Clothing manufacturer Levi Strauss (NYSE: LEVI) announced fiscal 2019 fourth quarter results that BEAT expectations.

Revenue came in at $1.57 billion, in-line with the consensus estimate. The figure marked a 2% decrease over the same period a year ago when revenues were $1.59 billion.

Adjusted earnings per share of $0.26 handily beat the consensus estimate of $0.21 by 24%. The figure was 13% lower than last year although the IPO boosted the share count.

Price increases and a lighter volume of low margin, off-price merchandise drove the better than expected profitability.

Full-year revenues of $5.8 billion increased 3% in 2019 over 2018. On a constant currency basis, full-year sales growth was 6%, at the high end of the company’s forecast.

The full-year results excluded the Black Friday and holiday shopping season as the fiscal year ended Nov. 24. Investors will be anxiously awaiting the first quarter numbers to gauge holiday sales performance.

 

DOMESTIC WHOLESALE REMAINS A DRAG

Levi’s is seeing improvement in its retail network and e-commerce channels. In the fourth quarter, however, this was offset by continued weakness in the U.S. wholesale channel where sales fell 4%.

Declining sales in the U.S. are being supported by improving sales in Europe. The European region is experiencing growth in both the direct-to-consumer and wholesale channels.

The company also announced a $100 million share repurchase program. To further enhance shareholder value, it plans to hike its annual stock dividend by 14% hits year. This marks the 8th straight year that Levi’s has increased its dividend.

Management’s estimates for 2020 look ambitious. It sees revenue growth of 6% aided by the Black Friday week falling in the fourth quarter which will give Levi’s two Black Friday results in its 2020 numbers.

The recent acquisition of a South American distributor is also expected to benefit results. Conversely, the sale of a U.S. footwear distributor is expected to partially offset these gains.

 

DIRECT-TO-CONSUMER, OVERSEAS MARKETS HOLD KEY TO GROWTH

Levi’s is trying to establish itself as a global lifestyle brand rather than just a jeans company.

The direct-to-consumer business and international operations are the pillars of growth for the rejuvenated Levi’s.

Following a 30-year hiatus, Levi’s returned to the public exchange in March of last year. The company has some things in its favour heading into 2020. 

For starters, the blue jeans market has blossomed into a $100 billion market globally. Although the iconic Levi’s brand may have lost some of its lustre, it remains a valuable asset.

Levi’s is trying to establish itself as a global lifestyle brand rather than just a jeans company. A focus on e-commerce and women’s apparel will be key growth drivers.

International markets represents a big growth opportunity as well. This is especially the case in China which only accounts for around 3% of overall sales. 

LEVI stock is up 3% this year while the industry is down 4%. This compares to a flat year-to-date return in the S&P 500 index.

It is trading around 1.3x sales compared to the industry average of 0.5x. Despite solid growth overseas and in the U.S. direct-to-consumer channel, the premium valuation relative to peers looks stretched. 

Investors will appreciate the earnings beat, but the slightly lower revenues is likely to cap the excitement level. Levi’s has a lot of balls in the air heading into the new year. Direct-to-consumer initiatives and international expansion are sound growth strategies, but at the end of the day margins must improve to drive better profitability.

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