We recently published a list of The 10 best clothing stocks to buy now. In this article, we take a look at how Levi Strauss & Co. (NYSE:LEVI) compares to other apparel stocks.

Trends in the clothing industry

The internet has changed the way people buy clothes. Social media platforms and influencers have popularized “haul culture,” where people order large boxes of inexpensive clothing online and then browse through them. Also known colloquially as the “Shein effect,” people are turning to fast fashion and ordering clothes that offer an element of surprise upon receipt. Although Shein’s main suppliers are based in China, its customers are primarily based in the United States. The company’s global sales reached around $30 billion last year, nearly matching the $39 billion global sales of Inditex, the old-school fast-fashion leader and owner of Zara.

Fashion and apparel are among the world’s most significant industries and create important value for the global economy. According to McKinsey, this would make it the world’s seventh-largest economy when compared to individual country GDPs. However, the industry faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China began the year with a strong performance, it gradually tapered off and slowed down in the second half. Even the luxury segment saw uneven performance and lower sales. The fashion industry in 2024 can therefore be described in one word: uncertainty. Weaker economic growth, dwindling consumer confidence and rising inflation are making it difficult for companies to develop suitable performance drivers. A Reuters report showed that consumers are becoming more selective in their clothing choices and are shopping more. This has led to a “patchwork of winners and losers.”

Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth varying by country and region. The luxury segment is expected to make the biggest economic gain, but that does not mean that companies in this sector will not experience difficult economic conditions. The global growth forecast for the industry is lower in 2024 compared to 2023, falling to 3-5% from 5-7% in 2023 as shopping sprees come to a halt after the pandemic. Growth in China and Europe is expected to slow, but the US market shows a completely different forecast. Growth in North America is expected to pick up in 2024 after a sluggish 2023, reflecting the region’s more optimistic forecast.

The story continues

In addition, the current political unrest in Bangladesh is expected to affect the global apparel industry, disrupting the work of global clothing retailers from H&M to Zara. As these apparel giants head into the crucial holiday season, the disruptions could cause heavy losses for U.S. retailers and Bangladesh itself, which is the world’s third-largest apparel exporter as of 2023. Overall, consumer behavior in the U.S. has slowed, with people making do with what they have in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report from Reuters showed that investors had previously bet that the Fed would cut rates by half a percentage point and now estimate a probability of about 75% for a quarter-percentage point cut at its September meeting. This should boost consumer confidence and ease spending behavior. With that in mind, let’s look at the 10 best apparel stocks to buy.

Our methodology

For this article, we used Finviz’s stock screener to identify over 20 apparel stocks. We then narrowed our list down to the 10 stocks with the most upside potential from current levels and listed the stocks in ascending order of their upside potential (as of August 19). We only selected stocks with a market cap of over $2 billion.

At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).

A stylishly dressed man in jeans and company jacket, smiling confidently.

Levi Strauss & Co. (NYSE:LEVI)

Upside potential from current level: 17.68%

Headquartered in San Francisco, Levi Strauss & Co. (NYSE:LEVI) sells apparel and accessories for men, women and children from its portfolio of brands, including Levi’s, Dockers, Denizen, Signature by Levi Strauss & Co. and Beyond Yoga. The company also sells its products through third-party retailers and directly to consumers through various channels. Levi Strauss & Co. (NYSE:LEVI) is expanding its global presence by targeting stores in Asia, opening its first store in Bangladesh and strengthening its direct-to-consumer strategy. The brand has also reopened its iconic store at CentralWorld Mall in Bangkok, Thailand, expanding it to approximately 370 square meters to make it Southeast Asia’s largest Levi’s store.

Despite its growing global presence, the brand saw its share price drop in June, mainly because its financial results for the second quarter of 2024 exceeded analysts’ expectations. Analysts had expected the company to earn only $0.11 per share in the second quarter of 2024 on revenue of $1.45 billion. However, the company earned around $0.16 per share, almost 50% more than analysts expected, and revenue reached around $1.44 billion.

So why did Levi Strauss & Co. (NYSE:LEVI) stock plunge after beating analysts’ expectations? First of all, the company didn’t earn $0.16 per share because that was a pro forma number. Instead, GAAP-adjusted earnings came in at $0.04.

On the positive side, the company’s earnings improved. Revenue increased 8% year over year and gross profit margin was 60.5%. This improvement was attributed by management to the company’s “transformative repositioning toward a (direct-to-consumer) business.” Although direct-to-consumer (DTC) sales did not outpace overall revenue growth, DTC sales typically result in higher profit margins, giving Levi Strauss & Co. (NYSE:LEVI) an optimistic outlook.

Levi Strauss & Co.’s (NYSE:LEVI) strength in DTC sales and e-commerce is promising and parallels the increasing consumer trend of purchasing directly from apparel companies. This overall trend could be positive for the company, even though its profits may suffer in the short term. However, in the long term, this consumer trend could support higher sales while eliminating the need to purchase through other retailers.

The stock is currently trading at a P/E ratio of 14.86 and a 4% discount to its sector. Overall, the stock has a consensus rating of Buy. Levi Strauss & Co. (NYSE:LEVI) revenue has grown at a compound annual growth rate of 6.94% over the past three years. Analysts expect annual earnings per share growth of 14.91% through 2025. The median price target implies an upside of 17.68% from current levels. 27 hedge funds hold shares in Levi Strauss & Co. (NYSE:LEVI) as of Q2 2024.

Overalls LEVI takes 8th place on our list of the best clothing stocks to buy. While we recognize LEVI’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than LEVI but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

Read next: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and Jim Cramer recommends these 10 stocks in June.

Disclosure: None. This article was originally published on Insider Monkey.