2023-08-23 05:05:42 ET
Summary
- Levi Strauss & Co.'s stock trades at 13.1x TTM P/E and offers a solid 3.4% yield.
- The company is focusing on direct-to-consumer sales and reducing reliance on wholesale distribution, but that is coming with higher capital expenditures.
- Levi's has a strong brand, high profitability, and a history of returning cash to shareholders.
Levi Strauss & Co's stock ( LEVI ) is back on my radar trading at 13.1x TTM P/E and yielding a solid 3.4% dividend. Since I last wrote about Levi's back in April 2020 when it traded at $13.40 during COVID, the stock has been on a bit of a roller coaster ride. It is now back in a territory where I am starting to get interested to add to my position although I would like to see some of the capital expenditures lessen and the Beyond Yoga acquisition to continue building into a more meaningful share of profits.
Levi's is a great historic brand and the company is making the right moves into direct-to-consumer ((DTC)) stores and sales to reduce its alliance on the struggling wholesale distribution network. The company's 2021 acquisition of Beyond Yoga brought Levi's into the growing activewear with a good brand and product line from a company founded and majorly run by woman. I will be excited to see this company grow under the guidance and marketing budget of Levi's parent company.
Latest Q2 Results show a Weak Consumer
In Levi’s latest Q2 results released back in May, the company reported weakening sales in line with guidance for a decrease of 9% driven by pressure in the U.S. wholesale business. The company reported diluted EPS of $0.00 and adjusted diluted EPS of $0.04. For the TTM period reported diluted EPS is now $1.08 giving the company a TTM P/E of 13.1x. The company lowered its guidance for EPS from $1.10-$1.20 from $1.30-$1.40. This updated guidance leaves Levi's trading at 12.1x forward P/E.
DTC net revenues increased 13% and 14% on a constant-currency basis, driven by broad-based growth in both company-operated mainline and outlet stores as well as e-commerce. E-commerce increased 21% on a constant-currency basis reflecting double digit growth across all segments. The 2021 acquisition Beyond Yoga saw revenue grow at 28% YoY in the latest quarter and 19% for the first half of the year.
Levi's Q2 Sales and Operating Profits (company Q2 results)
Strong Brand Brings High Profitability
Levi Strauss's strong brand has allowed the company to achieve average return on equity ((ROE)) and return on invested capital ((ROIC)) of 32.6% and 114.1%, respectively, since 2015. This average level of profitability is well my rule of thumb seeking 15% ROE and 9% ROIC, allowing me to be confident that, in my opinion, the company is able to maintain and continue to increase its intrinsic value over a business cycle while rewarding shareholders with excess profits. Levi's has had a rough couple years including COVID with malls shut and revenue down are 24% from 2019 to 2020 but that has not stopped the company from returning good profits over an 8 year period.
Historical Profitability and Growth at Levi's (compiled by author from company financials)
In terms of growth, Levi's book value per share has grown from $1.02 per share in 2015 to $4.83 in the latest quarter. Adding on the dividend payouts for the period, growth in book value per share has been around 29.3% annually which further supports the historical ROE average mentioned earlier. The company continues to invest it its brands, technology and infrastructure, and also acquired the Beyond Yoga business in 2021, allowing Levi's to enter the activewear market, which is five times bigger than denim and growing at a faster rate.
It's important for investors to keep in mind goodwill and intangibles on the balance sheet and their contribution to book value per share. Levi’s had goodwill and non-amortized other intangible assets of $366 million (0.91/share) and $259 million ($0.64/share), respectively, as of November 2022. Of this, $124 million ($0.31/share) and $216 million ($0.53/share), respectively, relate to Beyond Yoga. I will be keeping an eye on the revenues and profits from this segment to see if they are holding up to a decent rate of return.
Returning Cash To Shareholders
Levi's does a good job of returning cash flow to shareholders through the form of dividends and share repurchases. With capital expenditures and acquisitions only taking up on average 43% and 11%, respectively, of cash flow from operations since 2007, this leaves approximately 46% to be returned to investors through the form of dividends and share repurchases. With average cash flow from operations of $412.5 million over the past five years, this 46% would imply free cash flow available to shareholders of $190 million for only a 3.3% free cash flow yield at the current $5.7 billion market capitalization.
Cash Flow Analysis of Levi's (compiled by author from company financials)
Levis made a rare large acquisition of Beyond Yoga in 2021. If we exclude the unique Beyond Yoga acquisition, Levi's made almost net nil acquisitions over the period at only $8 million total. Excluding acquisitions from the above FCF analysis would make the FCF yield jumps up to 4.1%. As mentioned earlier, the Beyond Yoga brand's revenue grew at 28% YoY in the latest quarter and 19% for the first half of the year, so this acquisition looks to be holding its own for now.
What about Leverage?
Interest coverage (including lease payments) is tight like most other retailers but still looks healthy at 2.2x in 2022. Levi's liquidity was put to the test during COVID but survived with interest coverage including lease payments only dropping to around 1.0x and EPS being a loss of $0.32 for the 2020 year. This 2.2x coverage leaves room for any mid-term revenue weakness and further or prolonged higher interest rates.
Interest Coverage & Shares Outstanding (compiled by author from company financials)
Missing from the above historical graph is a meaningful amount of share repurchases in addition to the 3.4% dividend yield. I always like to see share repurchases by management as it shows capital budget discipline and management's faith in the long-term prospects of the business. The company has repurchased around 2% of its shares in total since the 410 million high in 2021, but it is not consistent enough to get me excited.
Price Ratios With Growth
As the creator of blue jeans back in 1853, Levi Strauss has a strong global brand that many consumers in developed and developing countries aspire to purchase (not to mention the company's Docker's brand). In addition to the activewear market mentioned earlier, the company sees a significant opportunity to deepen their presence in key emerging markets, such as China and India, to drive long-term growth as Asia, the Middle East and Africa. International sales now make up 53% of sales as of fiscal year 2022.
Since 2014, Levi's has achieved average revenue growth of 2.9% annually. This strong growth should be considered alongside the company's current 13.1x TTM P/E. This P/E can also be expressed as a 7.6% earnings yield which is a bit higher than the FCF yield discussed earlier. The FCF yield is being brought down by higher capital expenditures in recent years with the DTC expansion and the Beyond Yoga acquisition. I would like to see these two converge, with the FCF yield improving before investing more in Levi's.
Earnings Yields from Levi's (compiled by author from company financials and market data)
Takeaway for Investors
Levi's is a great historic brand that trades at a decent 7.6% earnings yield (13.1x TTM P/E) and FCF yield of 3.3%. The company is making the right moves into direct-to-consumer ((DTC)) stores and sales to reduce its alliance on the struggling wholesale distribution network, but that is showing up in higher capital expenditures in recent years. The company remains a holding of mine, but I would like to see capital expenditures get lower from recent years.
For further details see:
Levi Strauss & Co. Now Trades At Only 13.1x P/E Again