Strategic financial moves from major denim brands are about to stoke the competitive fires in the $60 billion global jeans market.
Levi Strauss & Co.’s planned Initial Public Offering (IPO), VF Corp.’s upcoming spinoff of Wrangler and Lee into new entity Kontoor Brands, and the breaking up of Gap and Old Navy into separate public companies set the stage for a substantial push to increase market share for all these brands. Denim experts said these companies will be fueled by fresh funding for expansion while they come under Wall Street pressure to increase volume to satisfy investors and increase their stock value.
“When the recent announcement by Gap is taken together with Levi’s IPO and the formation of Kontoor Brands led by Wrangler’s and Lee, I think we’re looking at three sides of the same coin, so to speak,” Bob Antoshak, managing director of textiles consultancy Olah Inc., said. “Although their approaches may differ, it seems to me that each of these brands is attempting to refocus and reenergize their jeans businesses to more closely align with the demands and tastes of so many of today’s consumers.”
Andreas Kurz, president of Akari Enterprises, said Levi’s IPO, in which it aims to raise up to $587 million, will give the company funds for retail, category and international expansion, “which are three major opportunities for the company to grow the business. So, I think it will be very positive for Levi’s business overall.”
Stefano Aldighieri, president of Another Design Studio, said the Levi’s IPO “makes sense” as a way to fund expansion.
“The brand is on a roll right now and the infusion of cash will allow it to… expand even further its own retail footprint, shielding it from the slow demise of their largest traditional retail partners.”
In its filing with the Securities & Exchange Commission (SEC) made in conjunction with filing the IPO, Levi Strauss said, “We have a diversified business model that spans our three regions, a robust presence across both our wholesale and direct-to-consumer, or DTC, channels and an established market share position in jeans, non-jeans bottoms and tops for both men and women.”
The company’s Europe segment represented 29 percent of its revenues in fiscal year 2018, and its Asia segment accounted for 16 percent. That compares to 23 percent for Europe in fiscal 2015 and 17 percent in Asia, which Levi Strauss said points to the geographical diversification of its business.
Levi’s said it believes it has a “significant opportunity” to deepen its presence in emerging markets like China, India and Brazil, in order to “drive long-term growth.”
“We continue to see growth among our top five developed markets: the United States, France, Germany, Mexico and the United Kingdom,” the company said. ”Our net revenues in these five markets have collectively increased from $3 billion in fiscal year 2015 to $3.5 billion in fiscal year 2018, and net revenues in these markets grew 10 percent from fiscal year 2017 to fiscal year 2018.”
In 2018, Levi Strauss said its men’s jeans business had a No. 1 market share in four of these five markets, and in Germany was third. The company said, “Across these markets, we plan to expand via a combination of new stores, expanded wholesale relationships and an increased e-commerce presence.”
Aldighieri said Levis Strauss “might even acquire some other business and strengthen further their position in the market place.”
Levi’s said in its SEC filing: “We will evaluate potential acquisition opportunities with a focus on strategic acquisitions that will enhance our portfolio of brands, bolster our product category expertise or add a new operating capability, while fitting well with our corporate culture and providing an attractive financial return.”
The Kontoor spinoff offers a more complicated assessment, with the jeans brands now having to stand on their own without the foundation of VF Corp.’s well-respected corporate structure.
Kurz, a former CEO at Hugo Boss USA, Diesel USA and 7 for All Mankind, said he doesn’t think the Kontoor spinoff is a good move for Wrangler and Lee because the brands had benefitted over the years from VF’s structure, “from a sourcing point of view and a worldwide distribution point of view.”
He said by separating from VF “you’re really not helping Lee and Wrangler,” but instead creating additional costs in areas like sourcing, legal and overhead, “and making it less efficient.”
Aldighieri’s analysis was more positive. He said with the spinoff of Kontoor: “VF is creating a strong, independent powerhouse, which can stand on its own and reassert its dominant position in the jeans market. Giving more focus to a specific segment of the business is a good move. The jeans brands will be able to concentrate on their own business. I think this is a great opportunity for VF to refresh the Wrangler brand and possibly expand it from its traditional Western wear market and to finally relaunch Lee and make it again the leading brand that it used to be.”
