During the October 2 episode of Mad Money, Jim Cramer discussed Levi Strauss & Co. (NYSE:LEVI) ahead of its upcoming earnings report:
Wednesday night, we hear from Levi Strauss, a terrific denim company. The stock has fallen from $25 in July to less than $20 today. This decline is typical of what happens in this particular tough market. Because of higher gasoline and higher interest rates, people expect a big slowdown in discretionary spending. They’re not going to buy any more jeans. I have no real answer for this kind of situation other than to say that Levi’s has to continually, endlessly execute with a high bar.
It is worth noting that Cramer made some positive comments on the stock when it reported its Q2 earnings in July. The company is scheduled to discuss its fiscal third-quarter results on October 7. Its latest published results cover the quarter ended May 31 and were reported in July.
Direct Sales and Online Growth Support the Business
Levi Strauss & Co. reported second-quarter revenue of approximately $1.56 billion, up 8% year-over-year, with organic growth of approximately 6%. Adjusted earnings per share increased to $0.28 from $0.22. Direct-to-consumer revenue rose 11%, including 19% growth in e-commerce, and accounted for 51% of total sales. Comparable sales in the direct business increased 6%, showing that growth extended beyond adding stores. Management raised its full-year adjusted earnings outlook to $1.46 – $1.52 per share.
Those results provide some support for Cramer’s favorable view of the company itself. His concern is whether it can maintain that performance as shoppers become more selective, rather than a collapse already evident in the latest reported sales. In September, we discussed why another apparel company was a good buy.
Tariffs and Uneven Demand Leave Little Room for Error
The growth was not uniform. European revenue increased 4% as reported but declined 1% organically. Gross margin improved only 10 basis points to 62.7%, with tariffs and currency movements offsetting some benefits from lower product costs and pricing. Management’s July earnings discussion also emphasized uncertainty around tariffs. Its outlook assumed incremental U.S. tariffs of 30% on imports from China and 20% elsewhere, without including potential tariff refunds. These were the assumptions behind the guidance, rather than a statement that trade conditions would remain unchanged.
The lower share price does not automatically make Levi Strauss & Co. the cheapest denim investment. Valuation readings show approximately 13.1x forward earnings, compared with 12.1x for Kontoor Brands. Levi’s still trades at a higher valuation to a close apparel competitor despite the decline Cramer described. We came across a bearish thesis for Kontoor in June, which you can check out here.
More Funds Buy In While Short Interest Remains Noticeable
Insider Monkey’s database showed 40 hedge funds holding Levi Strauss & Co. in the second quarter, up from 35 in the first. Citadel Investment Group increased its holdings in the stock by 36% to nearly 2.35 million in Q2 and was the largest shareholder among the 1000+ hedge funds tracked by Insider Monkey. Short interest represented 8.09% of the public float. While the increase in fund holders points to broader participation, the short position suggests that doubts about the stock remain.
Cramer likes Levi’s, but he is not treating its falling share price as an easy buying opportunity. The company has delivered growth and raised its outlook. Its next report will show if that momentum continued through the summer and whether management still expects the stronger earnings it projected in July.
READ NEXT: Jim Cramer Likes Medtronic (MDT) at 14x Earnings — So Why Isn’t He Buying More? and Jim Cramer Sticks With Palantir (PLTR) Despite Admitting His Target Was Too Aggressive.
Hedge Fund Resource Center