Return to public ownership a perfect fit for Levi's

March 25, 2019 

For decades, Levi Strauss somehow managed to combine being an American institution with being hip.

Marlon Brando wore 501 jeans in The Wild One. The image of James Dean in his 501s, white shirt and leather jacket remains one of pop culture's most iconic images.

 

But by the late 20th century it seemed that the brand was losing its gloss. Denim looked like it was going out of fashion, being supplanted by clothing introduced by "athleisure" brands such as Reebok.

 

At the same time, Levi Strauss was caught in a pincer movement between low-cost retailers producing their own cheap jeans and high-end fashion designers like Ralph Lauren muscling in at the top end of the market.

 

In 1999, on the back of a year in which sales slumped by 13pc, Levi Strauss shut down 11 factories in North America, laying off 5,900 workers and shifting production overseas.

 

However, reports of the company's demise proved to be spectacularly premature.

 

Last week investors piled into Levi's with shares opening at $22.22 (£16.81) each, more than 30pc higher than the $17 which was set in the initial public offering (IPO). This was only the second time in its 165-year history that Levi's had turned to Wall Street for capital. It offered shares back in 1971 before returning the company to private ownership in 1985.

 

deal was led by Bob Haas, the great-great-grandnephew of Levi Strauss, a German immigrant who founded the company in San Francisco in 1854 and patented the riveted blue jeans 19 years later. It was this design that became the 501 - a staple of men's wardrobes in the US and beyond.

 

"The Levi brand is incredibly important, not only for the fashion industry but also America's cultural identity," says Emma McClendon, the associate curator of costume of the museum at New York's Fashion Institute of Technology.

 

"Its history has taken on mythical proportions, especially the 501 jeans, which are symbolic of Americana.

 

"The company has had its ups and downs and, in my view, the market really changed early in the 21st century when companies created a market for premium denim." But the idea of denim as a luxury brand was not a happy fit for Levi Strauss. Fortunately for the company, the market changed again.

 

"There has been a revival in the vintage denim heritage," McClendon adds. "Men are pushing demand for authentic workwear."

 

The women's market has also surged, with sales soaring for what is known as "mom jeans" - straight leg trousers, reaching the waist, rather than being cut below the midriff as was the fashion 15 to 17 years ago.

 

Demand for Levi's soared. In 2017 the company set a new sales record of $4.9bn. Last year it hit $5.6bn.

 

It was against this favourable backdrop that Levi's returned to the stock market. "The company is very different from the company it was six to seven years ago," says Harmit Singh, Levi's chief financial officer. "Then it was skewed towards the US market and wholesale. Men's jeans were a much larger component. E-commerce was non-existent a few years ago. Now it is about four per cent of our business.

 

"Women's clothing is now about a third of our business and sales of tops and T-shirts now account for about a fifth, double what it was three to four years ago." The decision to go for an IPO was a reflection of the company's confidence in the future. "The management team which came here turned around the business."

 

Analysts have voiced fears that bringing in outside capital could result in Levi's being put under pressure to maximise profits at the expense of a longer-term strategy. But such fears are dismissed by Singh. "We are not changing our orientation. We are going to run this company for the long term."

 

The company took its time in searching for investors wanting funds who shared its vision.

 

"Our focus is to grow profits but with principle. We are big on sustainability," he adds, pointing out how the company was now using lasers to break in jeans, rather than environmentally damaging chemicals.

 

The company had been pretty bullish in its prospectus. Revenue in its top five markets - the US, France, Germany, Mexico and the UK - had grown from $3bn in 2015 to $3.5bn last year.

 

The feeling among analysts in the US is that Levi's has picked a good time to raise capital on the stock market.

 

"They have been performing well for some time," says Neil Saunders, managing director of GlobalData Retail. "The medium-term outlook for sales looks quite positive. The IPO seems like a sound decision which could bring them a windfall to fund expansion."

 

Levi's expects to use the cash - which should be at least $600m - to finance the company's expansion into new markets including India, China and Brazil. "I think they are doing the IPO because they have been assessing the landscape," says Marie Driscoll, managing director for luxury and fashion at Coresight Research, a global research and advisory firm specialising in retail and technology.

 

"Around 65pc of their business is wholesale and traditional channels, such as retail stores, are contracting.

"The double-digit growth in e-commerce is an opportunity and they want to expand their direct-to-consumer business to mitigate what is happening to their wholesale market.

 

"Operating a direct-to-consumer business is expensive. You have to have an online and social media presence. You have to have your own stores. You have to meet ever increasing consumer expectations. "It is something which requires continual upgrading and heavy-duty investment, which is why I think they are raising money."

 

Wall Street's excitement at the IPO does not surprise analysts like Jane Hali, chief executive of Jane Hali & Associates Investment Research, which specialises in retail and brands.

 

 

"It's a well-known brand, and denim is selling well - much better than in the past," she says. "They are running their own show with 824 company-operated stores and shop-in-shops.

 

 

"They are able to maintain their own image: it is amazing how many tops they sell. It's a lifestyle brand, not just denim. They offer everything from streetwear to skateboarding and vintage lines.

 

 

"Levi's are doing a really good job and everybody on the street is looking for new stocks and investment."

 

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