We recently compiled a list of the 10 Best Clothing Stocks To Buy Now. In this article, we are going to take a look at where Levi Strauss & Co. (NYSE:LEVI) stands against the other clothing stocks.
Trends in the Clothing Sector
The internet has changed the way people shop for clothes. Social media platforms and influencers have popularized the “haul culture,” where people order a big box of low-priced clothes online and sift through them. Also colloquially known as the “Shein effect,” people are turning towards fast fashion, ordering clothing that offers an element of surprise upon receiving. Although Shein’s primary suppliers are in China, its customers are majorly US-based. Its global sales reached around $30 billion last year, almost touching the $39 billion in global sales made by Inditex, the old-school fast fashion leader and owner of Zara.
Fashion and apparel rank among some of the most significant industries in the world, creating key value for global economy. According to McKinsey, it would rank as the seventh largest economy in the world if placed alongside the GDPs of individual countries. The industry, however, faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China started the year with a strong performance, it gradually waned, slowing down in the second half. Even the luxury segment experienced uneven performance and slower sales. The fashion industry in 2024 can thus be described with one word: uncertainty. Weaker economic growth, dwindling consumer confidence, and rising inflation are making it hard for companies to devise suitable performance drivers. A report by Reuters showed that consumers are becoming increasingly picky about the clothes they buy, and are shopping around more. This has resulted in a “patchwork of winners and losers.”
Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth variations across countries and regions. The luxury segment is anticipated to generate the largest economic profit, but that does not mean companies in this sector won’t experience tough economic environments. Global growth forecast for the industry is lower in 2024 compared to 2023, going from 5%-7% in 2023 to 3%-5% as post-pandemic shopping sprees halt. Growth in China and Europe is expected to slow, but the US market shows a completely different outlook. North America’s growth is expected to pace in 2024 after a sluggish 2023, reflecting the region’s more optimistic outlook.
In addition, the current political unrest in Bangladesh is expected to affect the global clothing industry, disrupting the functioning of global apparel retailers ranging from H&M to Zara. With these clothing giants heading into key holiday season, the disruptions might incur heavy losses to US retailers and Bangladesh itself, which is the third largest exporter of clothing in the world as of 2023. Overall, consumer spending patterns have slowed down in the US, with people making do with what’s in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report by Reuters showed that investors previously bet that the Fed would slash rates by half a percentage point, and are now estimating an approximately 75% probability of a quarter-percentage-point cut in its September meeting. This is expected to drive consumer confidence and ease spending patterns. With that, let’s look at the 10 best clothing stocks to buy.
Our Methodology
For this article, we used the Finviz stock screener to identify over 20 clothing stocks then narrowed our list to 10 stocks with the most positive upside from current levels, and listed the stocks in ascending order of upside potential, as of August 19. We only chose stocks that had a market cap of over 2 billion.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A stylishly dressed man wearing jeans and a jacket from the company, smiling confidently.
Levi Strauss & Co. (NYSE:LEVI)
Upside from Current Levels: 17.68%
Headquartered in San Francisco, Levi Strauss & Co. (NYSE:LEVI) sells apparel and accessories for men, women, and children across its portfolio of brands, including Levi’s, Dockers, Denizen, Signature by Levi Strauss & Co., and Beyond Yoga. It also sells its products through third-party retailers and directly to consumers through various channels. Levi Strauss & Co. (NYSE:LEVI) is expanding its global presence by targeting stores in Asia, opening its first store in Bangladesh, and strengthening its direct-to-consumer strategy. The brand also reopened its famous store at CentralWorld Mall in Bangkok, Thailand, expanding it to about 4,000 square feet to make it the largest Southeast Asian Levi’s store.
Despite its expanding global presence, the brand faced a fall in its stock price in June, primarily because of exceeding analyst expectations in its Q2 2024 financial results. Analysts had expected the company to earn only $0.11 per share in Q2 2024 with sales of $1.45 billion. However, the company earned around $0.16 per share, nearly 50% higher than analyst expectations, with sales reaching around $1.44 billion.
So why did Levi Strauss & Co. (NYSE:LEVI) stock plummet after exceeding analyst expectations? For starters, the company did not actually earn $0.16 per share, as it was a pro forma number. Instead, the GAAP-adjusted earnings came to $0.04.
On the bright side, the company’s earnings did improve. Sales grew by 8% year over year and gross profit margin was 60.5%. This improvement was accredited to the company’s “transformational pivot to operating as a [direct-to-consumer]-first company,” by its management. Although direct-to-consumer (DTC) sales did not exceed growth in sales as a whole, DTC sales usually do result in higher profit margins, giving Levi Strauss & Co. (NYSE:LEVI) an optimistic outlook.
Levi Strauss & Co. (NYSE:LEVI)’s strength in DTC sales and e-commerce is promising, going parallel to the increasing consumer trends of going direct to apparel companies for shopping. This broader trend may work out in favor of the company, even if its profits might take a hit in the short term. In the longer run, however, this consumer trend may support higher sales while eliminating the need to go through other retailers.
The stock is currently trading at a P/E ratio of 14.86 at a 4% discount to its sector. Overall, the stock sports a consensus Buy rating. Levi Strauss & Co. (NYSE:LEVI)’s revenue has grown with a CAGR of 6.94% in the past three years. Analysts are expecting a 14.91% year-over-year growth in its EPS by 2025. Its median price target implies an upside of 17.68% from current levels. 27 hedge funds hold stakes in Levi Strauss & Co. (NYSE:LEVI) as of Q2 2024.
Overall LEVI ranks 8th on our list of the best clothing stocks to buy. While we acknowledge the potential of LEVI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LEVI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
