Why Jeans Are a Good Investment

In this week's episode of Industry Focus: Consumer Goods, the Fool's Nick Sciple and Asit Sharma dive into the world of denim companies, especially Levi's (LEVI -0.73%), Kontoor Brands (KTB 1.00%), and (soon-to-be-public) Madewell.

Learn why jeans are a more appealing investment than any old fashion retailer, how these three companies stand out, what makes each unique, what investors should know about Madewell's ESG efforts, how athleisure could affect demand for denim, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 26, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Tuesday, November 26th, and we're talking jeans. I'm your host, Nick Sciple, and today I'm joined by Motley Fool contributor Asit Sharma via Skype. How's it going, Asit?

Asit Sharma: Well, it's going very well. Very excited to talk denim with you today, Nick.

Sciple: For listeners to note, we're pre-recording this episode on October 29th. Some facts may have changed between now and then. But, yeah, really excited to talk about denim and jeans. When you think about fashion, there's not a lot of articles of clothing or pieces of fashion that have the staying power that jeans have. And in the past year, they've really picked up some attention of Wall Street.

Jeans were invented in the 1870s by Levi Strauss and Jacob W Davis. Since then, as I said, they've become a fixture in American fashion, really ramping up in popularity in the 1950s after James Dean wore them in Rebel Without a Cause. But they aren't just fashion, they're big business. As I mentioned, over the past year, they've really caught Wall Street's eye. Levi Strauss IPO'd earlier this year. We've seen spinoffs of Kontoor Brands, who's the maker of Wrangler and Lee jeans, away from VF Corp. And, we've seen a spinoff of Madewell, from J. Crew. Asit, just off the top, why is there all this interest from Wall Street in jeans all of a sudden?

Sharma: [laughs] It's an intriguing question, isn't it? As the market has gradually crested ever since the Great Recession, the IPO market has become more and more intense. You see these very valuable unicorns, private companies with billion-dollar valuations, going public, and some of them doing quite well. Why are Wall Street investors still interested in jeans? There are a few reasons.

One is, these companies have extremely dependable growth. You mentioned Levi Strauss. That company has been around, as you said, I think it started in the 1850s. Jeans were only invented 20 years later. This is a recurring revenue stream, and Wall Street loves nothing more than recurring revenue streams. Think about software-as-a-service stocks, those are really hot now. Those are essentially the same things. They're selling the same products over and over again, and people are reupping every year, those software subscriptions. This is that but in denim.

Also, these companies, Levi's and Kontoor Brands, the first two that we'll talk about today, they throw off a pretty interesting dividend, a lucrative dividend, each of them. We'll get into the specifics a bit later.

The third thing that I wanted to mention is that if you are an IPO investor, let's say you're a hedge fund or a pension fund or a retail investor, you've seen in the last year that for every hot issue, there's an issue that inevitably burns a hole through your pocket. Look at Uber, look at WeWork, which actually pulled its IPO because it couldn't come to market, so Uber might be the more specific and better example. But, for every unicorn that does well, you're rolling the dice as to whether these companies with their new business models will make money. This is a great way, if you invest regularly in IPOs, to hedge those bets and put money in an issue that might not storm out of the gate, but over the years will return you a handsome bit of money.

The last thing I want to mention is, we rarely get a chance to invest in iconic brands in the consumer goods world. Between these first two companies that we're talking about, Levi's and Kontoor Brands, you've got the Levi's brand, you've got Dockers, you've got Lee jeans, you've got Wrangler. These are brands that have been around for decades, much beloved, extremely strong, great customer loyalty. We look for that in the IPO market. "Hey, what is this company bringing in terms of brand potential and brand value?" When you get a chance to put some money behind these in the public sphere, that's a very persuasive reason to invest.

Sciple: Yeah. As we mentioned, it's very rare you see a brand that has the type of staying power that Levi's had. When we were doing some preparation for this show, you compared it to Coke a little bit in that both of these companies have been around since the late 1800s. Both of these companies are in a market that has been durable since that entire period of time, and have had steady above-GDP growth that has been able to continue over time, which is one of the things that we mentioned is really attractive to Wall Street, is this annuity-like business model that's durable over time. Do you want to break that down a little bit, Asit?