For its part, VF said, “Enabling the jeans business to operate independently from VF will allow it to focus on its long-term strategic priorities and achieve even greater potential as a separate company with a separate management team.”
Kontoor “will be a global leader in the denim category, with iconic brands steeped in rich heritage and authenticity,” VF said. It “will have a best-in-class supply chain, channel and category management expertise, reinforced by deep and long-standing relationships with leading global retailers.”
Aldighieri noted that Levi’s, Wrangler and Lee are all in a tough position because over the past few years they have been squeezed between the high-end luxury market above them, where they have a limited exposure, at least in the U.S., and the fast-growing mass market/discount players below them.
“Even though Levi’s and VF still own some of the largest market shares in denim, their position has to be defended,” Aldighieri said. “They need more and better marketing, and better product differentiation–they cannot fight the mass market guys on price alone. There is scope for some expansion, but I would not expect huge shifts. Overall, I believe these are good news for these brands and for the market in general. It will reassert their leading position in the jeans universe.”
He and Kurz noted that Levi’s will undoubtedly look to keep its core brand positioning, while enhancing it and other labels. Levi’s said it is “actively focused on maintaining and strengthening our men’s bottoms business, which has been and will continue to be a key driver of our operating results.”
“Our men’s bottoms net revenues grew 3 percent from fiscal year 2017 to fiscal year 2018,” it said in the SEC filing. “Our iconic 501 jean continues to be a staple in closets around the world, and we continually find ways to update this fit to appeal to new consumers and remain relevant as tastes change. We are also introducing new products, such as updated straight leg and taper styles, and fabrics with added stretch for greater comfort. Enhancing the fit, finish and fabric of our existing product offerings while continuing to introduce new styles enables us to appeal to millennial consumers and to capitalize on the ongoing consumer trend toward casualization in fashion.”
The company said it will continue to invest in marketing and advertising to increase engagement with our brands, including TV, digital and influencer marketing, “focusing primarily on growing sales of our core product offerings and increasing engagement with all of our brands, particularly among younger consumers.”
In addition, the company said it is targeting value-conscious consumers through the Signature by Levi Strauss & Co. and Denizen brands sold through wholesale accounts, growing its business with accounts such as Walmart and Target.
Kurz noted that Levi’s has done a “phenomenal job” in e-commerce, and should look to improve its European presence after some missteps there.
The company said, “We have been focused on building out our e-commerce sites across geographies, while also upgrading the foundation of our sites in key geographies such as the United States and Europe in order to deliver a better user experience.”
Wall Street Pressures
In the Gap-Old Navy breakup, Gap Inc. said the spinoff will enable each company to maximize focus and flexibility, align investments and incentives to meet its particular business needs and optimize cost structures for greater profitability.
However, Moody’s vice president Christina Boni said, “Although the proposed spin at Old Navy will enable a sharpened strategic focus on its business priorities, it reduces the diversification the brand provides to the overall entity. Old Navy is Gap Inc.’s leading brand comprising 47 percent of sales in 2018 with margins that lead its portfolio. Old Navy continues to outpace Gap Brand and Banana Republic, and is one the fastest-growing major apparel brands with comparable stores of 3 percent in 2018 growing to over $7.8 billion in 2018.”
Kurz felt that similar to the VF-Kontoor situation, the breakup was another case of making the strong brand, Old Navy, stronger, and the weak brand, Gap, weaker.
As for Wall Street pressures, Kurz noted that in the case of Levi’s, which has long reported its financial results due to publicly traded debt leftover from when the company went private in 1985, the family and management retain the vast majority of shares and therefore control of the company.
“So it’s an investment opportunity,” Kurz said, “They are setting the company on the path of further growth.”
Aldighieri said whether these brands can balance Wall Street pressure to grow and invest in innovation “is the million/billion dollar question.”
“Without constant pressure for quarterly gains from the shareholders, a brand can make long terms plans, invest in innovation and have the luxury of not feeling compelled to react to each and every shift in the market,” he said. “It is much harder to stay the course when you have demanding shareholders who are not prepared to wait for long-term success and expect short term profit at all times, and force you to readjust your strategy constantly.”