Direct-to-consumer Focus And International Expansion Will Shape Future Success

Key Takeaways

• Levi Strauss is focusing on direct-to-consumer operations and international expansion to increase profitability, market share, and revenue.
  
• Strategic decisions and investments, including potential sale of Dockers and partnerships like with Beyoncé, aim to improve net margins and drive sales in key categories.
  
• Portfolio optimization and strategic shifts, coupled with supply chain and geopolitical risks, present significant challenges to revenue growth and operational efficiency.

Catalysts

Designs, markets, and sells apparels and related accessories for men, women, and children worldwide.

• Levi's brand growth and strategic focus on direct-to-consumer (DTC) operations are accelerating profitability and contributing to a stronger and more focused business strategy, with expectations for this trend to positively impact future revenues and margins.
  
• International expansion, with a particular emphasis on Europe's return to growth and strategic moves in China, is expected to enhance global market share and revenue, despite current challenges.
  
• The decision to review strategic alternatives for the Dockers brand, including potential sale or other transactions, underscores a commitment to capital allocation discipline and a focus on higher-margin businesses, likely improving net margins and overall profitability.
  
• Investments in product innovation and marketing, as highlighted by the partnership with Beyoncé, aim to increase brand awareness and drive sales, particularly in key categories like women’s wear, which continues to show robust growth and market share gains.
  
• Ongoing initiatives to increase full price sales and improved inventory management are expected to strengthen gross margins and operational efficiency, contributing to long-term earnings growth.

Assumptions

• Analysts are assuming Levi Strauss's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $700.6 million (and earnings per share of $1.75) by about December 2027, up from $154.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $602 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, down from 43.4x today. This future PE is lower than the current PE for the US Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Risks

• Challenges in the U.S. wholesale segment could continue to negatively impact top-line growth, indicating potential revenue and net margin pressures.
  
• The strategic decision to explore strategic alternatives for the Dockers brand reflects a performance issue that might influence overall revenues and brand portfolio optimization.
  
• Ongoing and potential future supply chain disruptions, including those caused by geopolitical tensions or labor disputes like port strikes, could increase operational costs and impact gross margins.
  
• Execution risks in the Chinese market, including the reset of business strategies and management changes, could delay the anticipated growth in this significant market, impacting overall earnings.
  
• Cybersecurity breaches within key wholesale customer systems highlight operational risks that could lead to shipping and inventory issues, negatively affecting sales and potentially increasing operational costs.

Valuation

• The analysts have a consensus price target of $22.39 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 $26.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.5 billion, earnings will come to $700.6 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of $16.95, the analyst's price target of $22.39 is 24.3% 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.