Sharma: Sure. When Kontoor Brands actually made its registration statement, provided details before it spun off from VF Corp, which holds brands like Timberlake and Vans shoes, we got some good data on their management's estimate of the market. Per their estimate, jeans is a $100 billion market globally. This company itself holds about a 3% market share. The interesting thing is that Kontoor Brands sees that this market has been growing steadily at a compounded annual growth rate, or CAGR, for about 4% for the longest time, and it's projected to speed up a little bit over the next few years to a 5% CAGR.

Nick, as were batting around this topic, you pointed out that that actually exceeds, if you look at global gross domestic product or GDP growth over time, that's somewhere around 2%, 3% at best. So, you have an industry here which is steadily growing in excess of 2% to 3% of gross domestic product a year. What that means is that it's staying slightly ahead. Consumers have that much more to spend, and they consistently buy these products.

Again, what does Wall Street love? They love an annuity business, a business that you can depend on those returns every year, year in and year out. A lot of the sophisticated valuation models behind stocks that we love, be it Amazon, Microsoft, in the consumer goods sphere, I'll throw out McDonald's in addition to Coke, most of the big institutions that keep pouring money into these stocks are thinking about future cash flows and discounting them back to present value. Wall Street loves nothing more than a company in which you can predict the certainty of those cash flows going forward. And that's one of the things that's so interesting to me.

Just to talk a little bit more about these first two companies, Kontoor Brands and Levi's. Kontoor Brands has roughly 3% market share, close to $100 billion. It has got about $2.7 billion in annual sales. Extrapolating those numbers to Levi's and its own revenues, which are about $5.6 billion a year, it's got 5% market share. That's not a lot. I know you add that up, it's 8% of the total global market, and yes, these two companies are dominant. But they've got a long runway to actually grab even more market share.

Briefly, Madewell, which has put out for a spinoff from its parent company, which is J.Crew, this company, the total company has $2.4 billion in annual revenue. Madewell itself has about $615 million in annual revenue. So, it's much smaller than either of these other two companies. By that criterion, it's got about six-tenths of 1% of total global market share, and it also has a very long runway to grow.

Sciple: Another thing on the jeans growing faster than GDP, I think they stand out as a piece of apparel relative to the rest of the market. There just aren't that many fashion trends that persist over the better part of a century. The market really likes predictability, as you mentioned, in these annuity-type businesses. When you have a track record of in excess of GDP growth over decades and decades that you can extrapolate into the future, in addition to a very strong brand like Levi's -- or, as we mentioned, Wrangler and Lee -- there's a lot of opportunities there.

You mentioned Madewell. That's a little bit of a different animal there. A lot faster revenue growth, a lot younger company. Actually has a little bit higher profit margin, a 10% net profit margin. Around the mid 6% for the other two. And their model is much more growth-focused versus those dividend models of those other companies. Actually, they're less jeans-focused than the other companies as well. A little over half of their revenue is attributable to items like T-shirts, footwear, leather goods, quote-unquote "everything you wear with jeans" is what they describe that as.

One other place where Madewell has differentiated from Kontoor Brands and Levi's is in its distribution model. A lot of folks, when they think about buying Levi's or buying Wranglers, they think about going to your local Macy's or JC Penney to buy these products. There is some concern about those slowing down. Well, Madewell as a younger, newer, more millennial-focused brand has this much more direct-to-consumer focus. We've seen the perfect example of that recently has been Warby Parker, a company that really is focused on direct-to-consumer, being able to build out from there. 87% of Madewell's wells sales are direct-to-consumer, and 40% of their sales are e-commerce. So really, a different approach from those other guys. Asit, can you talk about what advantages that direct-to-consumer model gives to Madewell, and what flexibility maybe it gives to the company?

