Levi Strauss (LEVI) Q2 Earnings: A Contrarian's Case for Value in a Discounted Blue Chip

Investors often find opportunities in companies that trade at a discount to their intrinsic value, especially when macroeconomic headwinds obscure underlying strengths. Levi Strauss (LEVI), set to report Q2 2025 results on July 10th, presents such a scenario. Despite facing near-term challenges—from foreign exchange drags to supply-chain disruptions—the stock's valuation, margin resilience, and post-earnings catalysts suggest a compelling contrarian play.

Valuation Discount: A Blue Chip at a Bargain Price

Levi's stock trades at $19.00, with a market cap of $7.52 billion, well below its 2021 peak. The company's forward P/E of 14.44x sits comfortably below the broader apparel industry average of 17.53x, and far below its own five-year high of 141.93x. This compression reflects skepticism over the brand's ability to navigate inflation, geopolitical risks, and a weak Q2 seasonality.

Yet Levi's dividend yield of 2.74%—backed by a payout ratio of 58%—adds a defensive edge. Analysts' average target price of $20.55 implies a ~8% upside, while bulls at Telsey Advisory Group see $22.00. The stock's 50-day moving average ($17.37) suggests support, but the real catalyst lies in Q2's results.

Margin Resilience: Navigating Headwinds with Strategic Leverage

Q2 is typically Levi's weakest quarter, with seasonal softness and costs tied to inventory resets. Analysts expect diluted EPS of $0.13, a 12.5% drop from $0.26 in 2024. But the decline isn't entirely due to operational slippage. Management has highlighted three drags:
1. Foreign exchange headwinds: Expected to subtract 2% from revenue growth.
2. Business exits: Closing its Denizen and footwear divisions will reduce revenue by 1.5%.
3. Project Fuel costs: Transitioning logistics to a hybrid model may pressure margins in the near term.

Yet Levi's Q1 2025 results were a rebuttal to pessimism: EPS of $0.38 beat estimates by 36%, with revenue growth of 3.1%. The company's focus on omnichannel retailing—e.g., Buy Online, Pick-Up in Store (BOPIS)—has driven digital sales growth of 15% year-over-year. Meanwhile, Project Fuel's efficiency gains could offset current costs over time.

The real test is whether Levi's operating margin, currently at ~4%, can hold ground. If management reaffirms its full-year guidance of $1.20–1.25 EPS, investors may shrug off the Q2 miss.

Post-Earnings Catalysts: Why This Could Be a Turning Point

The Q2 report is a stress test for Levi's strategy. A few key metrics to watch:
- Revenue trends: Even with headwinds, Levi aims to grow revenue low-single digits for the full year. If Q2 revenue decline is narrower than feared, it could signal momentum.
- Margin commentary: Management's tone on Project Fuel's cost savings and BOPIS's scalability will matter.
- Dividend sustainability: The $0.13 quarterly dividend—funded by a manageable payout ratio—could remain intact, even in a low-growth quarter.

The Contrarian Play: Buying the Dip Before the Call

The market has already priced in the Q2 EPS miss (the $0.13 estimate is a 12.5% drop). But if Levi's results beat expectations—as its 23% historical earnings surprise rate suggests—the stock could rally sharply. Even a modest beat could push shares toward $20–22, unlocking the analyst consensus.

For contrarians, the setup is ideal:
- Valuation safety: Trading at a P/E below peers, LEVI offers a margin of safety.
- Dividend cushion: A 2.74% yield provides downside protection.
- Catalyst timing: The earnings call on July 10th will reset expectations, likely sparking a reevaluation of the stock's valuation.

Risks and Considerations

• Execution risks: Project Fuel's logistics transition could underdeliver.
• FX pressures: The dollar's strength may persist, squeezing margins further.
• Consumer spending: A recession could hit discretionary purchases like apparel.

Investment Recommendation

Levi's valuation, dividend, and strategic moats position it as a high-conviction contrarian pick ahead of earnings. Investors should consider:
- Buying the dip: If the stock falls below $17.50 ahead of the report, the risk-reward becomes even more compelling.
- Aim for the post-earnings bounce: Wait until July 10th to assess results and guidance before scaling into a position.

The Q2 report is a pivotal moment. If Levi can show that its long-term initiatives are on track despite short-term headwinds, the stock could finally catch up to its brand's enduring value.

Disclosure: The author holds no position in LEVI at the time of writing.