It’s been a solid start to Q4 for shares of denim king
Levi Strauss (NYSE: LEVI), who have rallied close to 40% in just the past 6 weeks. Prior to that they’d
been trading sideways since June and well below their pre-COVID levels. This latest run, backed by an impressive earnings beat, sets them up nicely to have a good Q4 and an even better 2021.
When management released their Q3 earnings report in early October, analysts had been expecting EPS to be deep in the red. However, instead of a -$0.22 print, Levi were able to deliver earnings of $0.08 a share, printed very much in black ink. And even though revenue was down more than 25% on the year, it wasn’t down nearly as much as feared.
Recent Rally
Wall Street was impressed enough to have shares gap up on the following open to the tune of 13% and while they faded for most of that session, it sparked a rally that’s still going today as we head towards the middle of November. The general consensus seems to be that the company isn’t doing as badly as feared from the coronavirus pandemic and if anything is recovering much faster than expected.
CEO Chip Bergh spoke to this with the release when he said “we exceeded our expectations for Q3. Our total digital business has doubled as a share of total net revenues, and Levi’s remains the global leader in denim, where our women’s business continues to take market share. And the brand has gotten even stronger during the pandemic.”
The jump in e-commerce sales is particularly bullish as the ability to pivot revenue from brick and mortar sales to digital sales has been the making and breaking of many retailers this year. Management also saw fit to pinpoint the second half of 2021 as when they expect their numbers to be back at pre-COVID levels. With $1.4 billion reported in cash and analysts’ doomsday scenarios failing to come to pass, it’s hard to bet against them.
Fresh Upgrades
To this end, several sell-side heavyweights on Wall Street have jumped on the bandwagon in the weeks since and have helped to drive the momentum seen in their shares. Morgan Stanley upgraded the stock from Equal Weight to Overweight in light of October’s earnings and a growing belief in the recovery story. In a note to clients they said “impressive revenue acceleration and positive 3Q EPS highlight management’s swift response to a pressured retail environment. We come away positive on accelerated margin expansion driven by channel & geographic mix shifts, cost-cutting, and price/average unit retail increases."
UBS reiterated their Buy rating on the stock, noting that “we believe the market does not fully appreciate Levi's strength as a company. We anticipate LEVI will be one of Softlines' best performing stocks over the NTM." Most recently, Bank of America came out this week with their own upgrade to shares, moving them to a Buy rating from Neutral. The strong performance seen in the digital sales has underpinned what looks to be a much faster recovery than expected and justifies the move, with a fresh price target of $20 suggesting upside of about 30% from last week’s closing price.
For investors looking to get some retail exposure as we head into the traditionally busy Christmas period, there are far worse options out there than Levi’s. Shares are well on their way to setting fresh post-COVID highs and with this kind of momentum, they should be clearing them fairly soon.
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