Tariffs And Global Risks Will Limit Margins Yet Spark Change

Key Takeaways

• Heavy reliance on international markets and new tariffs introduce risks from geopolitical instability, currency fluctuations, and cost uncertainties, potentially compressing margins.
  
• Direct-to-consumer expansion and competitive pressures could increase operational costs and affect earnings if market strategies don't align with consumer preferences.
  
• Expanding international operations and diversifying product offerings are enhancing growth and stability, driven by strong direct-to-consumer and e-commerce performances.

Catalysts

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

• The announcement of new tariffs introduces uncertainty in cost structures, potentially leading to increased product costs and compressed margins, impacting overall profitability negatively.
  
• Levi Strauss's reliance on international markets, which represent almost 60% of total revenue, exposes the company to geopolitical risks and currency fluctuations that could hinder revenue growth.
  
• While current inventory levels are healthy, there may be challenges in managing costs effectively if the tariffs and sourcing adjustments lead to higher expenses, potentially affecting net margins.
  
• The aggressive expansion of direct-to-consumer stores introduces the risk of overextension, which could result in increased operating expenses and impact earnings if store productivity does not meet projections.
  
• Despite the brand's strong market positioning and cultural connections, there remains competition pressure in both the domestic and international markets, which could slow down revenue growth if consumer preferences shift or competitors gain market share.

Levi Strauss Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Levi Strauss compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Levi Strauss's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.6% today to 9.7% in 3 years time.
• The bearish analysts expect earnings to reach $589.9 million (and earnings per share of $1.5) by about April 2028, up from $360.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 17.6x today. This future PE is lower than the current PE for the US Luxury industry at 16.3x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Levi Strauss Future Earnings Per Share Growth

Risks

• Levi Strauss achieved high single-digit organic net revenue growth of 9% in Q1, driven by strong performance across sales, margins, and EPS, suggesting potential for sustained revenue growth.
  
• The company's direct-to-consumer strategy continues to be a key growth driver, up 12%, along with successful new openings and strong e-commerce performance, which may improve net margins through higher direct sales.
  
• Levi's expanded product portfolio, notably in women's clothing and lifestyle products, is accelerating growth and capturing market share, indicating potential revenue and earnings enhancement.
  
• International business growth, now accounting for close to 60% of total revenue, driven by strong performance in markets like Mexico, the UK, France, and Germany, may bolster overall revenue and margin stability.
  
• Margin expansion is evident, with gross margin reaching a record 62.1%, supported by lower product costs and a favorable sales mix, which may lead to improved earnings.

Valuation

• The assumed bearish price target for Levi Strauss is $15.7, which represents one standard deviation below the consensus price target of $18.61. This valuation is based on what can be assumed as the expectations of Levi Strauss's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.1 billion, earnings will come to $589.9 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 $16.08, the bearish analyst price target of $15.7 is 2.4% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.