Has the global pandemic hit sales beyond repair for the popular retailer, or will the stock bounce back, making its low price a steal and great purchase?
Aug. 12, 2020
The retail sector has taken a huge hit as the globe faces the ongoing crisis of the coronavirus. Levi (NYSE: LEVI) is known for its staple denim-wear and has worked up its brand for more than a century. Despite its household name, the retailer isn’t immune to the hardship the industry is facing.
Levi closed most of its physical stores temporarily amid the pandemic, resulting in a 62% plunge in revenue for the quarter. Adding fuel to the fire, the stock also dropped by around 40%. While this is not great news for Levi, the stock is at its lowest levels ever, making it an attractive entry point for investors.
The bull case for Levi
Levi is a popular brand and while there’s not a huge demand for purchasing jeans right now, it’s likely sales will start improving as lockdowns ease and more people venture outside. The retailer has been around for such a long time and has a huge global presence, so much so that nearly 50% of sales in 2019 were made outside of America. This is hugely important, given the frightful state of the U.S. at the moment. It’s therefore likely that sales will start to pick up towards the end of 2020 and the beginning of 2021 in places like Europe and Australia, where the virus is much less prevalent.
The company isn’t shy of admitting that a complete recovery will take some time, but the positive news is that 90% of its physical stores are now open. Levi also had a good quarter with its online sales, which increased by 25%. This is a promising figure given the COVID-stricken environment we now live in, along with Levi reporting that 40% of its stores are experiencing sales growth on par with last year.
Levi didn’t have the best quarter, experiencing a loss of $394 million, compared to a profit of $29 million at the same time last year. The retailer said the huge loss was mainly due to restructuring charges and loss of inventory from the crisis. Levi will also be cutting around 700 corporate jobs to try and generate $100 million in savings.
The business also faces the huge possibility of a second wave of the deadly virus, which could see stores close once again. Levi also has some tough competition, from PVH (NYSE: PVH) owned brands like Calvin Klein, and Tommy Hilfiger which decided to streamline its operations and slash its workforce by around 40%.
The retail industry is looking dire, with around 40 businesses filing for bankruptcy, including J.C Penny (NYSE: JCP) and more recently Ann Taylor (NYSE: ANN). There is also ongoing hardship ahead for resilient department stores like Macy’s (NYSE: M) who are struggling with rising costs, tightening margins, and a challenging labor force.
Levi is no doubt going to continue selling stock because of its reputable, high-quality name. It is tough times for most retailers, but Levi is taking steps to ensure it can stay afloat, such as job cuts. The stock is extremely low compared to its $18 price tag at the same time last year.
Levi also ended the quarter with roughly $2 billion in liquid assets. As markets across the world continue to re-open and customers need new outfits to wear, we should see a rise in sales. While it could be some time before Levi gets to pre-COVID levels, it gives investors the chance to buy the stock at a great price. I would be investing sooner rather than later.
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