Sharma: Yeah. If you think about how Levi's, and also Kontoor Brands, their big brands being Lee and Wrangler, how they've grown, they've grown through the mass market over decades. This is from the time that malls were big in American culture. You'd go to the mall and buy your jeans. Still, they have a wide what we call wholesale presence. Wholesale really means they are selling their jeans through retail channels. When you hear us say wholesale, we're really talking about, at the end of the day, those jeans are being sold in someone else's shop. That is a tough model over time as the retail landscape evolves. Listeners, you've heard us talk umpteen times on this show about how malls are dying, out the retail landscape is changing. The advantage you have in a direct-to-consumer channel, and what this means for Madewell, it's got about 135 stores. That's a rough number. Nick, maybe you can correct me a little later. But let's say it's close enough for jazz. With these stores and with its e-commerce sales, as Nick told you, they reach most -- this year, I think they're tracking closer to 90% -- of their sales through these direct channels. What advantage that gives them is, it's a tremendous builder of loyalty. When a customer is coming directly into your store, or they're buying online from you, you have a great opportunity to enroll them in your loyalty program. About 60% of the direct sales that Madewell generates end up snagging loyalty customers. These customers are responsible for about 67% eventually of all direct channel sales. So, people who visit a store or buy online one time, about two-thirds of those are buying again, and signing up for the loyalty program. So, you really can capture that customer.

Versus Levi's which, although it's a hugely strong brand presence, it still does compete on price. This is anecdotal, but for me, when I was a kid in the 70s, I don't want to say what part of the 70s because that'll maybe age me too much, [laughs] but, you had to come to school in Levi's jeans. Wrangler was the off-brand. Nick, were talking yesterday -- Wrangler, by the time you were in school, I think was a little cooler. But, there were times where my mom would take me to the mall, and she'd be like, "We can't afford all Levi's this year. This other brand is on sale, I'm going to buy some of that." So, when you are not in a preponderance of direct channels, you are vulnerable to this type of pricing. So, that's the main thing that you get out of this.

I would also say that this millennial-friendly aspect of Madewell that Nick talks about, it's a very persuasive way to go about the business, and it's led to this very fast revenue growth. They have a design team which actually crowd-sources some of the designs, with about 4,000 customers who have done 125,000 product reviews. So, it's a very hip and online brand, both in the way that they sell and in the way that they interact with their customers.

Sciple: Yeah. Madewell, very controlled distribution with that 130-some stores. You compare that to Levi's, their products are in 50,000 retail locations, 3,000 dedicated stores and shops-within-shops. So, obviously, much more exposure to the broad retail market. The result of that, their Americas revenue declined 3% in this most recent quarter. Levi's management has called it quote-unquote "a melting iceberg." So, it's a big market, but slowly, over time, this business is slowing down a little bit, at least in the U.S. We'll talk about international maybe a little bit later, and what opportunities there might be there. Also, one other thing to mention with Levi's too is that it's a little bit more of a premium product in the jeans market, so maybe a little bit more exposed to the department store market.

But, as a result of some of these concerns with their traditional distribution outlets, we've seen both Levi's, and to a lesser extent Kontoor Brands, try to push into the direct-to-consumer market as well. 35% of Levi's sales are direct-to-consumer. Kontoor Brands, 11%. Can you talk a little bit about what Levi's and Kontoor Brands are trying to do to build out this direct-to-consumer model, and what opportunities it gives to them as retail is changing?

Sharma: So, for Levi's, it's more of a process of building out their own branded stores. These are mostly the shops-within-shops that you mentioned. When they do that, obviously, it's more like the Madewell model, where they have a chance to interact on a closer basis with the consumer.

For Kontoor Brands, it's interesting. As you mentioned, they only have 11% direct-to-consumer sales, and they don't have a retail presence of their own. Now, this company happens to be headquartered in Greensboro, North Carolina, which is a stone's throw from where I live in Raleigh. They're testing out a prototype retail store in Greensboro, near their headquarters. I wouldn't be surprised to see them roll out more of this in the future. With their very well-known brands, they certainly have an opportunity in more affluent markets, in outdoor retail centers that are becoming very popular. They have an opportunity to exploit that.

