Levi’s Stock To See Declines in Long Term?
Levi Strauss & Co. stock (NYSE: LEVI), a designer and marketer of jeans, casual wear, and related accessories for men, women, and children, gained 7% year-to-date and is currently flat compared to its pre-Covid peak of $20.48. But the company saw its revenues fall 27% during this time. And, we believe that this mismatch between revenue growth and stock movement over recent quarters points to a likely reduction in Levi’s stock in the long term. This is taking into account the retailer’s unimpressive growth rate of over 3% in 2019, even before the pandemic struck. Consequently, there is a likely chance that growth might return to that disappointing pace once the coronavirus threat abates.
It should be noted that the retailer’s e-commerce sales grew 52% in Q3, up from a mere 5% in 2019 – indicating that the company is looking into expanding its digital capabilities. But still, the company relies a lot on jeans that are sold in retail stores. So, while it is building up those direct-to-consumer online channels, there are still so many department stores, specialty retail stores, and third-party stores, where people walk-in to try on the jeans first and then make a purchase. LEVI stock has slightly underperformed the broader markets between 2017 and now. The retailer’s stock is around 21% higher than it was at the end of 2017, compared to a 37% growth in the S&P. Our dashboard, Buy or Sell Levi Strauss & Co Stock?, provides the key numbers behind our thinking, and we explain more below.
Although LEVI stock grew 30% from $17 in 2017 to over $22 in 2018 – it then declined by 13% to around $19 in 2019. The company saw an 18% increase in revenues and around 35% growth in earnings per share between 2017 and 2019. This was driven by a 110 bps net margins expansion from 5.7% to 6.8%, partially offset by a 4% increase in shares outstanding during this period.
Finally, Levi’s P/E ratio declined from about 23x at the end of FY 2017 to 19x at the end of FY 2019. While the company’s P/E is around 20x currently, there is a downside risk when the current P/E is compared to levels seen in the past year.
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How Is Coronavirus Impacting LEVI Stock?
Levi’s revenues have declined 27% to over $2 billion so far in fiscal 2020 (year ended November 27). The decrease was primarily due to the impact of widespread temporary closures of its retail locations, particularly in fiscal Q2, as a result of the Covid-19 pandemic, partially offset by higher net revenues in the Q1. To breakdown its sales – the company saw a consolidated 28% decline in the Americas market (which constitutes over half of company sales), 22% decline in the Europe market (>30% sales), and a 34% decline in Asia (also includes Middle-East and Africa) segment. In addition, the retailer also witnessed a diluted loss per share of $0.46 compared to a gain of $0.73 during the same period last year.
Going forward, the company sees performance improving in Q4 and anticipates revenues to be down 14% to 15% below year-ago levels and earnings per share of $0.14 to $0.16.
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