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The Ratings Game: Levi Strauss diversified its supply chain a long time ago and says it’s now reaping the rewards

Levi Strauss & Co. says sourcing for its merchandise spans 24 countries, one of the reasons why the supply chain challenges that are wreaking havoc across the consumer space aren’t hitting the denim company quite as hard.

As a result of this diversification, less than 4% of the company’s production capacity is handled in Vietnam, which had to shut down facilities for a period due to COVID-19.

“We long ago decided that we would not source more than 20% of our product from any one country,” said Levi Strauss Chief Executive Chip Bergh on the company’s fiscal third-quarter earnings. The company reported profit and sales that beat expectations.

See: Supply-chain problems trip up Nike earnings, but analysts expect sports-gear giant to regain footing

The company is also “cross-sourcing” certain merchandise across two or more countries so it can shift production when necessary, and the company was able to redirect goods to East Coast ports as bottlenecks on the West Coast cause massive delays.

“We’re also leveraging our scale, expertise and strong relationships with our vendors to protect our capacity and control costs,” Bergh said. “We’ve locked in approximately 70% of ocean volume and costs through summer of next year.”

With supply chain troubles forcing some companies to take drastic measures to get goods on store shelves, Levi’s
LEVI,
+8.46%

efforts stand out with analysts.

“Levi reported 3Q21 top- and bottom-line results ahead of Street expectations up and down the P&L, while offering a very optimistic 4Q outlook in the face of growing investor concerns around supply chain, freight and input cost inflation,” wrote Wells Fargo in a note.

“Most notably from today’s print, Levi is navigating supply chain & cost inflation challenges prudently—mitigating the negative impacts through pricing and diverse supply chain.”

Wells Fargo rates Levi Strauss stock overweight with a $31 price target.

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There have also been concerns about cotton costs, which have soared 16%, according to Credit Suisse analysts. Levi says it has that under control as well.

“I will remind you that we have negotiated most of our product costs through the first half of 2022 at very low single-digit inflation,” he said on the call. “And for the second half, we are anticipating a mid-single-digit increase, which we will offset with pricing actions we’ve already taken.”

Credit Suisse thinks the reaction to cotton pricing has been too strong.

“We think the recent selloff in apparel stocks is overblown, and we maintain our
bullish outlook for the industry through year-end,” Credit Suisse analysts led by Michael Binetti wrote in a note focused on cotton inflation.

“We think recent stock pullbacks are driven by persistent headlines about Asia factory disruptions, freight inflation, and commodity cost pressures. But we think the stocks are under-appreciating the most powerful dynamic that this sector has not had in over a decade. Real pricing power.”

Levi Strauss stock jumped 8.4% in Thursday trading, and has rallied 31% for the year to date. The S&P 500 index
SPX,
+0.83%

is up 17.4% for the period.

And: California port crisis, tangled supply chains are fueling a shipping container boom. Will it bust?

“The market is too focused on near-term supply chain issues in our view, and doesn’t fully appreciate the positive impact on Levi’s future earnings from the combined power of an emerging denim cycle, brand investments, mix shifts and cost savings,” wrote UBS analysts led by Jay Sole.

UBS rates Levi stock buy with a $38 price target, up $1.

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