[TOP STORY] Levi Strauss numbers ‘really, really good’


SIMON BROWN: I’m chatting with Keith McLachlan. You’ll find him of course at Integral Asset Management.

Keith, I  appreciate the early morning time. …about a year ago – we got you on and you were talking around Levi Strauss as one of your preferred stocks.

Listen/read: Is Levi Strauss the next Nike? (Aug 2021)

Results just came out a week or  10 days or so ago. A good set of numbers. They’re seeing input costs, but they’re pushing through price increases. Revenue was up 15%, the dividend up 20% at 12¢. Your take on those numbers?

KEITH McLACHLAN: Morning, Simon. I thought the results were really, really good. They reaffirmed their guidance, which is also quite important because, remember, results are historic. Everyone is very concerned about especially how the consumer discretionary stocks are going to be looking in the next six months. But they reaffirmed their guidance and it’s important, if you take a step back to understand really what you’re investing in, in Levi’s, and what they’re trying to do. Most people won’t appreciate this, but they’re over 150 years old as a business. … when we talk about denim jeans, they’re top of mind in terms of a global brand.

Yet ironically, because of a little bit of their history, they’re actually quite new to the stock market. What they’ve been trying to do is really use Nike’s playbook – and Nike perfected this playbook in their athleisure space – they’re using Nike’s playbook to really build this company into one of the largest apparel plays in the world.

Nike’s playbook is quite simple. You take a excellent brand – in Nike’s case, that’s Nike, and in Levi’s case, that’s Levi’s – and you build a global business. So you grow globally everywhere in the world because this brand is really accepted. You then take that brand and you expand into other product categories that are related. In their case 75% of their volume comes from bottoms. They are growing tops, they’re growing footwear and accessories, they’re growing into a range of other things. Importantly also you build direct-to-consumer channels. So you’re omnichannel. There’s absolutely wholesale and everything, but direct-to-consumer allows you to capture the retail margin as well, so you actually lift your own margins.

Nike’s done this, it works – except Levi’s is doing this in the casualisation space. And in the casualisation space ironically you’ve had huge boosts from the pandemic work-from-home, and now we are tentatively all going back to the office. Let me phrase it this way – when was the last time you bought a suit, Simon?

SIMON BROWN: I don’t wear suits any more. I used to, I used to wear suits. I used to wear them every Friday for TV and for events and other dates.  I just don’t wear suits any more. And frankly, I don’t think I will. I hate that word ‘casualisation’, but it’s completely true.

There was a tweet that you retweeted from the CEO and the president, and he makes the point that CEOs are just so happy that staff are back in the office, they don’t care what you wear. Even bankers are letting their staff wear jeans, which when you and I were on a trading floor was unheard of.

KEITH McLACHLAN: Definitely. So not just in the pandemic, there’s been some pants size changes. So there’s a wardrobe re-dress cycle happening in the background. We’re not even going to touch on the fact that denim jackets are apparently coming back into fashion, and I’m the last one you should ever talk to about fashion. I don’t make those calls.

But, more importantly, the casualisation trends are real. Twenty years ago we wore a suit and tie to the office. Then 10 years ago you could drop the tie, it was just a suit. Now you can even drop the suit and just turn up in jeans and a shirt. So they’re really playing into great tailwinds. At the same time they’re executing on their strategy.

It’s a wonderful, wonderful business, over 150 years old, with an absolutely Goliath brand right at the centre that they’re building out.

And then, by the way, you can buy this on an 11 times multiple, whereas Nike’s trading on a 28 times multiple. It’s just so, so cheap for what they’re getting right, and the future’s looking really, really good.

SIMON BROWN: Yes. Nike’s done it. Levi’s  still going to do it, but they are doing it. You mention margin, gross margin – I know gross might not be the best margin in the world to look at – but it’s a good 58.1%. I mean, that is just an insane number.

KEITH McLACHLAN: Strong, strong core profitability. And gross margin is really a good reflection of your pricing power, not your volumes. Volumes come through in your operating margin. But your pricing power.

By the way, Levi’s Trust has also gone through a global strategy of diversifying their supply chain pre-pandemic. They did it because of the trade wars. They had a large amount of product coming in from China and they said, whoa, this exposes us geographically if something goes wrong.

And now they have no more than 20% of their product coming from any single country on planet earth. This is well ahead of the pre-pandemic, which really set them up nicely. So at the background they’ve also diversified nicely.

They’ve got the pricing power, they’ve grown volumes, they’re doing everything right.

I think everyone wants sexy businesses in tech changing the world, and they forget to look at the fact that everyone changing the world needs to wear a set of pants. That’s quite important. I think Levi’s is in a great space, a great team. They’re executing. They can carry on doing this for the next 10, 20 years. There’s no reason why this sort of growth is over in the short term. I think they’ve got a very long runway.

SIMON BROWN: Yes. I agree with you on that. Absolutely. And those results, the margin numbers just keep on.

Keith McLachlan from Integral Asset Managers, I  appreciate the early morning.

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