Levi Margin Woes Sink Stock But Analysts View as Temporary

(Bloomberg) -- Levi Strauss & Co. analysts reiterated their positive views on the apparel maker even as a second-quarter gross margin miss and declining U.S. wholesale sales caused the shares to tumble by a record amount on Wednesday.

Margin pressure is expected to be a short-term issue as currency headwinds ease and the company raises prices to match product investments. And while results for the domestic wholesale channel were disappointing, Citi said “the good news is that the brand seems to be resonating everywhere else,” including retail stores.

The stock plunged as much as 11% on Wednesday, snapping a six-day winning streak. The shares had gained almost 40% since their March initial public offering.

Here’s what Wall Street is saying:

Citi, Paul Lejuez

“Most parts of the business performed well, with the one weak point being the U.S. wholesale channel, which posted its first decline in six quarters and represents about a third of overall sales.”

The brand appears to be resonating in U.S. retail stores and in both direct-to-consumer and wholesale channels globally.

“Strong performance in less developed categories such as women’s and tops also underscores the brand strength and long term opportunity for growth.”

Rates buy.

Guggenheim, Robert Drbul

“We are encouraged by the strong momentum in key growth drivers,” including Women’s, Tops and direct-to-consumer. The “core” business also remains solid (Men’s +6%, Bottoms +8%, Wholesale +6%).

While gross margin missed Drbul’s estimate by 160 basis points, it was “largely driven by FX and product investment” and is expected to recover in the second half of the year.

Maintains buy rating and $26 price target

Morgan Stanley, Kimberly Greenberger

Levi’s results were a “mixed bag” as gross margin came in “significantly below expectations” due to currency headwinds and product investments (Levi’s Engineered Jeans launched internationally during the quarter).

On the other hand, the 9% growth in constant currency revenue suggests that the “top-line story remains intact.” In particular, Morgan Stanley highlighted the 10th consecutive quarter of at least 10% growth in the Women’s segment.

Longer term, Greenberger sees margin opportunities from direct-to-consumer channel growth and technological and supply chain improvements.

Remains equal-weight due to valuation, price target $23

Bank of America, Heather Balsky

Management’s “more guarded tone” on U.S. trends, which represent 46% of sales, and expectations for a sharp slowdown in second-half sales “left us incrementally wary.”

“We see the potential for sales and EPS beats on brand momentum, but we think multiple expansion is limited with shares already at a substantial premium to peers.”

Rates neutral, price target $25

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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