Levi Strauss Releases First Post-IPO Earnings, Debt Concerns Emerge

Levi Strauss

Levi Strauss’ first earnings call since its recent IPO was mostly upbeat, with good earnings results, although the company’s long-term debt does concern some analysts.

Levi Strauss’ IPO last month hasn’t gone quite the way a lot of people had hoped, at least those looking to trade it in the secondary market, perhaps looking to ride a strong wave up as investors step in re-evaluate a company’s stock upward once it is allowed to be traded by the general public.

Since its first day of trading on March 21, Levi Strauss has bounced around a little, but hasn’t shown us any clear sense of direction. During the first week, we ended up at around a dollar higher, a gain of about 5%, but we’ve been unable to get back there since, let alone take things higher.

We put in an all-time low on Monday at $21.30 a share, this time off about a dollar from the open price on March 21, but we at least had an earnings call coming up, and the hope was that the numbers would come in nice enough to set this stock back on the right track.

That’s exactly what ended up happening, and we’re now back into positive territory relative to this open price, and now only 45 cents off the high of March 29. If we’re stuck in a range, as Levi Strauss stock is, it’s better to be running against the upper edge of it than penetrating beneath its lower edge as was the case back on Monday.

Those who got in at the pre-issue price of $17 are still probably smiling, but investors who got in at the low $20’s are probably looking for more signs that this stock is ready to at least deliver market returns over the next while at least.

A Nice Earning Call All Around Does Help Things Though

Levi Strauss’ earnings call did bear some pretty good tidings, of the sort that investors really like to see. Business is good these days at the iconic clothing firm, most famous for its denim jeans.

Levi Strauss is the actual name of the company’s founder, who started the company at the tender age of 18 all the way back in 1847. Perhaps the company didn’t know that much about what they were doing back then, being the first company to ever offer blue jeans, but doing it successfully for 172 years now does inspire a lot of confidence, especially given that things are still going well.

Revenue for the company came in at $1.44 billion, up from $1.34 billion year over year. Earnings came in at an appealing 37 cents a share, retail sales grew by 11%, and CEO Charles Bergh expressed his excitement about the growth potential of his company’s e-commerce and direct to consumer efforts.

In spite of this good report card, analysts are concerned about just how much this company can grow over the next few years alongside it’s over a billion dollars in long term debt, which some analysts find a little troubling.

CFRA’s Camilla Yanushevsky is “cautious on Levi’s long-term growth potential” and sees “Levi’s debt load of $1 billion challenging its need to swiftly expand direct to consumer offense to keep pace with the evolving consumer.”

About 60% of Levi’s business is through the wholesale trade, and they are looking to streamline this more by ramping up both online sales as well as increasing its direct to consumer store sales numbers. This will cost real money though, and the concern here is that they may not have the ability to take this all up enough to keep up with their competitors.

Levi Has to Stay Ahead of its Competitors, Which Costs Real Money

Lulemon Athletica has been putting pressure on Levi Strauss’ sales, and while they have been thus far a company focused on ladies’ yoga wear, they are eyeing the male demographic a lot more and are making inroads into selling more clothing to men already.

Given that 70% of Levi’s business is with men, this new competition is causing some concerns as well, although athletic bottoms are not the core part of Levi’s business. If Lulemon successfully takes this further though, there might be more to worry about.

Lulemon appears to be willing to do this, and are even looking to expand into men’s business casual now. They expect that the men’s side of their business will go from the 20% that it currently represents to 25% in 2020, and this new business has to come from somewhere, where a gain for them will represent a corresponding loss elsewhere.

While Levi may be able to defend themselves from all this, and are the big elephant in the room here, their debt level may impact their ability to do this successfully enough. Neil Saunders, managing director at GlobalData Retail, shares these concerns, and points out that this debt has “resulted in an interest expense of over $200 million this quarter, a level that while manageable, is uncomfortable.”

Levi Strauss did not use this IPO to raise funds, but to pad the pockets of the Haas family mostly, who got to take some of their stake in the company off the books and into the bank. If this IPO had been rolled out in a more traditional way, providing a good influx of capital into the company, then things might be different, but that’s not the path that the company chose.

Saunders is more upbeat about the company’s seeking more control over the distribution of its clothing though, and sees “taking control over distribution in this way is a critical component of future success.” He adds that “more traditional routes to market simply cannot be relied upon to sustain wholesale revenue growth over the medium to long-term.”

He also feels that Levi will be able to pay down their debt over time without a lot of trouble. How much this debt burden ends up slowing down the company’s growth along the way is the big question though.

There are always issues with companies though and this one doesn’t look like a particularly big issue, and the market seems to agree thus far, giving this new stock a nice little boost after this earnings report came out. Levi Strauss may not be going to the moon like some people hope with IPOs, but it does seem to be on solid enough ground for now.