Levi’s Outlook for Revenue Growth And Margin Opportunities Appear Intact: Morgan Stanley
Levi Strauss & Co, an American clothing company known worldwide for its Levi’s brand of denim jeans, warned after its net revenue plunged over 60% in the second quarter that the effect of the coronavirus would negatively impact their businesses even in the second half of this year.
Net revenue declined 62% to $497.5 million, largely due to the temporary closure of company-operated, franchise and wholesale customer retail locations as a result of the COVID-19 pandemic, partially offset by the company’s e-commerce business which grew 25% for the quarter, with sequential month-over-month acceleration to nearly 80% growth for May, the company said.
The company recorded a net loss for the quarter of $364 million and an adjusted net loss of $192 million. Gross margin decreased 19.2 percentage points on a reported basis to 34.1%. Adjusted EBIT was a loss of $206 million.
The company also said that it would reduce our non-retail, non-manufacturing workforce by about 700 positions, or roughly 15%, which we expect will generate annualized savings of $100 million.
“Below-expectation 2Q20 results and challenging 2H20 likely pressure the stock near-term. However, e-commerce acceleration and expense cutting initiatives leave us constructive on Levi’s long-term margin story. Raise price target $1 to $18; remain equal-weight (EW),” Kimberly C Greenberger, equity analyst at Morgan Stanley noted.
“The company is in early innings as it executes its LT growth strategy and navigates softer U.S. wholesale. Levi’s experienced senior management team has proven it can deliver results. DTC, international, and underpenetrated category growth all present runways for revenue growth. Gross margin is the likely driver of EBIT margin expansion, though we do not expect further SG&A deleverage. Levi’s strong balance sheet and FCF growth should allow it to increase share buybacks and/or engage in potential organic M&A,” the analyst added.
While Levi has not yet re-closed any retail doors, the company closely monitors coronavirus trends for signals that may prompt re-closing. At this time, management indicates 40 doors are in areas of worsening virus trends. Even if stores do not re-close, deteriorating virus trends may dissuade consumers from shopping in-store – a potential headwind to expected 3Q revenue performance, Morgan Stanley noted
Morgan Stanley target price is $18 with a high of $25 under a bull scenario and $6 under the worst-case scenario. However, Telsey Advisory Group lowered its target price to $17 from $20 and UBS cuts price target to $25 from $27.
Three analysts forecast the average price in 12 months at $20.50 with a high forecast of $25.00 and a low forecast of $16.00. The average price target represents a 48.23% increase from the last price of $13.83. All those three analysts rated ‘Buy’, none rated ‘Hold’ or ‘Sell’, according to Tipranks.
However, we expect it is good to hold now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.