Get Some Cash Ready, It's Almost Time To Buy Levi Strauss (NYSE: LEVI)

A Dismal Quarter For An Iconic American Brand

Levi Strauss (NYSE: LEVI) reported earnings after the bell on Monday and I can’t say it was all that great. The company reported a larger than expected loss on less than expected revenue and withdrew guidance for the year. The news has the shares down more than 5.0% in pre-market trading and offers up what could be a great entry point for new investors.

The mitigating factor in Levi’s favor is the timing of the quarter in the question. Levi’s fiscal 2nd quarter for 2020 was in near-perfect alignment with the national shutdown. What this means for investors is that virtually all of the COVID-related felt by this company has already happened. In addition, the 2nd quarter is typically the company’s weakest of the year so the impact isn’t as bad as it could have been. Since the end of the quarter, the company has reached a 90%+ reopening rate which more than suggests a rebound is underway. The only question is how good will the rebound be?

Business Contracted, But The Rebound Is On

Levi Strauss reported revenue declined 62% in the 2nd quarter of the year. This is a stunning amount and more than 450 basis points off the consensus mark. GAAP and non-GAAP earnings also missed and by a large margin in GAAP terms. The only bright spot, in the raw data that is, is that margins came in better than expected despite a decline from last year.

The bright spot, the true bright spot, in this report is the data on digital and eCommerce. Levi’s says revenue growth through eCommerce channels accelerated to 30% in the quarter and only gotten stronger since. Management gave some color on June eCommerce figures citing a 70% YOY increase that is expected to linger on into the future. During the conference call, more than one exec referred to the “stickiness” of eCommerce trends that I myself have commented on in other articles.

Looking forward, Levi’s is expected to post a fairly dismal year for 2020 but rebound strongly next. Revenue will fall roughly 25% in 2020 and then spring back by 26% or so next. What the analysts haven’t factored in is the growth in the eCommerce which Levi’s management is trying to tackle. The company began a shift to eCommerce even before the pandemic struck and is now doubling-down on the efforts. "The pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of Levi’s brand," updates CEO Chip Bergh. He says Levi Strauss is doubling down on its digital transformation. 

Levi’s Has A Dividend, But It Might Get Cut

I have been digging deep and can find no mention of the dividend in today’s news or recently for that matter. But it’s there. Levi’s says it right on the website they’ve paid a dividend each year since 2008 and the last was just paid a month or so ago. At today’s prices, Levi’s yields about 2.4% but there is a catch. The company typically only pays 33% of its income as dividends and the income this quarter was negative. That said, the company is sitting on an enormous cash position inside the walls of a fortress balance sheet.

As of this quarter, Levi’s is sitting on more than $2 billion in liquidity and very little debt. The only worry, in terms of the balance sheet and earnings, is that this year’s payout ratio is nearing the 100% mark. Looking forward, however, and based on the analyst’s consensus, the ratio will spring back to 38% at least by next year. Bottom line, Levi’s pays a dividend but there is some risk, it may be wise to wait to buy until after the next expected dividend declaration due out later this month.

The Technical Position: Shorts In Control

The technical position is a little iffy right now because of the shorts. The short ratio is sitting near 13% which shows a moderately bearish sentiment is lingering for this stock. In the near-term, price action may continue to fall. The first targets for support are in the range of $12 to $13 and may produce a buy signal. If price action falls below $12 it may be possible to scoop up this stock in the $10 to $11 range. Longer-term I expect to see Levi’s complete its bottoming process and begin moving higher before the start of the Q3 2020 EPS reporting cycle.