Levi Strauss & Co. (LEVI) Stock Analysis

Market Capitalization: $6.90 Billion
Shares Outstanding: 396.73 Million
Sector: Consumer Discretionary
Industry: Apparel Manufacturing
Analysis as of: December 20, 2024

1. Company Overview

Levi Strauss & Co. (NYSE: LEVI) is a globally recognized leader in the design, marketing, and distribution of denim and casual wear for men, women, and children. Founded in 1853 and headquartered in San Francisco, California, Levi Strauss has built a strong brand reputation synonymous with quality, durability, and style. The company’s product portfolio includes a wide range of jeans, casual apparel, and accessories, catering to diverse consumer segments across various geographic regions.

Key Business Segments:

• Men’s Apparel:
  
  • Jeans: Iconic Levi’s jeans known for their fit, comfort, and style.
  • Casual Wear: Shirts, jackets, and outerwear that complement denim products.
• Women’s Apparel:
  
  • Jeans and Leggings: A variety of fits and styles to meet diverse fashion preferences.
  • Tops and Dresses: Trendy and comfortable options for everyday wear.
• Children’s Apparel:
  
  • Durable Denim: Sturdy and comfortable jeans designed for active children.
  • Casual Wear: Shirts, shorts, and jackets tailored for kids.

Strategic Initiatives:

• Product Innovation: Continuously enhancing product lines with new designs, sustainable materials, and advanced manufacturing techniques to meet evolving consumer preferences.
• Digital Transformation: Investing in e-commerce platforms and digital marketing strategies to enhance online sales and improve customer engagement.
• Sustainability and ESG: Committing to sustainable practices, including reducing water usage, minimizing waste, and promoting ethical labor standards throughout the supply chain.
• Global Expansion: Expanding presence in emerging markets to increase market share and diversify revenue streams.

2. Financial Performance

a. Revenue and Growth

TTM Revenue (as of Aug 25, 2024): $6.16 Billion
YoY Revenue Growth (TTM): +0.53%

Analysis:

• Stable Revenue Growth: Levi Strauss has maintained steady revenue growth over the past few years, with a TTM growth rate of +0.53%. While growth has been modest recently, the company has demonstrated resilience in a competitive apparel market.
• Fluctuating Growth Rates: Revenue growth has varied significantly, peaking at +29.45% in FY 2021 following the recovery from the COVID-19 pandemic, but declining to -22.74% in FY 2020 due to pandemic-related disruptions.
• Scalable Business Model: Levi’s diverse product portfolio and strong brand presence provide a scalable foundation, supporting sustained revenue generation across different consumer segments and regions.

b. Profitability

Net Income (TTM): $154.90 Million
EPS (TTM): $0.38
Profit Margin: 2.52%
Return on Equity (ROE): 8.12%
Return on Assets (ROA): 5.94%

Analysis:

• Positive Net Income: Levi Strauss has achieved a net income of $154.90 million in the TTM period, marking a solid profitability position. This positive performance reflects effective cost management and operational efficiency.
• Moderate Profit Margins: A profit margin of 2.52% indicates the company’s ability to convert revenue into profits, though there is room for improvement compared to industry peers.
• Healthy ROE and ROA: ROE of 8.12% and ROA of 5.94% demonstrate Levi’s efficient use of shareholders’ equity and assets in generating profits, highlighting robust financial performance and effective management.

c. Margins

Gross Margin (TTM): 59.09%
Operating Margin (TTM): 9.36%
Profit Margin (TTM): 2.52%

Analysis:

• Strong Gross Margin: A gross margin of 59.09% reflects Levi Strauss’s ability to manage production costs effectively while maintaining premium pricing for its products.
• Positive Operating Margin: An operating margin of 9.36% signifies controlled operating expenses relative to revenue, contributing positively to overall profitability.
• Sustainable Profitability: Maintaining positive profit margins indicates that Levi Strauss is on a path to sustained profitability, supported by steady revenues and efficient cost management.

