Levi Strauss & Co. (LEVI +10.20%) stock slid 16.5% through 12:30 p.m. ET Thursday despite the company delivering an earnings beat last night.
Heading into earnings, analysts forecast the blue jeans maker would earn only $0.11 per share on $1.45 billion in second-quarter 2024 sales. In fact, Levi earned $0.16 per share -- nearly 50% more than expected -- while sales came in close to the mark at $1.44 billion.
Wait. Levi earned more than it was supposed to despite selling less stuff? What's wrong with that?
NYSE: LEVI
Key Data Points
Levi Strauss' Q2 earnings
Well, first of all, what's wrong is that Levi didn't actually earn $0.16 at all. Turns out this was a pro forma number and, when calculated according to generally accepted accounting principles (GAAP), Levi's real profit was only $0.04 per share.
That's better than the breakeven profits Levi reported a year ago, but still kind of disappointing.
That being said, Levi did grow sales 8% year over year, and did report a record gross profit margin of 60.5%, leading to the earnings improvement, a fact management attributed to its "transformational pivot to operating as a [direct-to-consumer]-first company," selling primarily via e-commerce. Although direct-to-consumer (DTC) sales didn't grow any faster than sales as a whole, these kinds of sales do apparently result in stronger profit margins -- so this is a bet that's worked out well for Levi.
Is Levi stock a buy?
Arguably Levi's best news last night was that the DTC switch has resulted in surging free cash flow at the company. So far this year, Levi has generated $437 million in positive FCF, versus negative $66 million in the first half of 2023. Trailing-12-month FCF is now $613 million, resulting in a price-to-free-cash-flow ratio of only 12.6 on the stock.
Long story short, therefore, even if I might quibble at Levi's net income number, I think the stock looks very attractive at 12.6x FCF, a 2.1% dividend yield, and analyst forecasts of 14%-plus long-term earnings growth. Call me an incurable optimist, but I think Levi's stock is a buy.
