Billion dollar denim - what you need to know ahead of the Levi's IPO


#1

A Levi’s IPO is on the way. The darling of the 80s and world-famous denim brand, Levi’s filed its documents on 13th February, and plans to go public later this year. It’s looking to raise between $600 million and $800 million at a valuation of over $5 billion, according to CNBC.

So firstly…

“Wait, how is Levi’s not public already? My parents bought Levi’s. My grandparents bought Levi’s”

Yep, OK. So Levi’s actually was public from 1971 to 1985, when descendants of Levi Strauss undertook a leveraged buyout to reclaim control of the company. Since then it’s been privately owned, but now they’re ready to take it back to the markets.

So why are they making a comeback and what do potential investors need to know before deciding if Levi’s is a good fit for your portfolio? We jumped head-first into the company and filings.

Let’s get started… :jeans:

Analysis

Levi’s seems to be in roaring health under current CEO Chip Bergh - famed across the internet for his cavalier attitude to jean hygiene.

The only CEO in the world with a ‘double denim’ clause in his contract

When he took the helm, Bergh swiftly became a transformational CEO deciding Levi’s should operate like “a 160-year-old startup”: becoming bold, agile and looking to the future, rather than living off the past.

A brand specialist from Procter & Gamble, Bergh not only polished up the Levi’s brand but also revitalised company culture, product innovation and manufacturing, with a big impact on the bottom line.

So for Levi’s management, it looks like a good time to go public and use that investment to grow further.

Here are the positives. :pray:

Sales are up

Last year Levi’s generated about $5.6 billion in sales.

The below chart from QZ shows how its sales figures have grown over recent years:

Levi’s revenues grew by just under 14% in 2018, up from just under 8% in 2017.

To keep this growth going, Levi’s is thinking internationally. The San Francisco-based business believes it has “significant opportunity” to expand its business in emerging markets such as India and China. China makes up roughly 20% of the global apparel market, but just 4% of Levi’s sales came from China in 2017, it noted in its IPO papers.

So how have Levi’s managed to support this growth?

It’s focused on connection with young shoppers

Levi’s is an iconic brand. But for a generation of consumers it wasn’t even in the conversation when it came to buying a pair of jeans.

“In the ’60s, ’70s, ’80s, and early ’90s, this brand was America,” said Levi’s CEO Chip Bergh. Levi’s sales peaked in 1996, when it generated $7.1 billion in sales. However then, younger consumers turned to new, seemingly cooler brands and Levi’s lost its way a little. “Levi’s wasn’t even in the consideration set,” Bergh explained when recalling the shopping habits of his children in the 2000s.

Levi’s has since focused on its brand and found new ways to connect with younger audiences across the globe. In 2017 Levi’s posted its highest revenues for a decade and followed up with even steeper growth in 2018. A big part of this comeback was its focus on innovation and what consumers want. When yoga pants sales were soaring, and Levi’s declining, the business realised it needed to embrace comfort and new ways to encourage consumers to wear jeans again.

It also used collaborations with popular fashion designers and brands to get its “cool” back. A collaboration with Michael Jordan led to people queuing outside Levi’s retails stores for days before the product release. And social media campaigns like 501 Day have also helped the brand to reconnect with younger generations.

On a less measurable standard, 90s nostalgia in a currently angst-ridden world, as well as Levi’s status as an authentic classic, may well be driving some of the revival.

Its strategy to reconnect with consumers is clearly working. Revenues are up, and in a recent study of America’s most-loved brands, Levi’s clocked in at 14th.

Diversifying beyond denim

The below QZ chart shows how Levi’s has been diversifying its business over recent years. Between 2012 and 2017 its percentage of sales from men’s products dropped from 75% to 72%, and over the same period its percentage of sales from jeans dropped from 86% to 72%.

In its SEC filing Levi’s shared: “We are focusing our product design and marketing efforts to reshape our global consumer perceptions from a U.S. men’s bottoms-oriented company to a global lifestyle leader for both men and women.”

“We are focusing our product design and marketing efforts to reshape our global consumer perceptions from a U.S. men’s bottoms-oriented company to a global lifestyle leader for both men and women.”

Direct-to-consumer sales

In the last decade, direct-to-consumer retail has grown significantly, with companies like Harry’s, Dollar Shave Club and Casper all becoming multi-million dollar brands.

For traditional retail brands like Levi’s, this market shift has forced a change in strategy. Levi’s has adapted well to the new realities of retail as its direct-to-consumer business grew 13% for the fourth quarter and 18% for the full year in 2018.

According to its SEC filing papers, Levi’s had 65 more company-operated stores in August 2018 than it did in August 2017, and in total Levi’s operates 798 company-operated stores and approximately 500 company-operated shop-in-shops.

Currently, Levi’s relies on department stores and partner retailers as its primary distribution channel. But long-term it sees this approach as a potential threat to its business.

