by Ian Harvey
October 11, 2019
Levi Strauss & Co. (NYSE: LEVI), the top jeans brand in the world, reported earnings after the market closed on Tuesday. The company reported third-quarter net income of $124.5 million, or 30 cents a share, compared with $130.1 million, or 33 cents a share, in the year-ago period. Adjusted earnings were 31 cents a share. Revenue rose to $1.45 billion from $1.39 billion in the year-ago quarter. Analysts had forecast earnings of 27 cents a share on revenue of $1.43 billion.
On Monday, 7th October, 2019, before the market opened, Stock Options Made Easy advised “Earnings Predictions” members to buy Levi Strauss put options. We were able to enter the trade at $0.50, and were in a position during Tuesday trading to sell pre-earnings at $1.35 for a profit 170%; or sell after the results Wednesday at $1.75 for a profit of 250%.
A Great Profitable Short-Term Trade!
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The Trade Recommended for Levi Strauss…..
“Levi Strauss & Co. (NYSE: LEVI), the top jeans brand in the world, will report earnings after the
market closes. The consensus earnings estimate is $0.27 per share on revenue of
$1.43 billion; but the Whisper number is a little higher at $0.29 per share.
Short interest has
increased by 53.0% and overall earnings estimates have been revised lower since
the company's last earnings release. The stock has averaged an 8.0% move on
earnings in recent quarters.
Levi Strauss stock has had a rough outing
since it began trading in March of this year, with the stock price down 25%
since the IPO. One of the main reasons for investor pessimism has been the
weakness in the wholesale market, which makes up about two-thirds of Levi's
The denim market is expected to grow modestly through 2023, but Levi Strauss is suffering from the wave of retail store closings in the U.S., which caused a drop of 2% in the U.S. wholesale business in the second quarter. This decrease weighed on sales in the Americas region, which grew just 3% year over year, versus 9% in Europe and 6% in Asia.
The stock price has been under pressure, as market participants wanted to see better performance.
Back in July, shareholders were disappointed to see evidence of sluggish growth in the key U.S. market. Executives said several negative trends, including retailer closures and weaker customer traffic at malls, combined to pressure sales as revenue rose by 9%.
CEO Chip Bergh and his team cautioned investors to expect slower growth in Levi's third and fourth quarters this year, in part because of the timing of Black Friday, which will fall just outside of fiscal 2019.
Goldman Sachs Group downgraded shares of Levi Strauss & Co. from a “neutral” rating to a “sell” rating and cut their target price for the stock from $21.00 to $19.00 in a research note on Wednesday, July 17th.
Bank of America raised shares of Levi Strauss & Co. from a “neutral” rating to a “buy” rating and cut their target price for the stock from $25.00 to $20.00 in a research note on Thursday, August 15th. They noted that the move was a valuation call.
One analyst has rated the stock with a sell rating, two have issued a hold rating and five have assigned a buy rating to the company. The company has an average rating of “Buy” and a consensus price target of $24.14.”
Option trade to consider: Buy the LEVI OCT 18 2019 19.000 PUT at approximately $0.69.
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Moving Forward for Levi Strauss…..
There are several factors that suggest that Levi Strauss, despite a poor earnings report, is likely to move upwards in the near-term.
China is ready to an agreement, at least a partial trade deal, with the United States ahead of key high-level trade talks tomorrow in Washington.
"China is still a huge opportunity for us. It represents about 3% of our total business overall," CEO Charles Bergh told investors on a conference call late Tuesday. "We've been evolving our China business over the last couple of years. Go back two fiscal years, we declined in China. Last fiscal year we were flat."
"We took a number of steps in China last year to set ourselves up for success long term in China," he added. "China remains on track to post growth for the full year after being flat last year. You have the right people and strategies in place to accelerate China's growth in 2020."
Some retail analysts pointed out before earnings that Levi will continue to be a good bet for investors because denim is not just a passing trend.
“Denim is strong and not going away,” Melissa Gonzalez, CEO of retail strategy firm Lionesque Group. Levi has been focusing more on direct-to-consumer sales, and Gonzalez said that casual dress is going to be a driver for direct-to-consumer retailers moving forward.
Gonzalez said that Levi’s has done a good job at “focusing on building a relationship with consumers as a brand and shifting away from a wholesale-only business.”
Gonzalez said that building the brand beyond denim has fared well for Levi so far, and will likely continue to keep momentum behind the company’s growth.
“People are looking for outfits around the jeans,” Gonzalez said. “So they are seeing strength in kind of diversifying that product mix.”
As well, Jane Hali & Associates analyst Jessica Ramirez said in the long run, Levi's direct-to-consumer model would yield results, but issues in the wholesale business remain a concern.
Telsey Advisory Group Chief Research Officer Dana Telsey was rating Levi stock as a outperform.
"Overall, we believe (Levi) has established a solid foundation for future profitable growth given Levi's leading market position that should continue to capture share through marketing investments," she said in an Oct. 4 research note. "Focused execution on categories beyond bottoms such as tops, and longer-term, accessories and footwear; outsized growth in the direct to consumer channel; and expanding businesses in underpenetrated and emerging markets."
Where to now for Levi Strauss?
Will we recommend another options trade on Levi Strauss?
What will “Stock Options Made Easy” advise members to do?
AS ALWAYS THE DECISION IS YOURS!
An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!