Two years ago, almost to the day, we pointed out that, at a share price of $14, Levi's valuation at ten times earnings was, on the face of it, not unattractive for such a well-established company. Family ownership, prudent management and a convincing track record of profitability were also solid guarantees of quality.
On a less convincing note, growth was certainly lagging, both in terms of sales and profits. Profitability was steadily eroding, even with increasing leverage. The year 2023 - marked by a change in management - was again in this vein.
The business therefore called for in-depth restructuring, both to capitalize on direct sales and digital and to improve margins. It had become clear that, despite its popularity, Levi's had limited pricing power. This realization implied a new strategic direction, with operational efficiency - rather than up-market positioning - in its sights.
For the moment, the patient is on the operating table, so it's still too early to draw any conclusions. For the first nine months of 2024, however, we can see that the sales growth breakdown continues. Only Europe is pulling up the overall figure, while North America is slipping back and Asia is stagnating.
On the other hand, MarketScreener analysts were aware that gross margin had reached its highest level for fifteen years over the period - a direct consequence of a drastic cost-cutting program. The latter entailed a restructuring charge of $174 million, which weighed on profits, but the improvement was significant once this exceptional item was removed.
Beyond Yoga, acquired during the pandemic, posted double-digit growth, but this performance was unfortunately offset by the double-digit decline in Dockers sales. In structural difficulty for years, Dockers may soon be sold.
Although they are not getting overly excited, investors seem to be maintaining relative confidence in CEO Michelle Gass, and continuing to bet on the success of the restructuring plan; witness the valuation at fourteen times next year's expected profit.
