Levi Strauss & Co

Levi Strauss & Co (NYSE: LEVI) designs, manufactures, and sells apparel and accessories. It operates through three geographic divisions – Americas, Europe, and Asia.

Investment Highlights – SELL at USD 27.83

• LEVI’s stock price has yielded a remarkable return of over 125% in the past year, giving an attractive opportunity to book profit.
• The prolonged and intensified impact of the Covid-19 can disrupt the supply chain, adversely affect discretionary consumer spending, and can increase non-cash asset impairments.
• The overstrained share price might suffer from derailed economic recovery and possible monetary tightening.
• From a technical standpoint, LEVI’s stock price is moving towards the overbought position as 14-day RSI is ~52.19 level.
• In Q2 FY21, EBITDA margin and net margin of LEVI’s reflected a lower position than the industry median of 16% and 8%, respectively.

Key Risks

• The resurgence in Covid-19 cases due to the Delta variant can accentuate the industry’s challenges and increase the operational costs.
• The inflationary market conditions and macroeconomic instabilities can impact the consumer’s disposable income and spending habits.

Q2 FY21 Financial Highlights (for the three months ended 30 May 2021, as of 8 July 2021)

 (Source: Company Website)

• During Q2 FY21, reported net revenue soared 156% year-on-year. Therefore, the Company raised its FY21’s outlook for both net revenues and earnings per share.
• The Company has also accelerated the growth from the eCommerce channel, and this net revenues from the digital channel grew 75% year-on-year in Q2 FY21.
• It declared and paid a dividend per share of US$0.06 in Q2 FY21.
• Total inventories were down by 12% at the end of Q2 FY21, as compared to Q2 FY21.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (Illustrative)

Conclusion

LEVI’s revenue potential is influenced by economic conditions since it directly impacts consumer spending and consumer confidence towards consume durables. As the Covid-19 pandemic continued to cause supply chain disruption, labour shortage, and macroeconomic instabilities. Therefore, such overweighed stocks could suffer slow economic recovery and conservative consumer pockets. Therefore, it is prudent to liquidate the position in profits before the plausible share price consolidation. The stock made a 52-week High and Low of USD 30.84 and USD 11.91, respectively.

Based on the subdued consumer disposable income, inflationary concerns, exceptional notional gains, macroeconomic uncertainties, overstrained share price, and unfavourable valuation conduced above, we have given a "SELL" stance on Levi Strauss & Co at the current market price of USD 27.83 (as on 5 August 2021, at 9:02 AM ET), while we look forward to reviewing how it responds to the pandemic easing.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer

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