I also think that, as they expand geographically, which is the second way to counter this type of U.S. mall-based declining sales quandary, that Kontoor Brands has a huge opportunity to not only expand its direct business, but in general to grow into a new business. The parent VF Corp never really helped this company grow to its full potential. That's not the fault of VF Corp, because they have a gazillion brands. But when you're under a centralized control, you only have so many resources that you can use to further your own growth. One of the markets, of course, they're looking at is China. I was pretty surprised to learn that Kontoor Brands had never been sold in China. Now that they've spun off in May from VF Corp, they will have that Wrangler brand in China in early 2020, they're shooting for January, which is both an indirect and a direct e-commerce opportunity for them. So, lots of potential there for both companies to wend away from the small base decline. Again, it's more e-commerce and it's also geographical expansion, because outside of the U.S., developing countries, malls are all the rage, and that's actually a place you want to be selling within.

Sciple: You mentioned how Kontoor Brands' management has called out that they felt hamstrung by the relationship with the VF Corp, held back their ability to invest in product innovation as well as international expansion. You mentioned pushing into China. When you look at the opportunities outside of the U.S. for these companies, Madewell doesn't have much of a presence there, but they mentioned a number of times throughout their S-1 that they would like to continue to expand more internationally. When you look at the opportunity for these companies to expand overseas, and just the way jeans resonate outside of the U.S., how big of an opportunity is this for these companies?

Sharma: It's tremendous. Kontoor Brands is interesting because it's actually got a supply chain that stretches across North America into Mexico. When we think about overseas for Kontoor Brands, that might mean also expanding southward to a very big market -- let's talk about Coca-Cola again. It's a counterintuitive idea, but Coke has a big customer in Mexico, in the Mexican consumer, and has spent a lot of resources over decades. And it's worked out for them because their costs to supply to Mexico are a lot cheaper than supplying overseas. Of course, they've built over time their distribution within these markets. But the same principle can apply to Kontoor Brands. I think that for them, that's a tremendous opportunity.

Their global exposure is just 22% right now. Obviously, the opportunity for them is probably greater than it is for Levi's. Levi's has about 55% of revenue in the U.S., 29% in Europe and 16% in Asia. For those of you who are not geographically challenged like me, you'll notice, what about the Middle East and Africa? Levi's includes those two big geographical regions within its Asia count. So, 16% is actually a greenfield for them to plow in the future. With developing economies, not just in China, but if you look at, economies such as Indonesia, Vietnam, Japan; looking in Africa, South Africa, Kenya; and moving on into the Middle East, those are very wealthy economies -- they have a lot of ground, as I talked about at the outset of the show, to capture another few percentage points of market share. For Levi's, what does another 1% of market share mean? It means about $1 billion of revenue each year.

One thing that, Nick, you were talking about yesterday when we were kicking around our preparation for this show, is that the company's seen global direct-to-consumer growth that's hit the double-digits for a while. So, not only is Levi's expanding outside the U.S., but it's doing it more in the direct channel. That channel is growing faster than the overall business. So, you get a two-for-one there in Levi's potential.

Sciple: We've mentioned that America's revenue was slowing slightly, but when you look at overseas, Europe growing double-digit rate, Asia near a double-digit rate, you mentioned the direct-to-consumer market growing -- appears to be a strong opportunity for them there. And, an opportunity to push that direct channel, higher-margin business as well.

Another opportunity for these companies to take share and to grow their business is to push out to new customers. For Levi and Kontoor Brands, I think that means expanding more into the female channel. Madewell, the other way, they need to push into men's products. When it comes to Levi's, what moves are they making to try to attract more women to their brand and to expand their market in that fashion?

Sharma: So, Levi's is doing two things. One, they are emphasizing that they've got a core discipline in menswear. It's sort of like owing both your strength and your vulnerability. Menswear and men's bottoms each account for 60% of revenues. So, while Levi's doesn't disclose what that final number is, that is, how much are men's jeans the real driver of the business, you can cross-section those two numbers and see it's a pretty big percentage. So, they're emphasizing women's fashions. That actually moves into accessories. Not to say that men don't have as great fashion sense as women, but we don't tend to accessorize at the pace that women do. Levi's has been very savvy in growing that.

