Levi's (LEVI)

Denim clothing company Levi's (NYSE:LEVI) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 2% year on year to $1.53 billion (Dockers revenue was moved to discontinued operations. If we add back Dockers, revenue would have exceeded expectations). Its non-GAAP profit of $0.38 per share was 35.2% above analysts’ consensus estimates.

Company Overview

Credited for inventing the first pair of blue jeans in 1873, Levi's (NYSE:LEVI) is an apparel company renowned for its iconic denim products and classic American style.

Thanks to social media and the internet, not only are styles changing more frequently today than in decades past but also consumers are shifting the way they buy their goods, favoring omnichannel and e-commerce experiences. Some apparel and accessories companies have made concerted efforts to adapt while those who are slower to move may fall behind.

Levi's primary competitors include Wrangler and Lee (owned by Kontoor Brands, NYSE:KTB), Gap (NYSE:GPS), American Eagle Outfitters (NYSE:AEO), and Calvin Klein and Tommy Hilfiger (owned by PVH Corp, NYSE:PVH).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Levi's grew its sales at a weak 1.6% compounded annual growth rate. This fell short of our benchmarks and is a rough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Levi’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can better understand the company’s sales dynamics by analyzing its constant currency revenue, which excludes currency movements that are outside their control and not indicative of demand. Over the last two years, its constant currency sales averaged 1.4% year-on-year growth. Because this number aligns with its normal revenue growth, we can see that Levi's has properly hedged its foreign currency exposure.

This quarter, Levi's missed Wall Street’s estimates and reported a rather uninspiring 2% year-on-year revenue decline, generating $1.53 billion of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

Levi’s operating margin has been trending up over the last 12 months and averaged 5.3% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports lousy profitability for a consumer discretionary business.

In Q1, Levi's generated an operating profit margin of 12.5%, up 12.6 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Levi’s EPS grew at an unimpressive 3.9% compounded annual growth rate over the last five years. This performance was better than its flat revenue but doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, Levi's reported EPS at $0.38, up from $0.26 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Levi’s full-year EPS of $1.38 to shrink by 4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Levi's has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.5%, subpar for a consumer discretionary business.

Levi's broke even from a free cash flow perspective in Q1. The company’s cash profitability regressed as it was 14.7 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Levi's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Levi’s ROIC averaged 2.1 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Levi's reported $574.4 million of cash and $2.15 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $911.7 million of EBITDA over the last 12 months, we view Levi’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $20.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Levi's blew past analysts’ constant currency revenue expectations this quarter. We were also excited its EPS and EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its full-year EPS guidance fell short. Overall, we think this was still a decent quarter with some key metrics above expectations. The stock remained flat at $13.40 immediately following the results.

Updated: April 8, 2025 at 10:48 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Levi's falls short of our quality standards. To kick things off, its revenue growth was weak over the last five years, and analysts don’t see anything changing over the next 12 months. On top of that, Levi’s projected EPS for the next year is lacking, and its constant currency sales performance has disappointed.

Levi’s price-to-earnings ratio based on the next 12 months is 9.6x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $20.99 on the company (compared to the current share price of $12.30).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.

Correction published April 9, 2025. Previous version of this article omitted the impact of the Dockers revenue moved to discontinued operations.