Levi's Revenue Dips, But Record Margins Might Stitch Things Up

Core Viewpoint - Levi Strauss & Co. has disappointed investors by lowering its guidance for the fiscal third-quarter of 2024, leading to an initial 8% sell-off in shares, despite some positive aspects in the earnings report that were overshadowed by the negative headline metrics [1]. Financial Performance - The company reported a 2-cent EPS beat over consensus estimates of 33 cents, but revenues rose only 0.4% YoY to $1.52 billion, falling short of the $1.55 billion consensus [3]. - Net revenues in the Americas fell by 1%, while Asia's net revenues were flat YoY [3]. - Dockers brand revenues plunged by 15% as reported and 13% in constant currency [3]. - Wholesale revenue declined by 6% YoY on a reported basis and 5% in constant currency [3]. Positive Aspects - Levi's brand sales grew by 5% YoY globally, marking the highest revenue growth in two years [4]. - The company achieved a record gross margin of 60%, up 440 bps YoY, driven by lower product costs and a favorable brand mix [4][6]. - Direct-to-consumer (DTC) sales rose by 12% YoY in the U.S. and 9% in Europe, contributing to the higher gross margin [6]. Regional Performance - The Americas experienced a 1% sales decline, primarily due to exiting the Denizen business, but would have seen a 2% YoY revenue increase without this exit [5]. - Europe showed a positive trend with net revenues climbing 6% on a reported basis and 7% in constant currency [5]. Strategic Considerations - The company is considering a strategic review of the Dockers brand due to its poor performance, which may lead to divestment [7]. - CEO Michelle Gass highlighted three areas of softness: Dockers, Mexico, and China, and mentioned plans to address these challenges [10]. Guidance and Future Outlook - Levi Strauss lowered its full-year 2024 revenue guidance to $6.24 billion from $6.32 billion, and adjusted EPS estimates to a tighter range of $1.17 to $1.27, below the $1.25 consensus [8]. - The average analyst price target for the stock is $22.75, with a high forecast of $26.00, indicating a potential upside of 15.75% [4][52].