BofA: 'Sluggish' Outlook From Levi's Is The Takeaway From Q2 Report

Jeans and apparel company Levi Strauss & Co. LEVI reported a second-quarter beat Tuesday that was overshadowed by a cautious outlook, according to Bank of America Merrill Lynch. 

The Analyst

Heather Balsky maintained a Neutral rating on Levi Strauss with an unchanged $25 price target.

The Thesis

Levi's reported a beat on the top and bottom lines, although adjusted EBITDA fell short of expectations by around 3.5%, Balsky said in a Wednesday note. (See her track record here.) 

The company benefited in the quarter from lower SG&A and a more favorable tax rate, but this was partly offset by lower gross margins, the analyst said. 

Levi's revised guidance implies constant currency sales growth of 4% in the back half of the year, which marks a deceleration from 10% in the first half of the year, Balsky said.

The full-year 2019 sales guidance update at the high-end of the company's prior mid-single digit sales growth target was a disappointment, she said, as the stock's valuation reflected expectations for a bigger move higher.

The "sluggish" outlook shouldn't come as a surprise given multiple store closures and bankruptcies, along with Black Friday shifting to the fiscal first quarter, Balsky said. And Levi's is dealing with wholesale customers who are ordering less merchandise after a "tough start" to the year, she said. 

The bottom line from BofA: Levi's has the potential to show better-than-expected sales growth given its strong brand momentum,  but the tougher retail environment implies a more limited likelihood of this occurring. 

Price Action

Levi's shares were down 10.19% at $21.25 at the time of publication Wednesday. 

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