Lifestyle Brand Expansion And DTC Transformation Will Improve Future Profitability

Key Takeaways

• Levi Strauss's DTC strategy and brand expansion are key to boosting revenue, improving margins, and enhancing customer engagement.
  
• International market success and cost management initiatives are expected to drive profitability and expand international revenue.
  
• Foreign exchange headwinds and divestments could hinder Levi Strauss's revenue growth, while flat wholesale performance and global tax changes may impact earnings stability.

Catalysts

Designs, markets, and sells apparels and related accessories for men, women, and children in the United States and internationally.

• Levi Strauss is accelerating its direct-to-consumer (DTC) transformation with double-digit growth, which could enhance revenue and margins by increasing control over pricing and customer engagement.
  
• Expansion of the Levi's lifestyle brand through new product lines, such as tops, dresses, and outerwear, along with culturally relevant marketing, is expected to boost brand affinity and drive revenue growth.
  
• Strong international performance in top markets like Mexico, France, and India, and continued investment in fast-growing regions like Latin America and Asia Pacific, are likely to propel international revenue expansion.
  
• Strategic cost management initiatives, including rigorous operational excellence and Project Fuel savings, aim to sustainably improve gross margin and EBIT margin, leading to enhanced profitability.
  
• The planned sale of non-core assets such as the Dockers brand, along with a focus on organic growth channels, is positioned to optimize the company's portfolio, potentially improving net income and shareholder value.

Levi Strauss Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Levi Strauss's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $806.7 million (and earnings per share of $1.68) by about March 2028, up from $210.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 30.2x today. This future PE is lower than the current PE for the US Luxury industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Levi Strauss Future Earnings Per Share Growth

Risks

• Levi Strauss faces potential foreign exchange headwinds, which could impact reported revenues negatively given the anticipated 250 basis points drag primarily from the euro, Mexican peso, and Indian rupee.
  
• The exit from Denizen and footwear and the impact of the 53rd week together account for a 300 basis points headwind, potentially affecting reported revenues and the growth outlook.
  
• The anticipated flat performance in the wholesale channel suggests cautious growth expectations due to possible volatility, which could impact overall revenue stability.
  
• The global tax implications, such as potential changes in the tax code and the normalization of the tax rate, could result in a headwind affecting earnings.
  
• Dockers, a sizable business, is slated for divestment at what is described as breakeven EBIT margins, indicating it might not be a profitable line, and the sale could potentially impact overall earnings depending on the transaction terms.

Valuation

• The analysts have a consensus price target of $21.376 for Levi Strauss based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $806.7 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 8.4%.
• Given the current share price of $16.09, the analyst price target of $21.38 is 24.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.