Levi Strauss (LEVI) Retests Highs

Levi Strauss & Co. (LEVI) shares rose more than 7% during Wednesday's session after the apparel maker reported a third quarter profit and outlined a path to recovery next year.

Key Takeaways

  • Levi Strauss shares moved sharply higher after the company reported a surprise third quarter profit and predicted a recovery in the second half of 2021.
  • The company said that a 52% increase in e-commerce sales helped offset store weakness, while price increases helped improve gross margins.
  • The relative strength index (RSI) moved to overbought levels, but the moving average convergence divergence (MACD) continues to support a bullish thesis.

Levi Strauss reported third quarter revenue that fell 26.9% to $1.06 billion, beating consensus estimates by $238 million, while non-GAAP earnings came in at eight cents per share, beating consensus estimates by 30 cents per share. A 52% increase in e-commerce sales helped offset store weakness, while a 60-basis-point increase in margins from price increases and a shift to higher-margin products led to unexpected profitability.

In addition to the better-than-expected earnings, CEO Hermit Singh predicted a return to pre-COVID revenue at some point during the second half of 2021. The team believes that its strategy and execution will drive a structurally strong business beyond 2021, with more than half of total business coming from direct-to-consumer channels. Adjusted EBIT margins for e-commerce will be on-par with the total company when e-commerce is double its current size.

From a technical standpoint, the stock extended its breakout from the 200-day moving average at $14.56 to retest prior highs from early-June. The RSI moved into overbought territory with a reading of 72.04, but the MACD continues to trend higher. These indicators suggest that the stock could see some near-term consolidation before continuing higher.

Consolidation is a technical analysis term referring to security prices oscillating within a corridor and is generally interpreted as market indecisiveness. Said another way, consolidation is used in technical analysis to describe the movement of a stock's price within a well-defined pattern of trading levels.

Traders should watch for consolidation between prior highs at $17.00 and the 50-day moving average at $14.56 over the coming sessions. If the stock breaks out, traders could see a move toward Fibonacci resistance at $18.20 over the coming sessions. If the stock breaks down, traders could see a move toward the 50-day moving average at $12.90 over the coming sessions, although that seems less likely to occur.

The Bottom Line

Levi Strauss shares moved sharply higher after the company reported an unexpected profit during the third quarter, predicting a return to normal by the second half of next year. While the stock reached overbought levels on a technical level, there are signs that the bull thesis remains intact.

The author holds no position in the stock(s) mentioned except through passively managed index funds.

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