This American Brand Could Disappear Forever

Blue jeans revolutionized fashion, and Levi Strauss & Co. (LEVI) revolutionized blue jeans starting all the way back in 1873.

Levi’s jeans were such an iconic American brand that they would sell for 5x-10x face value on the Russian black market during the Cold War.

Today, the company faces a different set of challenges as it grapples with fast fashion, fading brand loyalty, and a tightening consumer.

After the latest quarter’s results, management dropped a bombshell…

Levi’s is eyeing the exit of its Dockers® brand, potentially ditching khakis to double down on denim.

According to our TrackStar data, that got retail traders and investors reading up on the stock at an accelerated rate.

So, does the latest 5% stock drop offer an opportunity or a warning?

Levi Strauss’ Business

Levi’s reach extends across 110 countries, with its products gracing the shelves of over 45,000 retail locations. 

From rugged 501s to trendy cuts, Levi’s outfits everyone from cowboys to rock stars.

Levi Strauss & Co. carves up its empire into four key slices:

• Americas (49% of total revenues) – The home turf, covering North and Latin America’s jean scenes.
• Europe (26% of total revenues) – Where denim meets haute couture across the continent.
• Asia (18% of total revenues) – Bringing American cool to the Far East.
• Other Brands (7% of total revenues) – The khaki kingdom of Dockers® and yoga-chic Beyond Yoga®.

The latest quarter saw Levi’s core brand buck the trend, growing 5% while overall revenues flatlined. 

Direct-to-consumer sales surged 12%, offsetting wholesale declines. 

So, let’s talk a bit about Dockers.

Back in 1984, Dockers was a great brand that added value to Levi’s.

Today, it’s lost its popularity and flare. Sales for Dockers dropped 15% YoY for the quarter.

Levi’s could sell the brand or just shut down production as it did with Denizen.

It’s all aimed at focusing on the core Levi’s brand and Beyond Yoga.

The company’s latest marketing campaign features Beyoncé rocking their rivets, betting her star power can keep its jeans on top in an ever-changing fashion landscape.

Financials

Source: Stock Analysis

As a company, Levi’s has struggled to gain any meaningful traction with its sales.

Outside of the post-pandemic surge, revenues are pretty much flat.

While gross margins have improved, operating and profit margins declined, with the latter suffered from merger and restructuring costs as well as asset write downs.

Consequently, free cash flow margin held constant, save for changes in accounts payable.

After doubling in 2020 to $2.7 billion, total debt has declined to $2.3 billion. Although that’s still high, interest expense only accounts for 0.66% of revenues.

With around $600 million in cash generated from operations and an annual CAPEX of $250 million, there has been plenty of money to pay the $200 million in dividends, yielding 2.7%, along with a 1.2% yield from share buybacks.

Valuation

Source: Seeking Alpha

On a P/E basis, Levi’s is as expensive as they come, as is V.F. Corp (VFC).

But on a price-to-operating-cash-flow basis, it’s the second cheapest behind Under Armour (UAA).

What’s interesting is the Enterprise value to Sales ratio, which is right in the middle of the pack, whether looking at the trailing 12-month period or forward, implying the company is fairly valued compared to its peers.

Growth

Source: Seeking Alpha

The revenue numbers here tell the tale of an apparel industry struggling to find growth.

None have achieved double-digit growth, while some are negative YoY, looking forward, or averaged out over the past 3-5 years.

This pressure translated to inconsistent profitability, with many showing flat or declining EBITDA and EPS growth.

Profitability

Source: Seeking Alpha

Amongst the clothing companies listed here, Levi’s appears to do well in all categories, with Ralph Lauren (RL) being the top in nearly every category.

Other than Ralph Lauren, all of these companies show awful returns on equity, assets, and total capital.

Our Opinion 5/10

Buying a fairly valued company in a struggling industry isn’t an ideal investment.

While Levi’s generates decent cash flow and is right in jettisoning Dockers, we don’t know if that will help the company turn things around.

We’d rather put our money to work somewhere with better value, growth, or both.