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Levi's: a newcomer to the SKAGEN Focus portfolio

You can't say jeans without thinking of Levi's. And now you can't talk about SKAGEN Focus' portfolio without mentioning the world-renowned denim giant. The portfolio managers of SKAGEN's high conviction equity fund explain what prompted their decision to invest.

"It would have been madness not to buy into the stock," says Jonas Edholm, portfolio manager of SKAGEN Focus, who continues:

"The prevailing fear of a consumer-led recession has pushed the Levi's stock down to a level we haven't seen since the market hit rock bottom during the pandemic. This allowed us to buy into one of the world's strongest brands – a brand with huge growth opportunities – at ten times earnings and thus a significant discount to the value of the stock."

Don't expect plain sailing

The SKAGEN Focus portfolio managers had been on the lookout for a fashion stock for some time. Jonas Edholm explains:

"We had been looking for a new position in the affordable fashion sector for a long time. We certainly don't expect it to be plain sailing, and in the short-term, the stock could prove very volatile.  However, our expectation of a 50% upside over three years is supported when we analyse its growth prospects and look at the discounted cash flow (DCF)."

Levi's went public — for the second time — in March 2019 (after delisting in 1985) at $17 per share. The price reached $28 around the turn of the year and fell with the rest of the market during the spring to end up at $16 in July. That is when the Focus team pressed the buy button.

"No matter how we calculated it, the stock was obviously cheap with a good balance sheet and low debt," says Jonas Edholm, adding that Levi's has launched an annual $750 million share repurchase program as another example of the stock's attraction.

Wild expansion journey

Levi's has been on a wild expansion journey and is – surprisingly – mostly experiencing growth in their physical store network. Their physical direct-to-consumer sales take place at more than 50,000 stores worldwide accounting for 36% of revenue, with this number expected to reach 55% by 2027. Online sales, on the other hand, account for just 8% of revenue but are also expected to grow.

The group aims to open 80 new own brand stores every year by 2027, and in a commercial real estate market where supply exceeds demand, it is possible for the group to acquire retail premises in prime locations at a large rental discount.

The SKAGEN Focus portfolio managers are confident that consumer stocks will recover again after the natural decline resulting from a higher interest rate environment and rising consumer prices. The price target for the Levi's stock is set at $26 – a target it is expected to reach sometime over the next three years, no matter which way the macroeconomic winds blow.

"At such a favourable purchase price, we believe that the risk of recession has been factored in.  In the past month alone, we have seen a rotation towards more long-term stocks," says Jonas Edholm.

Clear value in the brand

And the epithet 'long-term' is highly applicable to Levi's, which has proven its ability to survive over several centuries, having been established as far back as 1853.

"There is clear value in the brand. Since the company is well known and has few competitors, their market position is not threatened. In addition, they have strong management and good expansion opportunities – both in their store network but also in new segments," says the portfolio manager.

A year ago, Levi's bought into the yoga clothing brand Beyond Yoga, which will be used as leverage for further expansion.  The brand currently has a much heavier influence on male consumers, with females only accounting for a third of customers:

"One of the growth catalysts we see at Levi's is the opportunity to expand the business through increased focus on female consumers – both via the main business Levi's and acquisitions such as Beyond Yoga," explains Jonas Edholm.

His conclusion is to the point and clear:

"From the time of buying into the stock, the market value has increased from $6.5 billion to $7.6 billion. The outlook is good."


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