Levi Strauss (NYSE:LEVI) shares down after IPO costs hit Q2 earnings

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Updated: 11 July 2019
  • San Francisco-headquartered company posts $0.07 GAAP EPS and $1.31B revenue
  • Margin worries, IPO costs and slower U.S wholesale sales concern investors but analysts remain relatively bullish
  • Shares valued at $20.86, now in negative territory since first listing on March 22

Levi Strauss (NYSE:LEVI) shares tumbled 12.1% on Wednesday after the company missed on both earnings and revenue as the costs involved with its recent IPO and a weaker department store environment dragged during the three month period to 26 May 2019.

Levi delivered $0.07 GAAP EPS and $1.31 billion in revenue in Q2, which fell short of the Wall Street consensus by 31 cents and $120 million, respectively. However, when adjusted for the costs associated with its New York Stock Exchange listing in March, Levi just managed to sneak in ahead of analysts’ forecasts.

Shares were down immediately after the clothing enterprise released its corporate report on Tuesday but the decline was more pronounced on Wednesday morning as investors noted the growing pains from its recent IPO and slimmer margins. The gross margin rate in Q2 was 53.3%, compared to 53.9% a year ago.

Levi’s guidance for slower sales in H2 2019 also affected investor sentiment. CFO Harmit Singh revealed in a conference call that “underlying business trends remain positive” but expects the absence of Black Friday in Q4 and a few other reasons to negatively impact the final six months of the year by around 100 basis points.

JPMorgan analyst Matthew Boss also expects market conditions to taper off in H2. he noted:  “Pressure in the wholesale channel is expected to impact the U.S. by 200 [basis points, or hundredths of a percentage point] due to a combination of bankruptcies/closures vs. a year ago, lower off-price sales, and ongoing soft overall wholesale market.”

Boss set an Overweight rating and $26 price target for Levi’s on Wednesday. Oppenheimer analyst Robert Drbul offered the same PT and a Buy rating after stating that Levi’s brand remains strong and “commands a modest premium”, while also highlight upcoming growth opportunities.

In a statement, Levi Strauss & Co CEO Chip Bergh said both Q2 and H1 results show that its diversified business model is working as “broad-based growth” was seen across various segments, markets and product categories amid a more challenging retail environment.

He added: “For both periods, the Levi’s brand grew in all three regions across men’s, women’s, tops and bottoms and maintained its position at the center of culture through iconic products and consumer experiences.”

A few other highlights from the Q2 report include a 4% drop off in adjusted EBIT on the back of unfavourable currency swings and higher ad spend brought over from Q1. There were bright spots in the form of a 4% rise to $700 million in gross profit and 3% and 9% spikes in revenue in the Americas ($693 million) and Europe ($398 million), respectively.

Levi shares had advanced 11% in the seven days prior to the report but slumped into the red immediately after as investor confidence quickly turned to concern about the short to medium term outlook.