d. Cash Flow

Operating Cash Flow (TTM): $860.00 Million
Capital Expenditures (CapEx) (TTM): -$226.90 Million
Free Cash Flow (FCF) (TTM): $633.10 Million
FCF Per Share: $1.60

Analysis:

• Robust Operating Cash Flow: Operating cash flow of $860.00 million demonstrates Levi Strauss’s ability to generate substantial cash from its core business operations, essential for funding growth initiatives and maintaining financial health.
• Prudent Capital Expenditures: CapEx of -$226.90 million indicates ongoing investments in infrastructure, technology, and product development to support future growth while maintaining efficient capital allocation.
• Healthy Free Cash Flow: FCF of $633.10 million underscores Levi Strauss’s capability to generate significant cash after accounting for capital expenditures, providing flexibility for debt repayment, reinvestment, and shareholder returns.

3. Balance Sheet

Total Assets: $6.25 Billion
Total Liabilities: $4.38 Billion
Shareholders’ Equity: $1.05 Billion
Total Debt: $2.25 Billion
Cash & Equivalents: $577.10 Million
Net Cash Position: -$1.67 Billion
Debt-to-Equity Ratio: 1.20
Current Ratio: 1.41
Quick Ratio: 0.65
Working Capital: $799.40 Million

Analysis:

• Asset Composition: With total assets of $6.25 billion, Levi Strauss maintains a balanced asset base to support its operations and strategic initiatives, including inventory, property, and intangible assets.
• Leverage Level: A debt-to-equity ratio of 1.20 indicates a significant reliance on debt financing. While leverage can amplify returns, it also introduces higher financial risk, especially in fluctuating economic conditions.
• Liquidity Position: Current ratio of 1.41 suggests that Levi Strauss has adequate liquidity to cover its short-term liabilities. However, the quick ratio of 0.65 indicates that a portion of current assets may be tied up in inventory, which could affect liquidity in the short term.
• Negative Net Cash Position: A net cash position of -$1.67 billion signifies that Levi Strauss has more debt than cash on hand. This highlights the importance of strong cash flow generation to manage debt obligations effectively.

4. Valuation

Current Stock Price (Dec 20, 2024): $16.65
PE Ratio (TTM): 45.83
Forward PE: 12.71
PEG Ratio: 0.94
Price-to-Sales (PS) Ratio: 1.13
Price-to-Book (PB) Ratio: 3.68
Price-to-Free Cash Flow (P/FCF) Ratio: 10.90
Price-to-Operating Cash Flow (P/OCF) Ratio: 8.02
EV/EBITDA: 11.31
EV/Sales: 1.39

Analysis:

• High PE Ratio: A trailing PE ratio of 45.83 indicates that Levi Strauss is trading at a significant premium relative to its earnings. This suggests high investor expectations for future growth but may also imply potential overvaluation.
• Attractive Forward PE Ratio: A forward PE ratio of 12.71 is considerably lower than the trailing PE, reflecting expectations of improved profitability and earnings growth.
• Favorable PEG Ratio: A PEG ratio of 0.94 suggests that Levi Strauss is fairly valued relative to its earnings growth expectations, indicating a balanced approach between growth potential and valuation.
• Reasonable PS and PB Ratios: PS ratio of 1.13 and PB ratio of 3.68 reflect that Levi Strauss is trading at a reasonable premium relative to its sales and book value, consistent with its strong brand presence and asset base.
• Valuation Metrics: P/FCF ratio of 10.90 and P/OCF ratio of 8.02 indicate that Levi Strauss is trading at a reasonable premium relative to its free and operating cash flows, which may be justified by its strong cash generation capabilities.
• EV Ratios: EV/EBITDA of 11.31 and EV/Sales of 1.39 suggest that Levi Strauss is valued at a moderate multiple relative to its earnings and revenue, aligning with industry standards.

