Levi Strauss Q2: Not Bad Despite The Market Reaction, Still Optimistic And A Hold

Core Viewpoint - Levi Strauss & Co. reported Q2 2024 earnings that were slightly better than expected in terms of revenue but fell short of market expectations, leading to a significant drop in stock price by 20% [3][5]. Financial Performance - Revenue increased by 7.5% year-over-year, but the company barely missed top-line revenue consensus [9]. - Adjusted operating income rose significantly from $10 million last year to $77 million this year, while unadjusted operating income was $22 million [4]. - Direct-to-Consumer (DTC) revenues grew by 8.2%, with North American DTC and wholesale revenues up 17% [4]. - E-commerce sales increased by 19% year-over-year, indicating strong performance in the DTC channel [4]. Market Reaction - The stock opened down 20% following the earnings report, reflecting market disappointment despite the revenue growth [3][5]. - The market had high expectations for growth, particularly in the denim sector, which were not met by Levi's results [11]. Valuation Concerns - Levi's current P/E ratio is between 15x and 16.5x, which is considered elevated given the company's growth prospects [10]. - The stock price decline indicates that the market is concerned about potential multiple contraction if earnings growth does not meet expectations [2][10]. - The company has reaffirmed guidance for adjusted EPS of $1.17 to $1.27 for the year, but this does not alleviate concerns about the sustainability of its current valuation [10]. Strategic Insights - Management acknowledged the need to improve productivity and profitability in the DTC channel, which is currently less profitable than wholesale operations [10]. - The company has expanded gross margins by nearly 200 basis points, driven by lower costs and higher-margin DTC sales [4]. - Despite the positive trends in the denim market, Levi has struggled to surpass its all-time high sales from the late 1990s, raising questions about future growth potential [10].