Levi Strauss & Company (LEVI) CEO Chip Burgh’s succession plan to retire from the job he’d held for 12 years began in earnest on Nov. 8, 2022, when the denim brand announced that Kohl’s (KSS) CEO Michelle Gass would join the company as President, reporting to Bergh.
The idea was to have Gass learn about Levi’s business over a maximum of 18 months, at which time the veteran manager would replace Bergh as CEO. The official announcement came a few months early, on Dec. 7, 2023. Gass officially takes over on Jan.29. Bergh will serve as Executive Vice Chair from the end of January until his retirement on April 26.
“Over the course of his tenure, Bergh evolved the company into one of the world’s best apparel companies and advanced the Levi’s® business from a predominantly men’s U.S. wholesale bottoms business to a global, DTC-driven one, in addition to reinvigorating the women's business,” stated the company’s December press release.
Despite returning the brand to its former glory and taking it public in March 2019, shareholders who bought IPO shares at $17 are losing money (excluding dividends) after nearly five years as a public company.
Gass has a big job ahead of her if she wants to deliver some capital appreciation for long-suffering shareholders.
However, the stock’s put/call ratios suggest the stock might be worthy of investor consideration. Here’s why.
LEVI Stock Once Traded Over $30
Levi’s share price hit an all-time high of $30.84 in April 2021 at the height of the e-commerce surge during the Covid-19 pandemic. At its September 52-week low of $12.42, it had lost 60% of its value.
While it got some of those losses back in the final quarter of 2023, it’s a long way from those halcyon days in 2021. Down more than 5% over the past 5% over the past five days, a resurgence in its stock price doesn’t look imminent.
However, from an options perspective, some sunshine might be on the horizon.
A quick overview of Levi’s options situation shows that its Put/Call OI ratio is favorable at 0.42, while its Put/Call Vol ratio is 0.67. This means more calls are open than puts, and the volume of calls traded on Tuesday was higher.
One thing to remember about the Put/Call Vol ratio is that more calls are typically traded than puts, so a bullish ratio for this metric is generally between 0.5 and 0.7. Anything between 0.7 and 1.0 is approaching bear territory. Anything over 1.0 is officially bearish.
That said, I don’t think there’s any question that the Put/Call OI ratio is positive despite a relatively low 30-day average volume of 722. By comparison, Kohl’s has a 30-day average of 16,421, with an open interest of 158,057, two-thirds more than LEVI.
If you’re looking for an option play for LEVI, the low volume might make it tough to pick an entry point.
As I look at current options prices for one year out (Jan. 17, 2025 expiry) on Wednesday morning, the busiest call is the $13 strike at 16 with a $4.40 ask and a 0.75949 delta. That’s nearly a 40% down payment. The stock will have to rise by at least 10.2% over the next 380 days to exercise your right to buy 100 LEVI shares. It’s doable.
As for Puts, the busiest for the Jan. 17/2025 expiry is the $13 strike with a $0.90 bid. That’s an annualized yield of 5.5%. Currently, out of the money by $2.78, the income would be decent but not spectacular were you to sell one or more puts. I’d look for a shorter duration and a double-digit annualized yield.
The State of Affairs at Levi’s
The one thing that’s always concerned me about Levi’s since it went public in 2019 is its level of debt. As of the end of August, its third quarter, it had a total debt of $2.11 billion and a net debt of $1.81 billion, excluding cash. That’s 28.4% of its $6.3 billion market cap.
By comparison, Lululemon’s (LULU) net debt is 0.12% of its $60.4 billion market cap. Perhaps a better comparison is Kontoor Brands (KTB), the owners of Lee and Wrangler jeans. Its net debt is 22.7% of its $3.4 billion market cap.
Even compared to its direct competitor, Levi’s has more debt. That’s something to be concerned about should we enter a recession in 2024.
In October, Levi’s reported its Q3 2023 results. The good news included a 14% increase (13% excluding currency) in its direct-to-consumer (DTC) revenue, accounting for 40% overall, 450 basis points higher than a year earlier. DTC revenue was higher year-over-year in all three geographic regions and its Other Brands, which include Dockers and Beyond Yoga brands. These revenues aren’t material to its overall business.
Levi’s continues to push ahead with its DTC business. That should help with gross margins, which were 55.6% in Q3 2023, 130 basis points less than in Q3 2022.
Should its Asia business continue to improve, that will help offset weakness in the Americas and Europe.
According to Barchart.com data, analysts give LEVI a Moderate Buy rating (4.09 out of 5) with a $16.36 mean target price, less than 50 cents higher than where it’s currently trading.
I could see Michelle Gass taking Levi’s DTC business to 45-50% of the brand’s overall revenue within the next five years. If she does that, there’s no question that $30 will be in play.
I'm not 100% sold on Levi’s overall business, but I think a $20 share price is more realistic for the global brand; using options to play the stock would, in my opinion, reduce the risk involved.
That said, there are better brands to own. I’ve already mentioned two of them.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