Many of these retailers have their own private label brands and if they focused more on their own brands, this could lead to reduced floor space and sales for Levi’s.

“We’re focused on growing our DTC [direct-to-consumer] channel in order to better control our brands and drive meaningful connections with our consumers globally,” the SEC papers explain.

Digital pieces, like their chatbot stylist, shows there’s some rigour to their aspiration to act like a startup, rather than a legacy fashion brand.

By putting direct-to-consumer growth at the core of its strategy Levi’s wants to own the whole consumer experience, rather than just the product.

Tech-led manufacturing

Levi’s aren’t just improving their sales process.

Levi’s Project F.L.X. (future-led execution), is a new operating model the business announced in 2018. The project focuses on how Levi’s can using technology to optimise its business.

Creating the classic Levi’s denim look used to be a time-consuming, labour-intensive and chemical-reliant process. But now, the business has moved from manual finishing to laser finishing—helping it to cut the time taken to add the finish to its denim from two to three pairs per hour to 90 seconds per garment.

Embracing new technology has also helped to cut the time it takes Levi’s to take products from concept to production. In some cases, processes that used to take months now take weeks and sometimes days. It’s also helped the business to eliminate thousands of chemical formulations from its supply chain and get closer to its goal of zero discharge of hazardous chemicals by 2020.

So things look relatively rosy. However, let’s take a look at some of the challenges Levi’s have.

A small number of customers drive much of its revenue

Despite opening up new sales channels, Levi’s still relies on external retailers for a large proportion of sales.

Levi’s top ten wholesale customers—like large department stores and stockists—accounted for 26%, 28% and 30% of its net revenues in the first nine months of the fiscal year in 2018, 2017 and 2016, respectively.

These relationships can be terminated at any time and Levi’s doesn’t have long-term agreements with these businesses. Though Levi’s focus on direct-to-consumer growth could go some way to negating this threat.

“If any major wholesale customer decreases or ceases its purchases from us, cancels its orders, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition,” it explained in its SEC filing papers.

Fickle fashion

As an industry, fashion is driven by fast-changing taste. That’s why they call it fashion! The biggest companies, like Inditex’s Zara, spend a huge amount of time and money staying ahead of the game on styles and trends.

Huge brands like Gap, Abercrombie & Fitch and J.Crew have seen declines to a greater or lesser degree after failing to adapt to newer styles.

This is even harder to navigate for a brand associated with one item or style. Levi’s are doing much better than most to navigate these trends e.g. producing a line of more comfortable jeans to compete with the Athleisure surge.

However, a dynamic CEO and an appetite for innovation won’t necessarily continue to outrun the pace of change in this particularly ephemeral industry.

Room to grow?

At $5B with over $5B in revenue, Levi’s doesn’t have a scary high valuation. There’s a lot of positivity in the story.

Bergh has done sterling work in refreshing the brand and the company, but there’s a difference between restoring the brand and continuing to grow to new peaks.

While there’s excitement in seeing an iconic brand shake off the cobwebs, this shouldn’t be confused with massive growth potential. Levi’s is still a mature company, primarily operating in physical retail, in a market filled with competitors.

They’re doing a great job catching up very quickly to current climates, but meteoric growth will be a new challenge entirely.

To sum up

Levi’s should be commended: the management team and CEO are high quality and they seem to be creating and executing a superb comeback strategy.

So if you’re interested in investing in a solid, well-run retail brand, Levi’s might catch your attention. That said, don’t get carried away by the fun and hype: a long-established mid-range fashion brand is not a tech company. Levi’s may be going public, but it’s no newbie.

Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.

*What are your thoughts on the upcoming Levi’s IPO? Let’s continue the discussion in the comments thread. :speech_balloon:_


(Yogesh) #2

Very well written :grinning:
It would be great if there is a way to tag all these analysis write-ups to find them easily and not miss ou


(Alex Sherwood) #3

Thanks for the suggestion, they’ll be given their very own sub-category very soon :smile:


(Stu) #4

Great article - cheers Alex.(Toby even!)


(Jonny) #5

Very informative, cheers @Toby


(Emma) #6

Great read, thanks Toby


#7

Imagine having these analysis linked to the stock in the app!


#8

Thanks folks - what do you think of Levi’s as an investment and a fashion choice?


(Jonny) #9

When you hear Levi’s is going public…


(Stu) #10

I’m of an age where I only wear 501’s, but reading your post I guess that makes me old! I also buy a lot of their shirts. From a retail perspective they are quite expensive but really good quality. And their retail outlets in the US are really well run shops.


(Alex Sherwood) pinned #11

(Jonny) #12

Is there any plans to intergrate this IPO into the app or at least add Levi’s as soon as they are public?


(Alex Sherwood) #13

We won’t be able to integrate the IPO into the app at this point unfortunately but we can definitely add them once the dust settles.


#14

A good return for Levi Strauss :tada:

Well played on doing it in👖