Also, they have moved one other area to diversify away from this men's jeans core of their business -- to look at tops as being a slice of their market. They are heavy into T-shirts, jackets with different substrates, different cloths. They're also cyclically pushing the jean jacket. I wanted to stop right here and ask you, Nick, have you ever owned a jean jacket in your life before? My personal theory is, they come way into fashion, and then you wouldn't want to be seen dead with one.

Sciple: Yes, I have owned a jean jacket, maybe middle school days. I never got into the full-on hipster thing. If I was leaning into the hipster culture, that's more of the jean jacket scene these days. What about you, Asit? When's the last time you put one of those on?

Sharma: When I was a teenager. Again, I won't tell what part of the 80s, but in the 80s, my sister bought me a jean jacket. I was recently talking on this show about my sister being a fashion maven and myself not having much of a sense of fashion. So, she got me a jean jacket, and she's like, "You have to wear this every day." And I think it might have been 10 years later, I met up with her. We both moved to different cities. And I was wearing that jacket, and she was like, "What are you wearing?!" [laughs] I said, "You bought this for me! Doesn't this look great?" No. It was much out of fashion.

I think Levi's is aware that the jean jacket is a tremendous seller, and it's a lead-in for other articles of clothing. But if they had their druthers, and if Kontoor Brands had its druthers, the denim jacket would be in fashion all the time. But, what a great piece of wear when it's hot, and something you wouldn't be caught dead in when it's not.

Sciple: Exactly. Just to throw a couple numbers at you, Levi's called out 17 consecutive quarters of expansion in women's clothing, 11 consecutive quarters of double-digit growth in women's lines. Compare Levi's having a very nice 69% of their revenue coming from bottoms, to Madewell. As we mentioned earlier, 52% of their revenue coming from tops, T-shirts and those sorts of things. Maybe draws the line into that gender dynamic between those companies. Obviously a big opportunity there for Levi's.

Kontoor Brands also doing some product innovation there when it comes to women's products. They've announced this Lee jeans Body Optix line which uses materials research, imaging technology, and insights from cognitive science to use fabrics that are more visually appealing and attractive for wearers. That's a really big opportunity for both of these companies.

Another area that a couple of these companies are pushing into is this ESG, recycling, taking care of the environment push. Madewell in particular has touted that at the very front page of their S-1. They tout 600,000 jeans recycled turned into 100 million square feet of housing insulation. Asit, with these companies pushing toward this ESG, sustainability type focus, what opportunity does that create to drive customers, particularly the younger generation, to their brand?

Sharma: It's a double-edged sword. I used to think that, "Hey, it's wide open opportunity," but there's a cost to every initiative that you undertake. We don't always understand the economics. I'll give you one example. Kontoor Brands has developed a really cool, innovative strategy for their jeans in that they're using foam now as a dye instead of using a water-based dye. That saves them a tremendous amount of waste. It uses zero water and it's supposed to reduce waste by 60%. But we really don't see those play out in the financials until years have passed. But these companies are erring on the side of the younger consumer, that this is extremely important to building lifetime value of a customer who's maybe in their 20s, is a socially conscious millennial, maybe versus a baby boomer. Not to say that baby boomers aren't sustainably oriented and environmentally conscious. But, as a spectrum of consumer, they've been shown in studies to be a little less concerned about the provenance of the items that they use, and a little bit less attuned to these socially conscious issues. So, long term, it's a win. It's a win for the environment. It's a win for these companies, in the sense that if they pick up a customer in their 20s and prove to them that the customer can feel good about buying the product, they'll have that customer for decades. And it's a win for their bottom line eventually. But I think from now on, when we talk about ESG issues with consumer goods companies, we should recognize that there's a near-term cost. Anytime that you adjust a supply chain to make it more sustainable, there's a near-term cost on the financials.

