Levi Strauss & Co. (NYSE: LEVI) received several downgrades and price target reductions ahead of the Q4 earnings report that, frankly, failed to account for the company’s brand strength, market position, DTC channels and the underlying strength in the consumer that continues to underpin inflation.

The point is that, only a few days later, the company reported a solid Q4 and gave favorable guidance that has shares up more than 7% ahead of the opening of trading. The takeaway is the analysts may be about to change their tunes and, even if they don’t, this stock is one attractive investment for income-oriented investors who don’t want to worry about what they’re buying or how safe the dividend is. 

Levi Strauss Impresses On The Bottom Line 

Levi Strauss reported a mixed quarter but mixed in a way that can only be viewed as good. The company reported $1.59 billion in net revenue for a decline of -6.5%, which was in line with the Marketbeat.com consensus estimate and coupled with margin strength. The margins contracted YOY, but less than expected and the relative strength is expected to carry into 2023 as well. The top-line results were driven by a shift in the mix, with declining wholesales and DTC sales on the rise.

The key takeaway is that revenue was flat on an FX-neutral basis and only turned negative when the off-shore money was brought back home. Within DTC, sales through digital channels are weakening post-COVID as shoppers return to stores but they are still strong and up versus the 2019 period. 

Moving down to the margin, the margin contracted at both the gross and operating levels, with the adjusted gross margin down 300 basis points and the adjusted EBIT margin down 300. The takeaway is that margin pressure was less feared and left the earnings down YOY but well ahead of the consensus figures.

The adjusted $0.34 beat the Marketbeat.com consensus by $0.04 or 1330 basis points, aided by share repurchases. The company repurchased another 2.2 million in Q4 bringing the total to 8.7 million for the year, good for a 2.2% reduction in YOY share count. 

The guidance is mixed as well. The takeaway is that revenue growth is in the picture for 2023, and the analysts expected the margins to be much worse. The company expects revenue to grow by 1.5% to 3.0%, with adjusted EPS in the range of $1.30 to $1.40 versus the $1.45 consensus. The EPS guidance is below the consensus figures. Still, analysts have been, in general, slow to alter the long-range targets, and the market (if not the analysts) was expecting something much worse.

Levi’s Is A Buy, Regardless of The Downgrades 

Levi’s stock is pegged at a Moderate Buy regardless of the pre-release downgrades. The consensus price target is still 20% agave the price action as well, and both sentiment and price target could easily firm now the results are in. In this light, Levi Strauss may gain a tailwind from the analysts that could send it toward the $20 level.

The dividend may help as well. This stock is paying 2.9% with a 37% payout ratio at the low end of 2023 guidance. The balance sheet is also very strong with debt in decline and low at 1.1X equity, cash reserves strong, and inventory stronger. 

The charts show some resistance above the $17 level, which may cap gains in the near term. In this scenario, the price action may move sideways at or near the current levels until something changes in the market is a shift in analyst's sentiment or an increase in institutional activity. Either way, this is a great company, a good stock, a value at 12X earnings and it pays a nice dividend.