Levi Strauss & Co.

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 3/5

A global apparel company known for its iconic denim and other apparel products, with a strong brand heritage, distribution networks, and a growing focus on digital channels.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Levi Strauss & Co. (LEVI) is one of the world’s largest apparel companies, designing and marketing jeans, casual and dress pants, tops, shorts, skirts, jackets, and related accessories for men, women, and children around the globe. The company operates through three segments: Americas, Europe, and Asia. LEVI sells its products through wholesale channels, owned-and-operated retail stores, and ecommerce.

Recent Updates and Performance: Levi Strauss & Co. has shown signs of strength in its business in the most recent reports. In the first nine months of 2023, net revenues increased by 7%, driven by a 13% increase in DTC (direct-to-consumer) sales. Their gross margin also improved. However, gross margins and profitability are still impacted by a higher cost of goods sold due to production and transportation costs as well as markdowns. The most recent quarter also highlighted a few positive points such as DTC growth, gross margin improvements, continued growth from its international and e-commerce segments. Despite these improvements, results have been mixed, with weaker results from the wholesale channel and some cost pressures still affecting the business.

Industry and Competitive Landscape: The global apparel industry is highly competitive and fragmented. Companies face intense competition from various other global brands such as Nike and Adidas as well as other clothing retailers, both brick-and-mortar and online. Competition revolves around brand recognition, product quality, innovative designs, distribution efficiency, pricing strategies, and marketing efforts. A significant trend in the industry is increasing online shopping. Many companies are also emphasizing sustainability and responsible sourcing. The apparel industry is cyclical with shifts in the economy and changing consumer preferences affecting the financials. The industry is influenced by changing fashion trends, and brands are constantly trying to stay relevant by launching new products and through marketing campaigns.

Moat Analysis: Levi Strauss’s economic moat can be assessed across a few dimensions:

Brand Strength: LEVI possesses a globally recognized and iconic brand associated with quality, durability, and classic American style. The brand has existed for over 150 years, giving it a strong historical and emotional connection with consumers. Its brand has a presence in clothing around the world. The brand power allows them to have high pricing power on their main brand.
Distribution Network: The company operates a well-established distribution network including retail stores, wholesale channels and online platforms which is hard to replicate.
- Retail: Levi’s operates a significant retail presence consisting of stores, outlets and shop-in-shops. This multi-channel approach allows the company to connect with customers directly, showcasing its brands and controlling the customer experience.
- They have a growing focus on direct-to-consumer operations.
- Wholesale: Levi’s relies on its wholesale channels for most of its revenues, partnering with major department and specialty stores to broaden its reach and make its brands available to more customers.
- Digital: Levi’s has also focused intensely on its ecommerce and digital platforms, using its website and partnering with e-tailers to generate significant revenues as customers move toward buying online.
- Direct to Consumer (DTC): Has shown consistent and rapid growth over the last few quarters. This includes both ecommerce and physical stores. The focus is on brand and product, resulting in higher margins for the company. They are adding new loyalty program members at fast rate that leads to growth in both DTC sales and revenues.
Limited Competitive Advantage
- A lot of their brand power lies in its long history of offering similar and similar products and its name. They don’t provide any innovative solutions. Their main revenue stream comes from the core Levis brand, which is a commodity denim that can be replicated by other brands with ease and is susceptible to fast-changing consumer trends.
- The company does not have a pricing power moat. It operates in an industry where consumers buy products from competitors regularly with ease and at similar prices, if the price is slightly lower.
- Their distribution network while wide is not extremely difficult to replicate.
- The moat is therefore narrow and is still at risk of competition.

Moat Rating: 2/5 - While Levi’s has brand strength and distribution scale, it faces the threat of fast-changing consumer trends and a lack of innovative products that makes its moat narrow with limited durability.

Risks to the Moat and Business Resilience:

Fashion Trends and Shifting Consumer Preferences: The apparel industry is subject to fickle consumer tastes and frequent changes in fashion trends. Levi’s needs to quickly innovate and adapt to changing consumer trends. The brand may be vulnerable to losing relevance if it fails to anticipate or adapt to changing trends.
Competition and Pricing Pressure: The market is highly competitive, and pricing pressure may harm margins. Competing brands may emerge and erode Levi’s market share, and as the brands have no moat on pricing, this could heavily affect their margins.
Supply Chain Disruptions: The apparel industry has experienced disruption in the supply chain due to global tensions, and these issues could lead to increased costs for the company and affect delivery times. The company is also vulnerable to geopolitical risks as a large proportion of their sourcing and sales is abroad.
Increased Operating Costs: Due to inflation and other factors the company may have to incur more operating expenses which will decrease their profitability.
Retail Store Performance: Any decline in physical stores can affect the company’s distribution, as a decline in physical stores may hurt brand recognition and overall sales,
Reliance on Key Suppliers: Reliance on key suppliers for raw materials and manufacturing could create supply risk. A disruption to a major supplier or in the sourcing locations for raw materials could affect their production and ability to meet customer demand.

Financial Analysis: Levi Strauss & Co’s financials show a mixed picture.

Revenues grew by 7% in the most recent nine months, but revenues are still impacted due to economic conditions. A large chunk of this growth has been driven by the direct-to-consumer segments. Their revenues are fairly diversified geographically.
Gross Profit: Gross profit margins improved, which is good for the profitability and for the strength of the business. However, they are still under pressure from input costs.
Operating Income: Operating income has increased in the latest quarter, largely driven by an increase in the gross profit margin.
Profitability: The company has shown varying levels of profitability across different segments, depending on market conditions, and its different brands. Overall profitability can still be improved.
Liquidity: Levi’s financial position is somewhat healthy. The debt-to-equity ratio has improved which indicates they are paying off debt. Their cash reserves may help them navigate any short term issues.
Capital Expenditures: The capital expenditure is low for a company that manufactures and ships goods, which might raise a few eyebrows. This suggests the company may have low investments in infrastructure.
- They have a revolving credit agreement which provides a line of credit of around 1 billion dollars which should help mitigate risks related to a short term economic downturn.

Balance Sheet Health Rating: 3/5 - The company has a decent balance sheet, with cash and assets to meet its short term obligations and a low debt-to-equity ratio. However, I would have preferred to see higher liquid cash available to address any volatility. While the cash flow trends are going in the right direction and they are showing improvements, there are still risks that are affecting their financials.

Understandability Rating: 1/5 - While the core business of selling clothes is relatively straightforward, the details behind its operations and financials, particularly the different segments, various pricing strategies and complicated supply chain makes it a bit complex for investors to understand fully. Also, financial statements have become even more difficult because they often use a lot of complicated non-GAAP measures. The company has also started using many acronyms and different ways to define their performance.

Key Concerns and Management Commentary: The company’s most recent report shows that they were successful in growing the DTC business while facing challenges in the wholesale sector and some cost increases. They are also facing some issues in the European market due to recent political and economical events. In their earnings calls the management reiterated their focus on their “value-creating business” which includes their DTC business, its higher-margin business, and its strategic focus on higher profitability. The management also stated that they have been successful in improving inventory management and focusing on cost savings. The CFO has acknowledged the higher rates and stated that the company needs to navigate the situation while maintaining their long-term capital allocation priorities.

Conclusion: Levi Strauss & Co. is a company with a popular brand name, global distribution channels, and ongoing focus on higher profitability. However, the company’s moat is quite weak and vulnerable to competition. It should remain a decent business with some returns as it capitalizes on its iconic brand, however, the company is still exposed to the competitive risks of the market, and its stock should remain in line with the market.