Levi’s Stock (LEVI) At Near Five-Year High Ahead of Earnings – What to Expect

Levi Strauss & Co. (NYSE: LEVI) is approaching its fiscal third-quarter earnings release tomorrow with considerable momentum, its stock price hovering near a five-year peak. The stock is currently trading at $24.59 in the pre-market, up 5.25% in the last five days, indicative of a strong upward trend fueled by strategic initiatives and positive market sentiment. But is this rally sustainable?

Analysts project an adjusted EPS of $0.31 on revenue of $1.50 billion for the upcoming Q3 earnings. This represents a 6% year-over-year decline in earnings and a 1.20% decrease in sales compared to the previous year's figures.

While the projected decline might seem concerning, it's important to consider the context. The company has been navigating a complex global economic environment, including inflationary pressures and supply chain disruptions. The question is whether the market has already priced this in, and if Levi's can beat expectations.

Since the start of the year, LEVI's stock has risen by approximately 40%, with gains of 9.36% in the last month. This performance significantly outpaces many of its peers in the apparel sector.

Driving this surge are several key factors. Levi's has successfully capitalized on robust global demand for denim, leading to upgraded revenue and profit forecasts earlier this year. Strategic investments in direct-to-consumer channels and a diversified product line, including the popular Beyond Yoga brand, have proven effective. The company reported a 6% increase in net revenues to $1.4 billion and a quadrupling of net income to $67 million in July, demonstrating tangible results from its strategic shifts.

The sale of the Dockers brand to Authentic Brands Group for up to $391 million also signals a strategic focus. This move allows Levi's to concentrate on its core brand and high-growth acquisitions. Proceeds from the sale are earmarked for shareholder returns, including a $100 million share repurchase program, further boosting market confidence.

Adding to the positive outlook, JP Morgan upgraded Levi Strauss's rating to Overweight in April, setting a 12-month price target averaging €20.13 per share, indicating a potential upside of over 33% from earlier levels. This upgrade reflects confidence in the company's growth trajectory and strategic initiatives.

Levi's commitment to Environmental, Social, and Governance (ESG) factors is also noteworthy. The overwhelming shareholder support for its diversity, equity, and inclusion (DEI) initiatives underscores the company's alignment with broader corporate governance trends, potentially enhancing brand reputation and customer loyalty.

However, not all signals are unequivocally positive. The projected decline in earnings and sales for the upcoming quarter, albeit modest, warrants careful consideration. While Levi's has successfully navigated market challenges thus far, its dependence on denim trends and its ability to compete effectively against fast-fashion brands remain potential vulnerabilities.

The denim market, while currently strong, is subject to rapid shifts in consumer preferences. A sudden change in fashion trends could leave Levi's with excess inventory and reduced pricing power. The sale of Dockers, while strategically sound, also removes a significant revenue stream.

Furthermore, the cost-cutting measures, including workforce reductions, could impact innovation and long-term growth. The market may be underestimating these risks, leading to a potential correction in the stock price. The upcoming earnings report will be pivotal in determining whether Levi's can sustain its current momentum or if a more cautious outlook is warranted.