Levi Strauss & Co. (NYSE: LEVI) is all set to announce its fiscal Q2 results today after the market close. Shares of LEVI have not fared well this year and have tanked 35.9% this year in the midst of macroeconomic volatility. Soaring inflation has made investors question LEVI’s prospects in Q2.
Even Guggenheim analyst Robert Drbul is “curious to hear LEVI’s update on inventory levels as well as the demand trends in the quarter, taking into account the current inflationary environment.”
According to the analyst, the retail industry sector is experiencing higher inventory levels due to “excess levels of supply.“ However, Drbul continues to be bullish about the stock. Let us look at the reasons behind the analyst’s optimism.
Drbul’s Belief in LEVI’s Brand Strength
The top-rated analyst continues to believe in the Levi brand and has estimated Levi’s to generate revenues of $1.46 billion, up 14.2% year-over-year, and earnings of $0.25 per share in Q2. Drbul firmly believes that the LEVI brand has strong pricing power, which could mitigate the current inflationary pressures.
While the analyst admitted that there is more uncertainty regarding consumer behavior due to inflation, Drbul anticipates “minimal markdown risk as the majority of Levi’s inventory is seasonless.”
Drbul has forecasted a gross margin of 58.8% in Q2 and expects that the company’s gross margins will be “flat compared to prior year as we believe Levi’s will continue to benefit from casualization trends occurring and the ongoing denim cycle underway.”
Levi’s Focus on Five Key Pillars of Growth
Last month, after attending the company’s Investor Day, the analyst came away encouraged by the company’s five-year ambitious growth plan. LEVI aims to achieve revenues ranging between $9 billion and $10 billion, annual growth ranging from 6% to 8%, and an adjusted operating margin of 15% by 2027.
The retailer aims to achieve these targets through five key pillars of growth. This includes strengthening its brands by “more effectively integrating product, design, marketing and consumer in-store experiences.”
LEVI is also looking at increasing its investment in “DTC [direct-to-consumer] expansion (new stores and DCs [distribution centers]), ecommerce, and digital transformation (AI [artificial intelligence] and ERP [Enterprise Resource Planning]).”
Drbul also approves of Levi Strauss’s recent announcement of share buybacks worth $750 million and the company’s plans to maintain its dividend payout ratio between 25% and 35%.
Will Levi Rise to the Macro Challenges?
The analyst also noted that despite macroeconomic challenges, LEVI remained confident of meeting its FY22 outlook of revenues between $6.4 billion and $6.5 billion, growth in the range of 11% to 13% year-over-year. The company has projected adjusted diluted earnings to come in between $1.50 and $1.56 per share.
LEVI’s management had warned on its Q1 earnings call that Russia’s war on Ukraine and other macroeconomic headwinds “together will impact revenue by approximately $200 million and EPS by approximately $0.15 [in FY22].”
As a result, Drbul reiterated a Buy rating on the stock and a Street high price target of $33. The analyst’s price target implies an upside potential of 108.8% at current levels.
Other analysts on the Street agree with Drbul and remain bullish about LEVI with a Strong Buy consensus rating based on a unanimous three Buys. The average LEVI price target of $28.67 implies an upside potential of 81.5% at current levels.
It seems that LEVI is well-poised to navigate the current volatile environment not only in Q2 but this entire year. The stock also scores a “Perfect 10” on the TipRanks Smart Score System, indicating that the stock is highly likely to outperform the market.
The TipRanks Smart Score system is a data-driven, quantitative scoring system that analyses stocks on eight major parameters and comes up with a Smart Score ranging from 1 to 10. The higher the score, the more likely the stock will outperform the market.