Levi Strauss & Co (NYSE: LEVI) shares are gaining after the jeans company said it was leaving its guidance unchanged for the full year.
But there’s a caveat: its outlook includes “no impact from the proposed tariffs”, which could be a major red flag that warrants pulling out Levi’s stock on the post-earnings strength.
Levi’s relies rather significantly on countries other than the US for manufacturing, which suggests it’s not particularly well-positioned to navigate tariffs and a subsequent trade war that’s emerging.
Despite its post-earnings rally, LEVI is down some 25% versus its year-to-date high at writing.
Levi’s relies heavily on China and Vietnam
Levi’s makes million of products every year in Vietnam and China, both of which have been hit with heavy tariffs under the Trump administration.
Vietnamese imports are now subject to 46% duties in the United States while Chinese imports have been slapped with an additional 34% tariff.
This could prove significant for Levi’s given it currently has 50 factories in Vietnam and another 130 in China.
In fact, the apparel giant no longer manufactures jeans in the US.
It has shifted production to several other countries in pursuit of lower labour costs, including India, Pakistan, and Bangladesh. Versus their 52-week high, Levi’s shares are currently down about 40%.
Tariffs could hurt Levi’s profitability
On the earnings call, Levi’s chief of finance Harmit Singh said the tariffs situation said it was hard to evaluate the potential impact from tariffs as the development is quite unprecedented.
However, it’s reasonable to believe that the effect will likely be significant given “the supply chain for lifestyle brands is entrenched in Asia and not easily relocated,” as per Stifel analyst Jim Duffy.
Duffy does not expect names like Levi’s to attract a lot of investor interest as Trump tariffs could mean a significant hit to their profitability moving forward.
However, Levi’s shares currently pay a rather lucrative dividend yield of 3.85% that makes them a bit more attractive to own at writing.
Is it worth investing in Levi’s stock
Levi’s continues to see up to $1.50 a share of earnings this year on as much as a 2% sales decline.
For Q1, the NYSE listed firm reported $1.53 billion in revenue on 38 cents of adjusted EPS last night.
Analysts, in comparison, were at $1.54 billion and 28 cents, respectively.
In the press release, chief executive Michelle Gass touted the company’s global footprint, strong margin structure, and agile supply chain position” that she believes positions LEVI well to navigate the challenging environment.
Investors should also note that despite tariffs related headwinds, Wall Street remains bullish on Levi’s stock.
The consensus rating currently sits at “overweight” with the mean target of about $20 indicating potential upside of more than 35% from here.
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