Can This Company Beat Their Earnings?Jul 07, 2021
With earnings due to be announced tomorrow, we believe Levi's are in for a big beat! On the heels of a strong macro backdrop, we think the global re-opening plays favorably into their US centric business model. While the street is also suggesting they agree, with the stock up 35% YTD, we believe denim sales will far outpace what most analysts are projecting, thus pushing top-line revenue further! We therefore are remaining overweight the stock and believe LEVI will continue to exceed expectations!
Let's break down the rationale below the interactive charts and financials! The price target and target date is included at the end of the article.
So why do we think LEVI will beat their earnings estimates? For a handful of reasons:
- LEVI's is diversifying their target audience and is starting to capture a significant portion of the larger TAM (total addressable market) of the women's retail market: Over the last 5 years Levi's has gone from their men's business driving 77% of their overall sales to 64% in 2020. We view this YoY shift downwards as extremely encouraging as the retail market for women's clothing is significantly larger than that of men. With a clear strategy to start capturing more market share, every 1% of market share added, leads to more revenue for the company vs 1% added in the men's demographic! We believe with COVID, that this will be amplified, as women and men go from wearing comfortable clothes around the house too shopping for Levi's standard denim products for outside use. The tailwinds from this macro backdrop, should propel sales more than analysts are conservatively predicting.
- LEVI's is in the middle of a transformational shift from brick and mortar sales to e-commerce: Last time Levi's announced an update on their online sales they raised their outlook as e-commerce was coming on stronger than anticipated. With a strong internal push towards this channel (as it comes with higher margins), and an external macro push geared towards online shopping, we believe Levi's e-commerce sales numbers will continue to outperform. Levi's sneakily has a large presence online with $1.7B in direct to consumer sales and with more sales coming, this should "juice" their margins - something all investors love to see!
- Denim is back: Last quarter Levi's announced that they saw a new trend emerging as Gen Z'ers made the push from the popular skinny jean to more wide legged fits. This trend is extremely important to note! If this catches on more broadly we could be in the middle of an entirely new wardrobe change, where consumers go from wearing old jeans that they've had for years to swapping them out for the new more popular styles. Looking across the industry, we see other retailers updating their forecasts as well, as the generational shift is driving a spike in sales. This trend is not to be discounted as it is a massive catalyst for Levi's to capture large swath's of new sales and a new age group.
The key takeaways here are that for an old sleepy company, Levi's is in the middle of capturing a new and massive opportunity. Companies like Levi's aren't supposed to be up this much on a YTD basis and this signals that the market is clearly catching on to the opportunity. We're using this opportunity to add to our already existing position, as we believe Levi's will continue to be on an upwards trajectory over the coming years. Our price target is therefore derived on a <1 year basis and we will continue to revise it as they make progress on their goals.
Price Target: $33 (22% upside)
Current Price: $27 (July 7th, 2021)
Target Date: 6 Months