Value Investors Tribe

Analysis Date: November, 2023

For the analysis of any business, I use the framework described by Warren Buffett in 2007 letter to shareholders. Warren Buffett looks for four parameters particularly: a) Understandable business economics b) Long-term growth prospects c) Able and trustworthy management d) A sensible price tag.

Business Economics and its Moat

Levi is in the business of apparel products and has built an impeccable brand in this space. The business has attractive gross margins and has lucrative financials. The business has been able to sustain the demand fluctuations more or less and has maintained pricing power. It outsources most of its manufacturing from about 22 countries. The products are highly appreciated especially in the denim category and the brand has been able to leverage it. It is building its presence globally and has seen strong traction from Asia i.e. region with high population. The moat of the company is its brand name and strong share of mind. There has been some disruption in the moat with multiple brands entering the space, backed by celebrities with strong social media presence and following. The demand fluctuations in recent times is evident of this and hence the future competitive advantage is somewhat questionable.

Growth Prospects

For the past ten years (2012-2022), sales has been flat, growing at about 3% and profit after tax has grown at about 15%. The volumes have grown modestly with lower growth rates than PAT. The cashflow is cyclical and the reinvestment rates are lower. Given the pricing power and growth in volumes, the free cash flow is anticipated to grow at about 3%-5% over the long run. With somewhat flat sales growth, the cashflow can vary significantly due to external factors and also can cause some inventory risk. Additionally, brand name is not as popular as it used to be about 15-20 years back. Newer generation is more inclined towards associating with the brand marketed by their favorite celebrity which leads to erosion of moat for Levis.

Management Trustworthiness

Management has seen some cyclicality and on-off hiring/rehiring has occurred. The integrity is unquestionable and the management has been candid in its interaction with its shareholders. Even though the management is great, Levis presents classic case of great management running difficult business (as in case of Warren Buffett and Berkshire Hathaway textile operation in early 1970s).

Valuation

Levi is witnessing somewhat erosion of its moat. The future sales and profitability are not as certain as they were about 15-20 years back. In this case, running a DCF analysis would only lead to garbage in-garbage out and so it does not make sense to value the business. Levi can present some opportunities to create wealth following the cigar-butt approach. This is not the approach that particularly appeals me so the valuation of this business in not conducted.  

Disclaimer: This fundamental analysis of Levi is primarily for educational purposes so as to help value investors learn core concepts. This is not a buy or sell recommendation of any form whatsoever. Reader discretion is advised.