5. Market Performance

52-Week Range: $14.87 – $24.34
52-Week Price Change: +11.12%
Beta (5Y): 1.16
Relative Strength Index (RSI): 51.45
Average Volume (20 Days): 1,570,883
Short Interest: 5.67 Million (1.43% of Shares Outstanding)
Short Ratio (Days to Cover): 2.86

Analysis:

• Moderate Price Appreciation: Levi Strauss’s stock has appreciated by +11.12% over the past 52 weeks, indicating stable performance amidst broader market movements.
• Slightly Higher Volatility: A beta of 1.16 suggests that Levi Strauss’s stock is slightly more volatile than the broader market, experiencing greater price fluctuations in response to market movements.
• Neutral RSI: An RSI of 51.45 indicates that the stock is neither overbought nor oversold, maintaining balanced momentum without extreme price pressures.
• Moderate Trading Volume: An average volume of approximately 1.57 million over the past 20 days reflects decent liquidity and active trading, facilitating ease of entry and exit for investors.
• Low Short Interest: With 1.43% of shares outstanding sold short and a short ratio of 2.86 days to cover, bearish sentiment is present but not excessive, reducing the likelihood of a short squeeze.

6. Financial Health and Risks

a. Liquidity

Current Ratio: 1.41
Quick Ratio: 0.65
Working Capital: $799.40 Million

Analysis:

• Adequate Liquidity: Levi Strauss’s current ratio of 1.41 suggests that the company has sufficient liquidity to cover its short-term liabilities, ensuring smooth operational continuity.
• Inventory Management: The quick ratio of 0.65 indicates that a portion of current assets is tied up in inventory. Effective inventory management is crucial to maintain liquidity and avoid potential cash flow issues.
• Positive Working Capital: Working capital of $799.40 million provides Levi Strauss with the necessary resources to support ongoing operations and invest in growth opportunities without immediate liquidity concerns.

b. Leverage

Total Debt: $2.25 Billion
Debt-to-Equity Ratio: 1.20
Debt-to-EBITDA Ratio: 1.95
Debt-to-FCF Ratio: 3.56
Interest Coverage Ratio: 14.09

Analysis:

• High Leverage: A debt-to-equity ratio of 1.20 signifies substantial reliance on debt financing, which can amplify returns but also introduces higher financial risk, especially in volatile market conditions.
• Manageable Debt Levels: Debt-to-EBITDA ratio of 1.95 suggests that Levi Strauss can service its debt comfortably with its earnings before interest, taxes, depreciation, and amortization.
• Debt Servicing Capability: An interest coverage ratio of 14.09 indicates that Levi Strauss has more than sufficient earnings to cover its interest obligations, reducing the risk of default and enhancing financial stability.

c. Profitability & Cash Flow

• Positive Net Income: Levi Strauss’s net income of $154.90 million and profit margin of 2.52% highlight the company’s ability to generate profits from its operations, supported by effective cost management and steady revenue growth.
• Strong Cash Flow Generation: Operating cash flow of $860.00 million and free cash flow of $633.10 million indicate that Levi Strauss is generating substantial cash from its core business activities, supporting dividends, debt repayment, and strategic investments.
• Return Metrics: ROE of 8.12%, ROA of 5.94%, and ROIC of 8.82% demonstrate Levi Strauss’s ability to generate returns on equity, assets, and invested capital, reflecting effective management and operational efficiency.

d. Operational Risks

• Market Competition: Levi Strauss operates in the highly competitive apparel industry, facing challenges from other established brands like Wrangler, Lee, and emerging fashion labels. Intense competition could pressure margins and market share.
• Fashion Trends: Rapid changes in consumer preferences and fashion trends require continuous innovation. Failure to keep pace with evolving styles could lead to decreased demand for Levi’s products.
• Supply Chain Disruptions: Managing a global supply chain is critical. Disruptions due to geopolitical tensions, natural disasters, or pandemics could impact production timelines and customer satisfaction.
• Brand Reputation: As a heritage brand, maintaining brand reputation is essential. Any negative publicity or quality issues could adversely affect sales and brand loyalty.
• Technological Advancements: Investing in e-commerce and digital marketing is necessary to stay competitive. Lagging in technological adoption could hinder growth opportunities.

