Levi Strauss & Co. (LEVI) is one of the world’s largest brand-name apparel companies. It designs, markets, and sells jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear, and related accessories for men, women, and children in the Americas, Europe, and Asia. On the other hand, American Eagle Outfitters, Inc. (AEO) is a leading global specialty retailer that provides clothing, accessories, and personal care products under the American Eagle and Aerie brands.

With back-to-school season gearing up, the retail industry should witness a rapid rise in its sales. According to the National Retail Federation (NRF), total back-to-school spending is expected to reach an all-time high of $37.10 billion, up from $33.90 billion last year. In particular, apparel sales are expected to have a steep jump of about 78% compared with the back-to-school season in 2020. Both LEVI and AEO are well-positioned to benefit from the increase in spending.

LEVI has gained 9.9% over the past six months, while AEO has returned 5.8% over the period. However, AEO’s 34% gains year-to-date compares with LEVI’s 32% returns. In terms of last year’s performance, AEO is the clear winner with 113.3% gains versus LEVI’s 111.2%.

But which stock is a better buy now? Let’s find out.

Latest Developments

On August 5, LEVI announced its agreement to acquire Beyond Yoga, a fast-growing, premium athletic and lifestyle apparel brand. The transaction is expected to close during the fourth quarter of 2021. The company expects this acquisition to allow LEVI to establish its presence in the fast-growing activewear segment while also facilitating its long-term growth algorithm.

On July 28, AEO announced the launch of the American Eagle (AE) brand’s Back-to-School (BTS) ‘21 ‘Future Together collection. The company also partnered with Snapchat, launching the Dress Yourself augmented reality experience. This demonstrates the AEO’s continued innovations to lead the industry through virtual shopping experiences with Snapchat and Bitmoji to connect with customers through augmented reality and digital expression.

Recent Financial Results

LEVI’s net revenues increased 156% year-over-year to $1.28 billion in the fiscal second quarter ended May 30. Its adjusted net income stood at $93 million, up 149% from the same period last year. Adjusted EBIT grew 156% from the year-ago value to $115 million. The company’s adjusted EPS increased 148% year-over-year to $0.23.

AEO’s total net revenues increased 35.2% year-over-year to $1.19 billion in the fiscal second quarter ended July 31. Its gross profit grew 89.4% from its year-ago value to $502.39 million, while its net income improved 983.6% year-over-year to $121.51 million. The company’s EPS improved 825% year-over-year to $0.58.

Past and Expected Financial Performance

LEVI’s net income and EPS grew at CAGRs of 3.9% and 1.4% over the past three years. Analysts expect LEVI’s revenue to increase 23.2% in the current quarter, 29.1% in the current year, and 9.9% in the next year. The company’s EPS is expected to grow 100% in the current quarter, 538.1% in the current year, and 11.9% in the next year.

On the other hand, AEO’s net income and EPS grew at CAGRs of 2.6% and 1.2% over the past three years, respectively. Analysts expect the company’s revenue to increase 33.7% in the current year and 7% in the following year. AEO’s EPS is expected to grow 71.4% in the current quarter, 5,325% in the current year, and 8.3% in the next year.

Profitability

LEVI is more profitable with a gross profit margin and levered FCF margin of 56.11% and 9.23% compared to AEO’s 39.39% and 5.30%, respectively.

However, AEO’s 24.51%, 8.99%, and 10.49% ROE, ROA, and ROTC compare with LEVI’s 22.39%, 5.10%, and 7.20%, respectively.

Valuation

In terms of forward EV/Sales, LEVI is currently trading at 2.03x, 46.3% higher than AEO, which is currently trading at 1.09x. Also, LEVI’s 14.13 forward EV/EBITDA ratio is 50.6% higher than AEO’s 6.98.

Thus, AEO is a relatively affordable stock here.

POWR Ratings

LEVI has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. AEO, on the other hand, has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

LEVI has a grade of A for Sentiment. This is justified, as all 10 Wall Street analysts that rated LEVI have rated it Buy. AEO, on the other hand, has a grade of D for Sentiment. Of the eight Wall Street analysts that rated the stock, five rated it Buy, while three rated it Hold.

Both LEVI and AEO have a B grade for Quality, owing to their higher-than-industry profit margins. LEVI’s 56.11% gross profit margin is 57.3% higher than the industry average of 35.67%. AEO, on the other hand, has a 39.39% gross profit margin which is 10.4% higher than its industry average.

Of the 80 stocks in the Consumer Goods industry, LEVI is ranked #8. Alternatively, among the 64 stocks in the Fashion & Luxury industry, AEO is ranked #45.

Beyond what we’ve stated above, we have also rated stocks for Stability, Momentum, Value, and Growth. Click here to view LEVI ratings. Also, get all AEO ratings here.

The Winner

The back-to-school season should bode well for both LEVI and AEO, given the substantial increase in spending as students prepare to resume in-person classes. However, LEVI’s consistent performance and better financials make it the better buy here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Goods industry here. Also, click here to view the top-rated stocks in the Fashion & Luxury industry.

LEVI shares were trading at $26.52 per share on Tuesday afternoon, up $0.02 (+0.08%). Year-to-date, LEVI has gained 32.99%, versus a 21.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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