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Is Levi Strauss’ Accounting to Blame for Lackluster Earnings?

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TLDR:

The recent earnings report from Levi Strauss & Co. (NYSE:LEVI) showed soft profit numbers, but there were promising signs beyond the statutory profit figures. Unusual items reduced the company’s profit by US$156m in the last twelve months, but these expenses are expected to be one-off. Analysts are forecasting higher profitability for Levi Strauss in the future. Although earnings per share fell in the last year, it is likely that the company’s earnings potential is understated. It is important to consider not only earnings quality but also the risks facing Levi Strauss. There are 3 warning signs to be aware of. Additionally, a high return on equity can be a good sign of a quality business. Valuation is complex, but a comprehensive analysis of Levi Strauss, including fair value estimates, risks and warnings, dividends, insider transactions, and financial health, can provide insight into whether the company is potentially over or undervalued.

Key Points:

  • Levi Strauss & Co.’s recent earnings report showed soft profit numbers.
  • Unusual items reduced the company’s profit by US$156m in the last year, but these expenses are expected to be one-off.
  • Analysts are forecasting higher profitability for Levi Strauss in the future.
  • Earnings per share fell in the last year, but the company’s earnings potential is likely understated.
  • It is important to consider both earnings quality and the risks facing Levi Strauss.
  • There are 3 warning signs to be aware of.
  • High return on equity can be a good sign of a quality business.
  • A comprehensive analysis can provide insight into whether Levi Strauss is potentially over or undervalued.

Article:

The market was pleased with the recent earnings report from Levi Strauss & Co. (NYSE:LEVI), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

For anyone who wants to understand Levi Strauss’ profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by US$156m due to unusual items. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual expenses don’t come up again, we’d therefore expect Levi Strauss to produce a higher profit next year, all else being equal. That might leave you wondering what analysts are forecasting in terms of future profitability.

Because unusual items detracted from Levi Strauss’ earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Levi Strauss’ statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year.

At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it’s equally important to consider the risks facing Levi Strauss at this point in time. You’d be interested to know, that we found 3 warning signs for Levi Strauss and you’ll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Levi Strauss’ profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

Valuation is complex, but we’re helping make it simple. Find out whether Levi Strauss is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.


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