Investing.com -- Wells Fargo downgraded Levi Strauss to Equal Weight from Overweight while maintaining its $25 price target, saying the apparel maker's strong share-price rally and earnings outperformance have largely been reflected in its valuation, leaving a more balanced risk-reward profile.

The brokerage said Levi's shares have climbed about 40% since February, outpacing the S&P 500's roughly 14% gain, helped by consecutive earnings beats, raised guidance and improving sentiment around the denim category. It noted the company's revenue growth outlook has increased to 7%-7.5% from 5%-6%, contributing to a valuation re-rating from below 12 times forward earnings to around 15 times.

However, Wells Fargo said recent results raised fresh questions about margins and earnings flow-through, particularly ahead of Chief Financial Officer Harmit Singh's planned retirement in November. The brokerage said second-quarter revenue exceeded expectations but margins showed no upside, third-quarter operating margin guidance fell short of Wall Street estimates, and fourth-quarter margin targets appear ambitious.

The analysts said Levi's fourth-quarter plan assumes operating margin expansion of 150 to 200 basis points, driven by seasonal volume, lower advertising spending, distribution centre efficiencies and easing tariff pressure. They cautioned that achieving the implied 45%-50% incremental margins would require a significant improvement in operating leverage.

Despite the downgrade, Wells Fargo left its earnings forecasts unchanged at $1.52 per share for fiscal 2026 and $1.64 for fiscal 2027, saying its long-term view on the company remains constructive but near-term execution risks warrant moving to the sidelines. The $25 price target is based on a 15-times multiple of its fiscal 2027 earnings estimate.