Levi (Levi; Ba2/BB+/BB+) 2Q Results (3m to May)

BS little changed, we don't expect rating changes. Any boost to FCF seems to be getting funnelled to equity pay-outs for now, noting co has no stated leverage target. -15% slide in equities that has carried over to US pre-market has little relevance for us - they seem to have baked in high expectations (+48% YTD) which was met with co leaving FY guidance unch. That was despite a beat on margins this qtr and mgmt verbally still conveying a expected pickup in 2H; "we are confident about the acceleration, both top line and bottom line in the second-half.".

27s trade at Z+112/OAS+120/4,2% working out to maturity (€98, cpn 3.375%). Is not cheap for us - switch to Airport retailer Dufry (Ba2/BB+) that is seeing growth & has firm targets for +30bp spread pickup or Coty 27s that trades flat to it and has limited call risk for carry. Note ticker for Levi 27s is {AN959932 Corp} after a exchange out of old ISIN for reg. reasons (has €5.9m remaining in old line).

Numbers below for 2Q (3m to May).

• Revenues at $1.44b (+8%yoy reported, +9% constant currency) was in-line. Americas firm at $712m and sight misses in Europe $354m and APAC $260m. DTC was $672 (+11% at cc), wholesale $769m (+8%) and e-commerce up 19%.
• Gross margin was 60.5% (+180bps, c58%), Adj. Operating income at $87m (c$66m) on 6% margin (+560bps yoy, unadj. 1.5%) and EBITDA at $132m (c$107m) on 9.2% margin - all were beats.
• Unadj. EBIT margin of 1.5% includes a $65m drag from restructuring charges (up from $20m last year). It's running restruc. costs at $200m this half (vs. $32m last year), most of it for "Project Fuel" - it's new CEO's flagship program to increase focus on DTC and cut costs (targeting $100m this year).
• Cash from operating activities was $263m, down from $286m last yr but was offset by lower capex ($40m vs. $70m last year) to leave FCF tad higher at $223m (vs. $216m last year).
• Dividends in 1H have totalled $95.6m (unch yoy), buybacks $42m (up from $8m last year). Its bumped quarterly dividend by 8% to $52m now and has $639m remaining in buyback programme (no expiration).
• BS had cash & eqv's of $641m, gross debt including lease liabilities we see little changed at ~$2.5b (3.1x levered on FY24 EBITDA consensus of $800m). We don't see rating changes/risk, noting Moody's has notched it 1-lower to CFR (at Ba1) which seems to be on existence of secured facility (we see undrawn).
• FY24 (to Nov) guidance kept unch at +1-3% revenue growth with headline expected to be at mid-point and constant currency at upper end-of the range.