period. Notably, LEVI has upgraded the e-commerce sites in Canada, Europe, and the United States. The company is also leveraging the use of data analytics and machine learning, which were key positives during the quarter. Promisingly, LEVI is well placed to benefit from the holiday season based on the enhanced rollout of omni-channel capabilities, which includes Buy Online, Pick-up In-Store. The company has also taken initiatives to bolster its U.S. loyalty program into its whole U.S. stores and Levi.com. Partnership with Target also adds to a significant milestone for the company’s future growth prospects. The company has also stated to extend its partnership from 140 doors to 500 doors by fall 2021.

Geographical Performance: In 3QFY20, net revenues in the Americas, Europe and Asia came in at $550 million, $390 million and $123 million, respectively. The Figures plugged 29%, 16% and 42%, respectively, on a year over year basis. Stemming impacts from COVID-19 led crisis impacted the performance. However, robust growth at the e-commerce business and broader digital trajectory on higher traffic and conversion were key positives in 3QFY20.

Geographical Highlights (Source: Company Reports)

Balance Sheet & Liquidity Position: The company exited the quarter with a cash balance of $1,353 million and short-term investments of $72 million. These were accompanied by $608 million accessible under its revolving credit facility. At the end of the quarter, long-term debt stood at $1,543.3 million, whereas total shareholders’ equity came in at $1,191.3 million. LEVI’s leverage ratio at the quarter end stood at 4.5x as compared to 1.4x reported at the end of previous year’s quarter. During the first nine months of FY20, cash from operations came in at $241 million, with an adjusted free cash flow of -$31 million. Notably, in 3QFY20, cash flow from operations improved $156 million from 3QFY19. Adjusted free cash flow in 3QFY20 grew $195 million from the prior corresponding period.

Net Debt and Leverage Ratio (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 50.31% of the total shareholding. Wellington Management Company, LLP and Capital Research Global Investors hold the maximum interests in the company at 10.47% and 8.93%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported Aug’20 Gross margin at 54.3%, higher than the industry median of 51.7%. For the same time span, EBITDA margins stood at 12%, as compared to -34.3% in May’20.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s financial performance is likely to get affected by the pandemic-led business disruptions. Weakness in consumer spending, due to the global economic slowdown amid the coronavirus crisis, might hurt LEVI’s performance. Also, during the third quarter, the company top-line was primarily affected by lower traffic and shutdown of the company-controlled and third-party retail locations. Moreover, higher expenses are expected to weigh on the company’s performance, going forward. LEVI’s leveraged balance sheet also poses risks with net debt of $141.9 million as of August 23, 2020. This indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, competition from peers adds to the woes.

Outlook: The company remains encouraged about its 4QFY20 results, given its strength in business and growth strategies. The company expects 4QFY20 revenues to decline in the range of 14-15% year over year. Adjusted gross margin is expected to remain flat to marginally up as compared to 54.3% reported in the year-ago quarter. For FY20, adjusted gross margin is expected to be more than 53.8% recorded in the year-earlier period. Capital expenditure is expected to come in ~ $160 million for FY20. Further, in 4QFY20, adjusted earnings are expected to be in the range of 14-16 cents per share. The company opines that it will return to pay quarterly dividends in FY21 if the positive business trends persist.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of LEVI closed at $16.85 with a market capitalization of ~$6.69 billion. The stock made a 52-week low and high of $9.09 and $20.7, respectively, and is currently trading above the average of its 52-week trading range. The stock went up ~6.6% in the last one-month period. LEVI will continue to drive diversification through high-growth, high-margin businesses while protecting and growing its profitable core. On a technical analysis front, the stock has a support level of ~$15.62 and an immediate resistance level of ~$16.95. Considering the above factors, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group - Ralph Lauren Corp (NYSE: RL), PVH Corp (NYSE: PVH), and Under Armour Inc (NYSE: UAA), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $16.85, down by 2.71% on 11 November 2020.

LEVI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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