What’s Going On With LEVI’s Stock (NYSE: LEVI)?

Levi's stock (NYSE: LEVI) came off a tough week in the markets, but has started Monday afresh, regaining the $20 level and adding 1.4% through the first half hour of trading.

The firm recently reported third quarter earnings that fuelled the bulls and saw stock prices drop as much as 11% by the open. The iconic apparel company, known for its Levi's denim brand, has shown resilience in a challenging market, achieving record gross margins and exploring strategic options for its Dockers brand.

In its latest earnings call, Levi Strauss & Co. highlighted a 2% increase in net revenues in constant currency, showcasing the best quarterly growth for the Levi's brand globally in two years with an expansion of 5%. The company's robust performance is underlined by a commendable surge in their gross margin, which reached a record high of 60%. This significant margin improvement enabled a 250 basis points boost in adjusted EBIT margin and culminated in double-digit growth in adjusted diluted EPS.

EPS was actually a beat on estimates, coming in at $0.33 against a consensus of $0.31, but revenues where where the miss hit home. The actuals of $1.52B against the expected $1.55BN did little to help elevated expectations, with Levi's stock having gained almost 30% in the two months leading into the report.

Direct-to-consumer sales rose by 12%, buoyed by strong performances in the US and European markets. E-commerce was particularly notable, as it surged by 18%. This digital growth aligns well with the company's ongoing focus on enhancing their direct-to-consumer offerings as part of their transformation in becoming a more global DTC-oriented business. There was yet another feather in LEVI's cap, with the company's women's business growing by 11% in Q3, cementing its status as the number one women's denim brand in the United States.

However, the stellar top-line growth masks some regional challenges that the company faced. In particular, China's macroeconomic headwinds coupled with a recent cybersecurity breach affecting the Mexican wholesale business posed unique hurdles. Despite these setbacks, the company's leaders expressed confidence in their ability to accelerate growth in Q4. This optimism leans on a stronger starting position, sustained robustness in the US and European markets, improved global wholesale performance, and a highly-anticipated new partnership with global superstar Beyonce.

The Dockers brand, while having a rich history within the Levi Strauss & Co. family, has been underperforming. Thus, the company is exploring strategic alternatives, which could include a potential sale. This decision is part of a larger strategy to concentrate on the booming Levi's brand and to accelerate the growth of Beyond Yoga.

Delving into the financial specifics, Harmit Singh, the Chief Financial and Growth Officer, delineated the drivers behind the gross margin outperformance. He noted that a combination of lower product costs, a surge in full-price sales, and a favorable mix of brands and sales channels contributed to the increased profitability. Singh's comments provide insight into the company's operational efficiency and pricing strategy.

Michelle Gass, President and CEO, gave further clarity on the company's strategic direction. She emphasised that while Levi Strauss & Co. is still evolving towards a global direct-to-consumer business model, significant strides have been made. New leadership and initiatives such as Project Fuel are indicative of the company's commitment to streamlining operations and propelling growth.

Levi Strauss & Co.'s Q3 earnings call painted a picture of a company that is adeptly navigating market challenges while solidifying its place at the forefront of the global denim industry. With a keen focus on direct consumer relationships, operational efficiencies, and strategic portfolio management, Levi Strauss & Co. is well-positioned to capitalize on its strong brand and uphold its legacy of success.