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Wall Street Expects This Cheap Stock to Grow 60%

The Motley Fool
The Motley Fool
 2022-01-24

It's been a tumultuous few weeks in the stock market with fears about the pandemic and economy sending prices down across various sectors. Many companies were overvalued to begin with, making it difficult to find great buying opportunities even among the stocks experiencing steep losses. But they do exist and often not where you'd expect. One such stock is Levi Strauss and Co. (NYSE: LEVI) .

Levi's stock trades at less than 20 times trailing 12-month earnings, and Wall Street expects this modest stock to gain 50% or more over the next year. Here's why it might be a great addition to your portfolio.

Everyone is wearing jeans

Levi's is an iconic apparel brand whose name is inextricably linked with blue denim. It's one of the oldest clothing brands in the U.S., but the company has only been public since 2019, aside from an earlier stint on the markets over three decades ago.

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Image source: Getty Images.

2020 was a difficult time for the company as it was for most retailers. Sales declined 62% in the fiscal 2020 first quarter, which included the beginning of strict lockdowns across the country. Levi's went on to end the year with revenue down 23%. However, it rose to the occasion by expanding its omnichannel operation, and that initiative is serving the business well today as it continues to widen its direct-to-consumer business.

Levi's has recovered nicely over the past year. In its fiscal 2021 third quarter, ended Aug. 29, Levi's posted 41% year-over-year sales growth, and the $1.5 billion top line was also up 3% from the same period in 2019. Even in 2020, it remained profitable, save for one quarter.

In the company's favor, office wear is out, and casual wear is in. Although that trend accelerated with the work-from-home arrangements that become so common during the pandemic, the growing demand for casual apparel should be long lasting. That means more jeans in people's closets. On the third-quarter conference call , CEO Chip Bergh said:

The casualization trends that have been accelerated by the pandemic globally are here to stay, and the denim cycle we started pre-pandemic is continuing to drive growth. In the U.S., both the apparel segment and the denim category are now larger than pre-pandemic with denim growth outpacing total apparel for the second quarter in a row. We expect these drivers will provide our business with a multi-year tailwind.

The company has a well-diversified supply system with sourcing in 24 countries. That's helped it avoid many of the supply chain disruptions plaguing other manufacturers, keeping inventory flowing globally. As for inflation, it has locked in cotton prices for the rest of 2022 and is offsetting a rise in costs with changes in pricing.

Many ways to grow

The shift to casual wear is one way to achieve higher sales, but Levi's is focusing on growing sales in other ways too.

The women's segment is outperforming the overall business. Back in fiscal 2018, it accounted for 29% of sales and grew at a compound annual rate of 21% from 2015 through 2018, outpacing men's growth of just 4% in the same period. And more recently, that trend has continued -- sales from women's bottoms increased 18% over 2019 levels in the fiscal third quarter, while men's bottoms grew 7%.

Levi's also acquired fitness-wear brand Beyond Yoga last September to expand its casual wear merchandise, allowing it to tap into the athleisure category that's been a catalyst for Lululemon Athletica 's popularity . One of its key strategic pillars is to diversify the business, and Bergh said in the latest earnings call, "Our ambition is to get our women's business to 50% of our total business." The Beyond Yoga deal could prove pivotal in this effort.

The company is making other moves to stay on-trend and differentiate its brand. It launched NextGen in 2019, bringing the concept to the U.S. in 2020. This concept is meant to build brand loyalty by creating a shopping experience for customers that combines physical and digital elements. Tech-enabled services such as custom product designs, a concept successfully employed by other companies like Nike , have demonstrated encouraging results for Levi's, producing some of the most profitable U.S. stores. As of the third quarter, Levi's was on track to open 100 stores in 2021, most of them under the NextGen banner.

Is an all-weather brand an all-weather stock?

Levi's stock is down 3% over the past year, even though it's in a much better place now, past the pandemic plunge and moving forward with new growth plans. The average price target among Wall Street analysts is about $34, more than 60% above the current price. The company has multiple avenues to expand its business, and this retail stock looks like an attractive buy to kick off the new year.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy .

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