Global jeans purveyor Levi Strauss will soon be publicly traded after a multidecade stint as a private company. In the following video, the Motley Fool Industry Focus: Consumer Goods podcast team discusses Levi's potential for growth in a competitive jeans market. Click below to learn why sharper and more focused management has increased the odds that Levi's can grow significantly after its initial public offering.
A full transcript follows the video.
This video was recorded on March 5, 2019.
Jason Moser: Let's flip it over a little bit here and talk about Levi's. Given your age and my age, I think we grew up at the same time, this is a brand that you and I are very familiar with. I got a couple of pairs of Levi's jeans at home still. When I think of jeans, I think of Levi's. That really is the only brand of jeans I will buy, and I've been doing that for 40-some-odd years, let's just say. [laughs]
We're talking about Levi's looking at giving it another run as a public company. Why do you think that is? What's your take on this business? Is it even worth us looking at it as investors?
Asit Sharma: I think it might be. The company has been around since the 1850s. It started its jeans business in the 1870s. Has done very well over the centuries, crossing of centuries. This is a company that's got a tremendous amount of brand equity. It was a public company between 1971 and 1985, but the controlling shareholders, the family who owned most of the shares, pulled it off the markets in the 80s. The company slumped through a number of factors. Tastes were changing, but management did not have a cohesive strategy to run the company.
Fortune started to turn around, interestingly enough, around 2011. This is when Levi's brought in a Procter & Gamble executive. Procter & Gamble is an amazing learning laboratory for anyone in the consumer retail business, so you really get a deep education in how to market a brand, how to manage costs, supply, chains, etc. So, they hired this CEO, Chip Bergh, in 2011. Since then, sales have rebounded. They had reached the $4 million to $5 million level after nearly hitting $10 million. Since Chip Bergh has taken over, sales have grown. Again, they were $5.6 billion last year, which represented a 14% improvement over the prior year. It's interesting.
We should mention, though, the jeans business is getting hot and crowded. I was reading the conference call transcript from Gap from last week. The CEO said, "We're going to lead with denim in the Gap brand. We've always done that and we're going to continue to do that." The Wrangler and Lee Jeans business, that's owned by a company called VF Corporation, which is next door to me in Greensboro, North Carolina, they're spinning off their jeans business, which has just under $2 billion in sales, so that that business can compete more in the marketplace.
I think this is an interesting company to look at because it's an iconic brand and because the CEO has really changed a lot of the culture of the company. It's a more focused company now, more in tune with contemporary marketing. He's expanded their global footprint. He's also cut a lot of costs.
Interestingly enough, Levi's doesn't need the money. Jason, a couple of shows ago, you and I were talking about our preference for companies -- this was the Beyond Meat episode -- when they go public that they're not struggling for cash. This is certainly the case here. Levi's has a pretty solid balance sheet. Its placeholder IPO filing says it's going to raise $100 million, but that's just a placeholder number. Most estimates I've seen say they're going to raise between $600 million and $800 million, which they don't have an immediate need for. That signals to me that they want to expand more globally, they want to expand more into the retail stores they've built. That footprint is one where they can control their product, control the distribution, make a higher margin.
Those are a few interesting nuggets sprinkled through the S-1 that makes me want to look into this company once it goes public. What are your thoughts on Levi's as an investment?
Moser: You and I look at the use of proceeds immediately when we go through S-1s. It's nice to see that they don't need the money to pay down debt. They have about $1 billion in debt on the balance sheet, but it's easily serviceable from the operating earnings that they're bringing in, it seems. There's a lot of nostalgia there that makes me want to take a closer look, just because I've known the brand for so long. I fall back to the lessons learned in retail investments, and again, I have to remember to check myself before getting too attached. But it's one that I would like to learn more about, at least, and see what the strategy is going forward. It's a brand that still resonates not only very well here domestically but clearly globally. They're pushing a lot of revenue through that model every year, and I think it is the type of company that is adapting very well in a direct-to-consumer world.