The analyst remains wary that the highly promotional environment during the holiday season could persist into Spring.
The management has said that of the roughly 400 basis points increase in gross margin relative to pre-pandemic levels, 100 basis points could reverse in a more normalized pricing environment.
The analyst forecasts F23 gross margin down 150 basis points to 56.2% compared to consensus at 57.6% and expect markdown activity will remain elevated in an uncertain demand environment.
Furthermore, with Q3 inventory +44% y/y and a planned ERP transition in 1H23, it could take longer for LEVI to get to a cleaner inventory position relative to peers.
The analyst said that Denim remains challenged (roughly 65% of sales), as evidenced by recent comments from peers.
The analyst expects Levi will continue to outpace industry denim sales, but comparisons in 1H remain tough given a strong 1H22.
U.S. wholesale (36% of sales) is another risk as the analyst expects department stores/mass retailers will remain laser-focused on maintaining tight inventory.
The warmer winter and weaker USD bode well for near term dynamics in Europe (26% of sales), but the analyst still sees some downside risk to street numbers given the uncertainty around the energy crisis.
The analyst doesn’t foresee any disruption to Levi’s strategy once Michelle Gass takes the baton from current CEO Chip Bergh.
That said, visibility on making strong headway toward its medium term 15% operating margin goal will remain cloudy in the near term, limiting a catalyst for upside to numbers until demand improves, added the analyst.
The analyst foresees a 20% downside to 1H23 estimates and remains uncertain that denim demand will improve in the near term.
Price Action: LEVI shares closed lower by 0.37% at $16.22 on Wednesday.
