Levi Strauss & Co (LEVI) – Closing Long Position – down 17% vs. S&P up 44%
We made Levi Strauss & Co (LEVI: $18/share) a Long Idea on March 22, 2019, the date of its IPO. LEVI earned a Very Attractive rating at the time of our report. We believed rising economic earnings, diversification of its revenue streams, growing direct-to-consumer business, and relatively cheap pre-IPO valuation gave the stock lots of upside.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior fundamental research and support more cost-effective fulfillment of the fiduciary duty of care[1].
During the more than three-year holding period, LEVI underperformed as a long position, falling 17% compared to a 44% gain for the S&P 500.
Levi Strauss’ strong fundamentals have helped the company recover from pandemic-related disruptions in 2020, and its Core Earnings over the trailing twelve months (TTM) are 40% above 2019 levels. However, as we look ahead, rising material costs, the strong possibility of a slowdown in consumer spending, and the growing risk of trade restrictions present near-term headwinds to the company’s improving profitability.
Longer term, the company’s strategy to grow sales in China exposes Levi Strauss to more geopolitical risk at a time when relations between the West and China are becoming increasingly strained. Furthermore, Levi Strauss’ expansion into the women’s products market is likely to be costly given ever-changing fashion trends and ample competition.
Given the unfavorable outlook for near- and long-term profit growth, Levi Strauss’ stock holds limited upside potential. We believe there are better opportunities in this market that present much more favorable risk/reward and are closing this long position.
Figure 1: LEVI vs. S&P 500 – Price Return – Unsuccessful Long Idea
Sources: New Constructs, LLC and company filings
Note: Gain/Decline performance analysis excludes transaction costs and dividends.
This article originally published on July 28, 2022.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.
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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.