BofA Downgrades Levi Strauss On Cautious North America Outlook

  • BofA Securities analyst downgraded Levi Strauss & Co LEVI from Buy to Neutral and lowered the price target from $19 to $17.
  • The analyst remains wary that the highly promotional environment during the holiday season could persist into Spring.
  • The management has said that of the roughly 400 basis points increase in gross margin relative to pre-pandemic levels, 100 basis points could reverse in a more normalized pricing environment.
  • The analyst forecasts F23 gross margin down 150 basis points to 56.2% compared to consensus at 57.6% and expect markdown activity will remain elevated in an uncertain demand environment.
  • Furthermore, with Q3 inventory +44% y/y and a planned ERP transition in 1H23, it could take longer for LEVI to get to a cleaner inventory position relative to peers.
  • The analyst said that Denim remains challenged (roughly 65% of sales), as evidenced by recent comments from peers.
  • The analyst expects Levi will continue to outpace industry denim sales, but comparisons in 1H remain tough given a strong 1H22.
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  • U.S. wholesale (36% of sales) is another risk as the analyst expects department stores/mass retailers will remain laser-focused on maintaining tight inventory.
  • The warmer winter and weaker USD bode well for near term dynamics in Europe (26% of sales), but the analyst still sees some downside risk to street numbers given the uncertainty around the energy crisis.
  • The analyst doesn’t foresee any disruption to Levi’s strategy once Michelle Gass takes the baton from current CEO Chip Bergh.
  • That said, visibility on making strong headway toward its medium term 15% operating margin goal will remain cloudy in the near term, limiting a catalyst for upside to numbers until demand improves, added the analyst.
  • The analyst foresees a 20% downside to 1H23 estimates and remains uncertain that denim demand will improve in the near term.
  • Price Action: LEVI shares closed lower by 0.37% at $16.22 on Wednesday.
  • Photo Via Company
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