As Levi’s recovers, does its share price have room to rise?

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Levi Strauss (NYSE: LEVI) is experiencing an “accelerated recovery” across its business, noted CEO Chip Bergh in the second quarter earnings report released earlier this month.

The stock price seems to reflect this sentiment as it has risen 8.9% last month and 33% since the start of the year. But could he go higher?

Image source: Getty Images.

Excellent business performance

Levi’s business is recovering well from the slump in revenues and profits it suffered during the pandemic. In the most recently released quarter, which ended May 30, revenue grew 156% year-over-year. However, the company had a particularly easy comparison – most US clothing stores were closed for much of the quarter of last year during the first COVID-19 lockdowns. Levi’s revenue was only 3% lower than its total for the second quarter of fiscal 2019.

Bergh attributed the better-than-expected performance of the company to strong demand for looser styles of denim it launched before the pandemic. These looser styles now account for almost half of the men’s and women’s stocking assortment.

Levi’s has the right styles to drive top line growth, and his results are improving as well. In the first half of its 2021 fiscal year, Levi’s has gone from a loss of $ 210 million a year ago to a profit of $ 207 million. For this, investors can credit Levi’s record gross margin of 58.8%.

CFO Harmit Singh called the company’s margin gains “structural and lasting.” Growth in Levi’s higher-margin e-commerce business accelerated from the previous quarter to 42% year-on-year. E-commerce now represents 8% of total turnover compared to 5% before the pandemic.

Management said gross margins were also improving due to increased full-price sales and a higher sales mix of denim stockings. Levi’s is poised to improve its adjusted operating margin from its current level of 9% to a high of 12% in fiscal 2022. That would certainly drive strong earnings per share growth and could fuel a rise. of the share price.

Are investors’ expectations too low?

Following the latest quarterly report, analysts are already raising their earnings estimates for Levi’s. The consensus estimate is for EPS of $ 1.31 for FY2021, $ 1.50 for FY2022, and $ 1.69 for FY2023. But those forecasts could rise if consumers continue. to acquire new Levi’s styles, especially through its e-commerce channels.

“We are investing in cutting edge technology and expanding our execution capabilities,” Bergh said on the earnings call, referring to the new distribution center the company has just opened in Nevada.

The stock’s price currently sits at $ 26.66, giving it a price-to-sell ratio of 2.12, higher than its valuation two years ago. But the booming e-commerce business and improving profitability make Levi Strauss fundamentally different from what it was before the pandemic.

LEVI PS ratio table

LEVI PS ratio data by YCharts.

Following a decline since the earnings report, Levi’s is now trading at a futures price-to-earnings ratio of 19.7, which looks appealing to a company that is expected to post double-digit percentage gains in earnings each year in the over the next three years.

Rising raw material costs could be a problem for the company in the short term, but management believes the company can raise prices to offset these higher expenses, and given the high demand Levi’s is currently experiencing, they are probably right.

For these reasons, Levi’s is a solid retail stock to buy at current levels.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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