Now, this is just a personal preference. I'm all for that. I don't mind if a company that I invest in takes near-term hits in terms of gross margin or ultimate profit margin, if I know that eventually, they're going to do better by the environment. I'm, maybe, a little bit on the more sustainable part of the spectrum in terms of where I've evolved. However, I'm also business person, and I hope to be over time a savvy investor. I'm still on that journey. I want a company to be able to do that in a fashion that also is easy on the bottom line. There is a trade-off there. I want to give more of an honest answer than what used to be an enthusiastic response to a question like that, Nick, which was like, "Yeah, it's great on all fronts!" Everything has a cost. But I think in the end, these companies will win by grabbing consumers for a long, long time.

Sciple: Sure. Linking the sustainability to driving sales, I think Madewell has an interesting approach there. Only 12% of their denim sales to shoppers are through their recycling program. But, if you do participate in their recycling program, they'll give customers a $20 discount on a new pair of jeans when they recycle a used pair. You can see psychologically, you feel way better about yourself going to buy new clothes, even if they're expensive clothes, if you can say, "Hey, I'm taking care of the environment by recycling my old clothes. Plus, I get a $20 discount." You can see how that could maybe build a little bit of loyalty, as well as maybe drive more trips to the store than may have happened otherwise.

The last thing I want to talk about here when it comes to jeans. This is more an assessment of the broader market. I talked about off the top of the show, what's been really remarkable about jeans as a fashion item is that they've been able to persist over a number of decades, and really be a staple of what people wear. We're seeing in recent years this rise of this athleisure trend. Really started a few years ago, when yoga pants started becoming a phenomenon. I remember when I was in college, you first started to see them pop up, and then it went from the college-aged folks all the way up to the grandmas and the mamas and all that stuff. Now it's just a phenomenon. Lululemon, this company that maybe nobody had ever heard of a decade ago, now a massive player in consumer goods. But, with this growth of athleisure, do you think there's any risk that as more athleisure clothing becomes part of our day-to-day wear, maybe some market share could be taken away from jeans, and that in-excess-of-GDP growth may come back toward GDP?

Sharma: There's some risk in it. Just some thumbnail numbers. It's really hard to get a sense of how big the athleisure market is. I've seen estimates that peg it at $83 billion annually to $200 billion annually. By some estimates, it's a little bit smaller than the jeans market. By some estimates, it's twice as big. But you have to remember that also includes things like socks and sports bras and accessories that go with this whole athleisure concept. It's not just leggings and yoga pants, which are the primary competitors to bottoms in the denim market, i.e. jeans. So, there is a potential for this to shave a few points off of the market for jeans.

I personally think that the two can coexist. If the athleisure market continues to grow -- and some estimates, actually, a firm I respect called TechNavio, they peg that this market is going to grow at a 7% CAGR. We talked about the jeans market speeding up to a 5% compounded annual growth rate. This is 2% points above that, for the next five years, is what TechNavio estimates. If it does continue to grow like this, sure, it's going to shave some of the top of the market off for jeans.

But, jeans have never really been a workplace-wear. Athleisure has some potential to go and replace some workplace-wear. I think jeans have always been more school-wear and also evening wear. So, when you're going out with friends or you're relaxing at home, or just being yourself, you're going to throw on a pair of jeans.

Plus, this thing that I've personally witnessed in my travels to different parts of the world -- jeans are aspirational. In developing economies, the uniform of the middle class is a pair of jeans and a branded shirt, whether that has a European logo on it; most the time, it's got an American logo on it. I don't know, off the top of my head, Polo, Ralph Lauren. That is sort of a uniform all around the world that says, "Hey, I've made it. I'm no longer in the lowest socioeconomic rung. I've climbed up to this other wrung here." So, I think jeans will continue outside of the U.S. to play this role in people's fashion choices.

Now, in the U.S., I think that's where we may see a little more deterioration in jean sales. Maybe, Nick, that's why we see the wholesale channel in the U.S. suffering a bit. Maybe it's not just the malls and the death of malls that are causing Kontoor Brands and Levi's to see a little bit of loss of business, but it's this creeping growth and popularity of athleisure. Now, having said that, a lot of the athleisure trend is confined to women. Men as yet aren't going en masse in yoga pants outside, but they could potentially in the future. I'll get your opinion that.

