While the company exceeded analysts' revenue expectations and slightly raised its FY19 EBIT margin and constant currency net revenue growth guidance, the stock is trading lower by 11%.
One potential reason for the weakness is that LEVI posted GAAP EPS of $0.07, slightly below the $0.08 consensus. However, on a Non-GAAP basis, which excludes costs associated with its IPO, LEVI generated EPS of $0.17, ahead of the $0.12 consensus.
Perhaps the issue is that LEVI didn't actually provide an Adj. EPS number in its press release. It did provide Adj. net income and diluted shares outstanding, allowing for the metric to be calculated.
The easier number to latch onto and compare to estimates was the GAAP number, and that is what is being widely reported this morning.
Another minor issue is that LEVI's gross margin slipped to 53.3% from 53.9%. This also doesn't look like a major concern because the dip was mainly due to 100 bps of unfavorable currency impact, which was offset by less discounted sales and higher revenue growth from its direct-to-consumer channel.
A more legitimate concern is that revenue growth in the America's region (53% of revenue) slid to 3% from 9% in the prior quarter. While its e-commerce channel is growing quickly, its wholesale channel still makes up a large portion of its business in the Americas.
This quarter, its wholesale business grew by 3% vs. 5% in Q1.
In our view, the slight drop in wholesale growth is nit-picking, especially since its DTC continues to grow, up 14% this quarter.
Furthermore, the company did raise its FY19 Adjusted EBIT margin to +10 bps from "flat to slightly higher, and its constant currency net revenue growth to the high end of the mid-single digit range, from mid-single digits.
Key Takeaway: LEVI's report demonstrated that the fundamentals remain strong overall. Therefore, we believe that the weakness in the stock is mostly attributable to the sharp 15% run it had been on just prior to the report. In other words, there is a "sell the news" reaction in play as traders lock in gains.
Longer term, the fundamental story and its growth catalysts, including further expansion of its e-commerce channel and additional product launches, remain intact.