After Reporting Better Than Expected Earnings Results is Levi Strauss a Buy? Global jeanswear leader Levi Strauss (LEVI) reported better than expected earnings result in its fiscal second quarter by capitalizing on changing tre...

Global jeanswear leader Levi Strauss (LEVI) reported better than expected earnings result in its fiscal second quarter by capitalizing on changing trends in attire. But several of its key markets continue to be affected by the delta variant of the coronavirus. So, is it wise to bet on the stock now? Let's find out.

Capitalizing on evolving trends in denim wear and a continuing shift to casual wear, shares of globally renowned apparel company Levi Strauss & Co. (LEVI) have advanced 10.6% over the past three months and 6.1% over the past month to close Friday's trading session at $28.38.

The company reported both top-line and bottom-line growth in its fiscal second quarter (ended May 30, 2021). Its net revenues for the quarter increased 156.5% year-over-year to $1.28 billion, and its net income came in at $64.72 million compared to a $363.55 million loss in the prior-year quarter. Its adjusted EPS in the quarter was $0.23 compared to a $0.48 loss in the year-ago period.

However, eight percent of LEVI's stores are still closed because of COVID-19 pandemic-related restrictions. The current spread of the delta variant of coronavirus is a major concern, especially in Europe and India, which are among the company's key markets. LEVI has raised its outlook for the second half of its fiscal year 2021 and expects its adjusted EPS to be between $0.72 and $0.76. But this assumes there will be no significant worsening of the COVID-19 pandemic or dramatic incremental closure of global economies. So, LEVI's near-term prospects seem uncertain.

Here are the factors that we think could influence LEVI's performance in the coming months:

New Denim Cycle

Thanks to COVID-19 pandemic induced lifestyle changes, consumers are shifting away from skinny jeans and gravitating toward loose-fitting, more comfortable jeans with different silhouettes, marking a new denim style cycle. This is proving to be beneficial for LEVI, with increasing demand for its products. With casual wear expected to dominate in the foreseeable future, consumers are likely to pick up new jeans for work as offices and restaurants reopen. Changing waistlines and the need to refresh wardrobes is also expected to contribute to an increase in the company's sales.

Sustainability Measures

LEVI has been taking several sustainable measures, including its Water<Less® techniques , its Better Cotton Initiative, Screened Chemistry Method and Responsible Down Standard, to establish itself as a responsible company. LEVI has saved more than 1.8 billion liters and recycled more than 129 million liters of water so far. LEVI joined the U.S. Cotton Trust Protocol earlier this month. The Trust Protocol is expected to assist its efforts by providing verified data on sustainability practices from U.S. cotton growers and access to aggregate year-over-year data on critical metrics, such as water use and energy use.

Stretched Valuation

In terms of forward non-GAAP P/E, LEVI's 21.38x is 29% higher than the 16.58x industry average. The stock's 2.17x and 1.99x respective forward EV/S and P/Sare higher than the 1.56x and 1.38x industry averages. Its 15.05x EV/EBITDA is 31.3% higher than the 11.46x industry average.

POWR Ratings Don't Indicate Enough Upside

LEVI has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. LEVI has a C grade for Growth. This is justified because analysts expect its revenue to increase 28.7% in its fiscal year 2021 and 9.4% in 2022, but its EPS is expected to decline at a 3% rate per annum over the next five years.

The stock has a C grade for Quality, which is consistent with its 11.75% trailing-12-month EBITDA margin, which is slightly higher than the 10.79% industry average and 0.91% trailing-12-month asset turnover ratio, which is 7.1% lower than the 0.98% industry average.

LEVI has a D grade for Value, consistent with its higher-than-industry valuation ratios. It has a D grade for Stability as well, in sync with its1.15 beta.

Click here to see the additional POWR Ratings for LEVI (Momentum and Sentiment). LEVI is ranked #35 in the Consumer Goods industry. For other top stocks in this industry, click here.

Bottom Line

LEVI has been gradually recovering from its pandemic lows and reinstated its dividend in January this year after halting dividend payments during the pandemic. The company increased to $0.08 for fiscal third quarter, payable on August 18, from $0.06 in the second quarter. However, several of the company's key markets continue to be affected by the COVID-19 related-restrictions. Its sky-high valuation looks unjustified amid this backdrop. So, we think it's wise to wait for a better entry point.

LEVI shares rose $0.16 (+0.56%) in premarket trading Monday. Year-to-date, LEVI has gained 41.91%, versus a 17.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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