So, bottom line on your question, yeah, I think that the ultimate market in jeans may be a bit compromised, but I don't see this athleisure trend wiping out jeans. I think the two will continue to coexist in people's closets.

Sciple: Yeah, Asit, I tend to agree with you. I don't know that yoga pants will be adopted by the male demographic, but I think some level of athleisure is going to, and is already beginning to, penetrate the male side of the market as well.

You mentioned the workplace. I think that's a really important thing to call out. We've seen a push across the board at many workplaces to move toward more casual wear. I know we're a very casual workplace here at The Fool. We see folks wearing jeans to work all the time. I think the segment of the market that is really at risk relative to athleisure, and maybe even relative to jeans as well, is the formalwear side of the market -- the that JoS. A. Banks, those sorts of things. I think in 20 years from now, there'll be a lot fewer people wearing a suit and tie to work than there are today. And I think that opens up market share not only for athleisure, but for Levi's and all these other denim brands as well. These are casual clothing that folks are really comfortable wearing on their day-to-day, going out and about, eveningwear, as you mentioned, Asit. So, I do think there's some chance that athleisure maybe tempers the growth of jeans, but I think the real loser here is formalwear.

So, last question, just going away. When you look at these three companies -- Levi's, Kontoor Brands, and Madewell -- which one are you most excited about as an investor?

Sharma: I'm most excited about Kontoor Brands. I told you I would talk about dividends. Really briefly, Kontoor Brands, when it gave its pitch to investors, actually came out and said, "We're going to grow our annual revenue 1% to 2% a year." That's not a lot, but they also said, "We're going to throw out a dividend which will yield 5%." I actually wrote an article some time ago, during the summer. The company's stock fell down to $27 bucks a share. It opened closer to $39 when it spun off in May of this year. And I wrote an article saying, "Hey, you can pick this stock up today and get somewhere between a 7% of 10% yield on cost if you purchase the shares." They've come back up to that $39 level.

But I'm very intrigued. I'm a dividend investor. For those of you out there who are seeking a stable source of income in a not-hypercharged selling environment, this is a very interesting company. Again, they really never had the chance on their own to see, what can we do with these brands? They were always under that VF Corp umbrella.

Having said that, I'm intrigued by Levi's. You know that Levi's is going to be around a lot longer than you or I will be. [laughs] Levi's jeans as a brand is going to be here likely another hundred years. They have a dividend which they just raised, which is now yielding 3.5%. If you're a dividend investor, maybe you split it between these two companies.

But, props to Madewell, because it is a niche company. Again, it's a fraction of the size of either the first two, but they've got a handle on this millennial consumer. They are going to grow at a lot faster pace. They'll be a little bit higher risk. But you can't ignore that one, either.

I don't want to make it seem that I don't like Levi's as an investment or I don't think that Madewell is going to be interesting. We'll have to see it go public actually, and see a few quarters of performance and analyze those financials. But it's an intriguing aspect.

But, for my money today, as a dividend investor -- and I encourage listeners who are income-seeking investors, check out Kontoor Brands. And you, Nick, I'm very curious where you land on these three companies.

Sciple: For me, it's going to be Levi's. Just the power of the brand, the staying power. It's a brand that's recognized the word over. When I think of prestige relative to Wrangler and Lee, it's just a little bit of a notch above. We talked about when we were preparing for this show, I said Levi's 1A, Wrangler and Lee 1B, the Kontoor Brands brands. Again, I really respect what Madewell has done. Their growth has been really impressive. Maybe it's my bias, because I'm not super familiar with the brand, and I've never purchased anything from them, but I have a perception -- maybe this is an unfair perception -- that they may be a little bit more sensitive to fluctuations in what's fashionable from time to time. I like that Levi's has this multidecade track record of being that 1A in the jeans market. I think they can persist over time. Really like that dividend, though, from Kontoor Brands, Asit.

Sharma: Absolutely.

Sciple: Asit, always enjoy having you on the show. Look forward to having you on again sometime soon. Thanks as always for coming on!

Sharma: It's been a pleasure. Appreciate it.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Asit Sharma, I'm Nick Sciple, thanks for listening and Fool on!