e. Market & Regulatory Risks

• Regulatory Compliance: Navigating diverse regulatory environments across different countries can increase operational complexities and costs, especially concerning labor laws, trade tariffs, and environmental regulations.
• Economic Downturns: Global economic slowdowns can reduce consumer spending on discretionary items like apparel, affecting Levi Strauss’s revenue and profitability.
• Currency Fluctuations: Operating in multiple currencies exposes Levi Strauss to foreign exchange risks, which can impact profitability and financial performance.
• Environmental, Social, and Governance (ESG) Pressures: Increasing focus on ESG factors requires Levi Strauss to enhance its sustainability practices, which may involve additional costs and strategic adjustments.
• Intellectual Property Risks: Protecting proprietary designs and preventing intellectual property theft is crucial. Infringement issues could lead to legal disputes and loss of competitive advantage.

7. Conclusion

Pros:

• Stable Revenue Base: Levi Strauss has maintained a consistent revenue base with a TTM revenue of $6.16 billion, supported by its strong brand presence and diverse product portfolio.
• Positive Profitability: Achieving a net income of $154.90 million and maintaining positive profit margins reflect the company’s ability to generate profits from its operations.
• Robust Cash Flow Generation: Operating cash flow of $860.00 million and free cash flow of $633.10 million provide Levi Strauss with the liquidity to fund operations, invest in growth initiatives, and manage debt effectively.
• Healthy Return Metrics: ROE of 8.12%, ROA of 5.94%, and ROIC of 8.82% demonstrate the company’s ability to generate returns on equity, assets, and invested capital, highlighting effective management and operational efficiency.
• Dividend Yield: An annual dividend of $0.52 yielding 2.99% offers a steady income stream for income-focused investors.
• Balanced Valuation: A PEG ratio of 0.94 suggests that Levi Strauss is fairly valued relative to its earnings growth expectations, offering a favorable balance between growth potential and valuation.

Cons:

• High Leverage: A debt-to-equity ratio of 1.20 signifies substantial reliance on debt financing, introducing higher financial risk, especially in volatile market conditions.
• Elevated PE Ratio: A trailing PE ratio of 45.83 indicates that Levi Strauss is trading at a significant premium relative to its earnings, suggesting potential overvaluation.
• Negative Net Cash Position: A net cash position of -$1.67 billion indicates that Levi Strauss has more debt than cash on hand, highlighting the importance of strong cash flow generation to manage debt obligations effectively.
• Dividend Sustainability Concerns: A payout ratio of 137.05% suggests that dividends are being paid out more than earnings, which may be unsustainable and could lead to dividend cuts if earnings do not improve.
• Operational Risks: Exposure to intense market competition, rapidly changing fashion trends, supply chain disruptions, and technological advancements poses significant risks to Levi Strauss’s operational performance and market position.
• Altman Z-Score: An Altman Z-Score of 2.76, below the critical value of 3, suggests an increased risk of bankruptcy, warranting caution for investors.

Final Note

Levi Strauss & Co. remains a prominent player in the global apparel industry, leveraging its heritage brand and diverse product offerings to maintain a strong market presence. The company’s ability to generate consistent revenue and positive cash flows provides a solid foundation for supporting ongoing operations and strategic initiatives. However, Levi Strauss faces notable challenges related to high leverage, elevated valuation metrics, and operational risks inherent in a highly competitive and fashion-driven market landscape. Balancing these opportunities and risks is essential for investors considering Levi Strauss as part of their portfolio.

Disclaimer:
This analysis is for informational purposes only and does not constitute investment advice. Investing involves risks, including potential loss of principal. Past performance is not indicative of future results. Consult a qualified financial advisor before making any investment decisions.