This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Levi Strauss & Co.
You can always sort of tell when someone is really into something or they are just merely tagging along for the ride, perhaps to appease someone special to them or to simply check off a box that they needed to check off, simply as a formality. Well, that is sort of what is happening here, not to be a total drag or anything.
However, the undisputed fact of the matter is that we haven’t analyzed many retail-related or clothing companies in quite some time, so we figured it would be a good time to brush off some of the dust and dive into a company that resonates well within the younger generations and, hey, it gets out of comfort zones in the sense that clothing and retail companies and their associated stocks frankly bore us to pieces, given the industry norms of relatively low margins, high overhead, threats of shrink (a term commonly used within the retail sector simply meaning theft), inventory issues that are all too easy to fall into, not to mention the seemingly ever changing consumer tastes that companies such as Levi Strauss & Co. have to constantly remain abreast on in order to best cater to the needs of consumers.
However, in keeping with the fact that any and every consumer brand has to stay ahead of relevant trends in order to stay in business, Levi Strauss has some things going for it, for one (or I guess two), a proven track record and powerful relative branding.
If Levi Strauss & Co. is a familiar sounding name, it should be, as many simply refer to this company’s core product, jeans, as “Levi’s”, which makes sense given that this San Francisco, California-headquartered firm is apparently the world’s largest manufacturer of pants.
Since we are just not all that fashionably inclined nor candidly interested, here you can find some more on the company and its products.
No offense, Levi Strauss & Co., we just see stuff, check prices and gravitate towards the cheapest option if we ever find ourselves at any sort of retail outlet.
We don’t really consider ourselves huge jean enthusiasts, oddly enough.
What we are interested is the recent and current state of the company’s financials, as we do think that one of the best things going for Levi Strauss is its inherent brand power, as there just seems like there is something about Levi’s that people just love, and for that, people are likely willing to pay a premium for the luxury of hugging their legs into a pair of Levi-branded jeans, perhaps enabling this company to be a bit more recession resistant than some of its competitors, but we will just have to see if this is really the case.
Ok, no more waiting, let’s dive headfirst into Levi Strauss & Co. and its core financials and other relevant figures and ratios.
Levi’s stock financials
Trading at a share price of $13.83 along with an associated market capitalization of $5.5 billion, a price-to-earnings (P/E) ratio of 20.03 while also issuing an annual dividend of $0.48, shares of Levi Strauss & Company are off to an interesting start, particularly in reference to the company’s present price-to-earnings ratio and the fact that it is trading at pretty much the exact, commonly held fair value benchmark of 20, indicating that this company’s shares (NYSE: LEVI) are fully priced in, however, if there is some recent year-over-year (YOY) annual revenue growth to be found within this company, Levi’s might be worth paying a little more for, perhaps.
At any rate, with respect to the company’s balance sheet, Levi’s executive team is responsible for and most recently handling around $6 billion in terms of total assets as well as $4.1 billion in terms of total liabilities, which, honestly, is much better than we had initially anticipated, as it greatly hints at the fact that Levi Strauss & Co. might just happen be really good at managing its inventory levels, perhaps through the best course of action possible; selling jeans!
The company could also have a solid inventory system in place outside of merely selling through much of its inventories, however, whatever the case may actually be, finding that this company’s total assets are higher than expected with respect to its total liabilities, this is a net-net positive, all things considered for the time being, especially for more forward-looking investors, as Levi’s can apparently afford to make a few sizable acquisitions with this sort of balance sheet, another means to an end in staying abreast with both prevailing and future consumer trends.
Onto the state of the company’s income statement, Levi’s total, year-over-year (YOY) revenues have found themselves essentially in the neighborhood (on average) of $5 billion, however, the company’s most recently displayed revenue figure (found on TD Ameritrade’s platform) as of 2022 touted an annual revenue figure of around $6.1 billion, however, we frankly wouldn’t get too fired up over this figure, as this was more than likely a combination of Levi Strauss & Co. flexing some pricing power with its suppliers and perhaps passing along some price hikes to its loyal consumers, which are both objective positives for the business but really the norm for a company as large and established such as this one.
As it relates to the company’s cash flow statement, Levi Strauss & Co.’s net income has actually seen some growth (excluding an inevitable down year in 2020 due to what else but COVID-19), for instance, as it has grown its net income from $285 million (2018) to a relative high of $569 million (2022), along with its total cash from operations all being positive between 2018 and 2022, however, still experiencing its fair share of fluctuations, some years extracting more total cash from operations than others, but, really, what else is new with retail-oriented firms.
Levi’s stock fundamentals
Being that Levi Strauss & Co. is a distinguished leader in the jeans space, it would only be fitting (get it?) if the company’s trailing twelve month (TTM) net profit margin was higher than that of the industry’s respective average.
Evidently, things don’t end up always being right, even though they should be, especially in this scenario.
According to the figures displayed on TD Ameritrade’s platform, Levi’s TTM net profit margin sits well below at 4.46% to the industry’s listed average of 9.62%, which frankly puzzles us as this is the leader in the jeans category, yet its TTM net profit margin surely isn’t one that of a leader.
Perhaps this could be sku problem in that they have too many jean types, designs and styles, some far more profitable than others, leading to a more than muted TTM net profit margin and/or perhaps this company is still in the process of digesting a few past acquisitions, thus presently eating into its profit margins, and ultimately, it could very well be the case that the company needs to do a better job at controlling its costs, as this would almost certainly tip the TTM net profit margin scale in the right direction.
In addition to its rather unassuming TTM net profit margin, the company’s TTM returns on assets and investment(s) are also rather depressing, with, for example, Levi’s TTM return on assets tucked in away at 4.64% to the industry’s respective average of a whopping 12.91%, which could be a byproduct of prevailing inefficiencies within the company, that, of course, must be addressed.
Should you buy Levi Strauss & Co. stock?
What started off rather rosy morphed into an unexciting stock pick, at least from where we stand.
Sure, this is surely a more than established, credible jean brand loved by members of many different demographics and generations, its balance sheet is in good condition and its revenues have been stable in recent years, however, there seems to be too many points of inefficiency and uncertainty within this company, specifically as found through its lackluster TTM net profit margin along with its inordinately low TTM returns on both assets and investment(s), and for a company and brand such as this one, we don’t feel as though it would be fair nor credible for us to simply give Levi Strauss & Co. a pass on this one, let alone any company for that matter.
Therefore, until we start seeing some meaningful improvements with the company’s core trailing twelve month margins and returns, we feel most inclined to offer the company’s stock (NYSE: LEVI) a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.