Today’s sell-off in Levi stock could be a great buying opportunity for value investors.
Levi Strauss & Co. (LEVI -16.40%) stock slid 16.5% through 12:30 p.m. ET Thursday despite the company delivering an earnings beat last night.
Heading into earnings, analysts forecast the blue jeans maker would earn only $0.11 per share on $1.45 billion in second-quarter 2024 sales. In fact, Levi earned $0.16 per share — nearly 50% more than expected — while sales came in close to the mark at $1.44 billion.
Wait. Levi earned more than it was supposed to despite selling less stuff? What’s wrong with that?
Levi Strauss’ Q2 earnings
Well, first of all, what’s wrong is that Levi didn’t actually earn $0.16 at all. Turns out this was a pro forma number and, when calculated according to generally accepted accounting principles (GAAP), Levi’s real profit was only $0.04 per share.
That’s better than the breakeven profits Levi reported a year ago, but still kind of disappointing.
That being said, Levi did grow sales 8% year over year, and did report a record gross profit margin of 60.5%, leading to the earnings improvement, a fact management attributed to its “transformational pivot to operating as a [direct-to-consumer]-first company,” selling primarily via e-commerce. Although direct-to-consumer (DTC) sales didn’t grow any faster than sales as a whole, these kinds of sales do apparently result in stronger profit margins — so this is a bet that’s worked out well for Levi.
Is Levi stock a buy?
Arguably Levi’s best news last night was that the DTC switch has resulted in surging free cash flow at the company. So far this year, Levi has generated $437 million in positive FCF, versus negative $66 million in the first half of 2023. Trailing-12-month FCF is now $613 million, resulting in a price-to-free-cash-flow ratio of only 12.6 on the stock.
Long story short, therefore, even if I might quibble at Levi’s net income number, I think the stock looks very attractive at 12.6x FCF, a 2.1% dividend yield, and analyst forecasts of 14%-plus long-term earnings growth. Call me an incurable optimist, but I think Levi’s stock is a buy.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
