Levi Strauss Returns to the Public Market – Investors button up for IPO

by Peter Hunt (peterhunt.com)

Ticker Symbol: LEVI

Levi Strauss became a publicly traded company back in 1971, some 48 years ago. At that time the world was a very different place, China and Eastern Europe were definitely not big markets for jeans and the Internet was yet to be born. The move back then by the Hass family, the descendants of Levi Strauss, took the company private. At the time it was the largest buyout of an American firm valuing the company at $1.6 billion.

On Wednesday 20th March the company returned to the market as a public traded company on the New York Stock Exchange, (JP Morgan and Goldman Sachs acting as lead underwriters for the IPO). Just as the brand is iconic, the Exchange floor was a little ironic, the Levi’s sign dominating the exchange floor. The usual rule barring denim apparel was suspended as stock specialists, brokers and traders all wearing Levi’s blues entering into the spirit of the day.

The Haas family planned to offer 21 million of their shares in the IPO at an expected price of between $15-17 a share, with funds designated for “general corporate purposes”. The closing price on Friday 22nd March nudging just over $22 per share and a market cap just shy of $8 billion. Of note, the listing is a Dual Class share structure, with the Hass family holding 82% ownership of the company in B class shares thus retaining control of decision making for the company. Last year the company reportedly earned $258.2 million. Long-term debt stands at $1.1 billion equivalent to around 19% of the market capitalization.

Business Model

There are really two parts to the way Levi’s distribute. Wholesale and omnichannel. Levi’s opened 74 stores in the fiscal year 2018 including a 17,000 square-foot location in New York City’s Times Square. Bricks and mortar provide not only a showcase for products but are important in pooling valuable data. Style and trend changes drive the inventory, evolution and production, the key is to understand changes and respond but most of all to innovate. Levi’s takes product development seriously with a state of the art “Eureka Lab” based in San Francisco, this is perhaps the most exciting part of the Levi Strauss way of working.

Data and understanding the market being highlighted by CEO Charles Bergh has seen investment ahead of the return to the market improving the ability to evolve products, not just style but flexible new fabrics and even a smart jacket, “Jacquard” working in collaboration with Google, the jacket can be washed 10 times. All products are shipped with RFID, (Radio Frequency Identifier Chips) embedded into the product. This allows store assistants to scan products to assist them in the sales process.

Tops and bottoms

Bottoms, (jeans, shorts & skirts) accounted for 74% of revenue in 2018, tops such as T-Shirts 20% with 6% footwear and accessories. The Dockers brand accounted for 7% of revenue, whereas it stood at 10% in 2015.

Outlook

Since the company was last a public company the world has changed greatly, few Levi’s jeans were worn in Eastern Europe and China in the1970’s, therefore more than ever global market conditions determine the challenges ahead. Slowing consumer growth in China and the United States is a factor many investors will be watching closely. In the fiscal year 2018, growth for Levi was 8.4% in Asia against 25.4% in Europe and 8.5% in the United States.

The retail landscape is also changing. How consumers buy means that omnichannel performance and data will likely be more than important in product evolution and distribution going forward. CMO of Levi’s, Jennifer Say as reported in GQ, states that around 80 percent of men own a pair of Levi in the United States. The ability of the company to expand in markets such as Asia and benefit from an appetite for products globally, will be key for investors to discover if they have slipped into the right size and the stock like the jeans remaining a fashionable opportunity.

This blog is not investment advice. It is based entirely on personal opinion, and is not a solicitation or offer of investment advice of any kind.  Consult a professional investment advisor before making any investment decisions.

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