Levi Strauss, the 165-year-old maker of denim jeans and apparel, will go public later this year. The San Francisco-based company filed for an IPO on Feb. 13, and plans to make its market debut on the New York Stock Exchange under the ticker symbol LEVI.
Levi Strauss previously went public in 1971, but the founder's descendants took it private again in 1985. It subsequently struggled to stay relevant in the competitive apparel market, but sales rebounded under CEO Chip Bergh, a former P&G executive who took the helm in 2011.
Should investors buy shares of Levi when it goes public again? Let's answer five questions about the iconic brand first.
1. How much money does Levi want to raise?
In its S-1 filing, Levi states that it wants to raise up to $100 million with its IPO. However, that's just a placeholder figure for companies that haven't decided on the exact number of shares they want to sell.
CNBC previously reported that Levi could actually raise up to $800 million in its market debut, which would give it an initial market cap of $5 billion. Levi states that it would use the proceeds for "general corporate purposes."
2. How fast is Levi Strauss growing?
Levi is best known for its denim jeans, but it also sells casual and dress pants, tops, shorts, skirts, jackets, footwear, and accessories. Its four main brands are Levi's, Signature by Levi Strauss & Co., Dockers, and Denizen.
It sells its products in over 50,000 retail locations, including about 3,000 brand-dedicated stores and store-in-stores, in 110 countries. It directly operates 824 stores and 500 store-in-stores.
Levi's revenue rose 14% to $5.6 billion in fiscal 2018, which represents an acceleration from its 8% growth in 2017. It attributes that growth to the "new revenue and profit growth strategies" which were implemented in 2011. However, investors should recall that Levi once generated over $7 billion in annual revenue during its heyday in the 1990s.
3. How profitable is Levi Strauss?
Levi's gross margin expanded 151 basis points to 53.8% in 2018, and its operating margin expanded ten basis points to 9.6%. Its operating income rose 15% to $537 million, but its net income improved less than 1% to $283 million.
Levi Strauss is growing faster than V.F. Corporation's (NYSE:VFC) jeans business, which includes the Lee and Wrangler brands. During the first nine months of 2018, V.F. Corp.'s jeans revenue fell 3.5% year over year to $1.89 billion, and the unit's operating margin fell 150 basis points to 13.3%. V.F. plans to spin off its jeans unit into a separate company later this year.
4. Which other competitors does Levi face?
V.F. Corp. is Levi's most prominent rival, but it also faces competition from diversified apparel makers like American Eagle Outfitters (NYSE:AEO). AEO, which has grown its comparable store sales for 15 straight quarters, constantly highlights its denim business as a core growth engine.
During last quarter's conference call, CEO Jay Schottenstein stated that AEO's goal was to become the "number one denim brand in the United States." In Piper Jaffray's latest "Taking Stock With Teens" survey, American teens ranked American Eagle as their second favorite clothing brand after Nike. Levi Strauss didn't even crack the top five.
Other prominent competitors include Guess, which reported robust demand for denim dresses, sweaters, and outerwear last quarter; Gap, which sells a wide range of denim products; and private-label brands from department stores.
5. How does Levi plan to stay relevant?
Levi Strauss invented denim jeans, but it now sells a much wider variety of apparel, including branded T-shirts which can be customized at select stores. Its turnaround strategy mostly consisted of new clothing lines, marketing blitzes, brick-and-mortar expansions (including a new 17,000 square foot flagship store in Times Square), and partnerships with celebrities like Justin Timberlake and brands like Nike's Air Jordan.
Levi Strauss plans to expand more aggressively into China, India, and Brazil. Levi notes that although China accounts for a fifth of the global apparel market, it accounted for just 3% of the company's sales last year. Levi Strauss opened its first company-operated store in India in late 2017 and launched its first e-commerce site in the country last year. The company generated just 1% of its revenue from Brazil last year, but the region's sales grew at a CAGR of 20% between 2016 and 2018.
Should you invest in Levi Strauss?
Levi Strauss could have the staying power of other iconic brands like Nike. However, it's also an aging brand in a saturated market, and it's unclear if more brick-and-mortar stores and marketing blitzes will lock in younger shoppers again. I'll keep an eye on Levi's IPO, but I'd rather stick with more reliable apparel plays like AEO for now.
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