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Levi’s and Kontoor Survive Tough Climate After High-Profile IPOs

It was a dramatic year for two of the biggest players in the jeans scene as Levi Strauss & Co. and Wrangler parent Kontoor Brands both went public.

In Levi’s case it was the second time in its long history that its shares were traded on the stock exchange, while for Kontoor, it was a spinoff from parent company VF Corp. So far, shares of Kontoor, which also owns Lee, have fared better than Levi’s.

Levi Strauss & Co. hit the Big Board on March 21, beginning a new chapter for the storied jeans brand. Trading under the ticker “LEVI,” the company’s shares opened at $22.22, approximately 30 percent above the $17 price tag Levi’s had priced its initial public offering (IPO) a day earlier. When it filed its IPO earlier in the month, the company had suggested a $14 to $16 per share range.

The San Francisco-based company offered close to 36.7 million shares, bringing the amount raised to $623.3 million and valuing Levi’s at approximately $6.6 billion. Levi Strauss shares closed the first day at $22.42 on the New York Stock Exchange, up 5.42 points, or 31.88 percent, from the pre-market pricing. This gave the company a market capitalization of $8.07 billion. It was trading at $19.85 as of market closing Wednesday.

In general, 2019 has been a challenging year for companies to go public, Bill Lewis, a director in the retail practice at consultancy firm AlixPartners, said.

The tumultuous trade landscape challenged apparel companies’ ability to forecast sales and earnings, Lewis said.

“In addition to trade uncertainty, you still have headwinds in the department store sector,” he added.

Kontoor Brands

Kontoor Brands Inc. completed its separation from VF Corp. on May 23, becoming an independent, publicly traded company, headquartered in Greensboro, N.C. Kontoor Brands shares begin trading under the ticker symbol “KTB.”

The stock opened at $35.51 per share and rose 3.9 percent on the day to close at $38.60. The company listed its market capitalization as $2.19 billion after the day’s trading. Kontoor shares were trading at $40.26 when the markets closed Wednesday.

Companies like Kontoor that break away from a larger corporation “are looking for more independence and more funding to go after a consumer business and focus,” Lewis said.

“Typically, the first year after an IPO will follow the overall equities trends, which have shown moderate growth over the year,” Lewis said. “Sometimes you’ll see bigger jumps or drops based on the first earnings release because there’s a gap in expectations.”

Simply Wall Street’s analysis this month of Kontoor Bands is that it was trading at 37.6 percent below its fair value, with earnings forecast to grow 28.01 percent per year. However, on the “risk” side, Simply Wall Street said the company has a “high level of debt, unstable dividend track record, large one-off items impacting financial results” and “profit margins (4.6 percent) are lower than last year (8.1 percent).”

Kontoor’s core brands are Wrangler and Lee—with a combined history of more than 200 years—and Rock & Republic, as well as the VF Outlet business. Wrangler saw $1.6 billion in net sales in 2018 and was the No. 2 men’s denim brand in the U.S. and the top denim brand in the mass channel. Last year’s net sales reached $1 billion for Lee, which was the leading denim brand in China and India.

Kontoor Brands is taking action to improve the performance of its Wrangler brand, which is “under-distributed” and “has been under-distributed for a long time,” CEO Scott Baxter said last month.

Speaking to analysts on a conference call reviewing third-quarter results that saw significant declines in revenue and profit, Baxter said Wrangler “played a very specific role in our past ownership and that was important, and it did exactly what it needed to do.”

Things have changed, now that Kontoor has separated from VF. Going forward, Baxter said, “as we look at this business and I look at what we need to do with that brand in the U.S. and globally, and for instance we both know that it’s not even in China, we’ve got an opportunity to go ahead and pick and choose really high-quality wholesale partners going forward.”

Wrangler’s U.S. wholesale performance was flat year to date and “we expect revenue to improve in the fourth quarter,” Baxter said, noting the brand saw U.S. wholesale revenue decline 3 percent in the quarter, excluding the impact of the Sears bankruptcy,

International growth is important for Wrangler, as well. “We are on track to launch the Wrangler brand in China in the first quarter of 2020,” Baxter said. “Our go-to-market strategy will focus on digital, launching with a large digital partner in this brand.

We’re encouraged by early consumer testing associated with our global Wear with Abandon ad campaign, which appears to be resonating well,” he added. “The global campaign goes live in the region in February.”

Despite declines in revenue and earnings, Wrangler and Lee parent Kontoor Brands feels better results are on the horizon, as the company offered updated outlooks for the fiscal year.

“We’ve made great progress and our strategic actions are on track,” Baxter said. “We remain confident that we will continue to drive improved profitability and generate significant cash flow in support of achieving our long-term annualized total shareholder return goal of 8 to 10 percent.”

In the back half of the year, actions to improve distribution in India are expected to help deliver on the lower half of the previously announced adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) outlook for fiscal 2019 of $340 million to $360 million. The company said, “While favorable mix from restructuring and strategic quality-of-sales actions will benefit gross margin in the fourth quarter, unfavorable mix in India will temper the underlying strength.”

Kontoor Brands’ outlook for the fiscal year ended Dec. 28 also includes revenue to still exceed $2.5 billion, reflecting a mid-single-digit decline compared with full-year 2018 adjusted revenue.

Levi’s

By going public, Levi’s made funds available to fuel investments in several key areas, while the limited stock offering allowed management to keep control of its board of directors and direction. Levi’s had gone private in 1985 after 15 years as a public company. It continued to report its sales and earnings since then because it had public debt.

After raising $623.3 million in its IPO, Levi Strauss said it anticipated capital expenditures of $190 million to $200 million and nearly 100 new company-operated store openings in fiscal 2019.

Coming off a third quarter with mixed results—net revenues rose 3.8 percent to $1.45 billion but net income fell 4.3 percent to $124.5 million—Levi Strauss & Co. executives detailed a three-pronged plan to improve performance. It all starts with the core Levi’s brand, according to president and CEO Charles Bergh who told analysts on a conference call, “Levi’s is the No. 1 denim brand in the world by a mile and we are maintaining our share leadership position by putting the consumer and our values at the center of everything we do.”

That doesn’t mean that challenges don’t exist, especially in the U.S. wholesale channel that markets to the department store sector. In addition, the company and brand must contend with ongoing currency conditions in the international and sourcing arenas due to the strong dollar and geopolitical issues.

“We’re also taking a segmented approach to U.S. wholesale overall, to drive the business within the broader channel, deploying various strategies to capture growth and these strategies are working,” Bergh said.

The company said last month that it has been drawing down its reliance on China as a source for its jeans and sportswear in recent years. Imports from China now represent less than 8 percent of its overall production and the company said it was in the process of “actively managing this down to very low-single-digits by fiscal year 2020.”

But China is a target for expanded consumer sales, executives noted on a conference call with analysts Tuesday. The market there, however, is complicated and requires continued fine-tuning.

On the upside, Levi’s was trading at 33.8 percent below its fair value, with earnings forecast to grow 19.12 percent per year, after growing 31.6 percent over the past year, Simply Wall Street said. However, “risks include a high level of debt and an unstable dividend track record,” the firm added.

Wholesale companies with marquee brands benefit from increased awareness, which shows up in search metrics and consumer affinity.

The outlook for public companies such as this is “strong provided they have good corporate governance and a positive operating fundamental trend,” Lewis added. “As long as there’s certainty in the trade agreements and the tariffs calm down, I think the outlook is good for apparel.”

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