The COVID-19 pandemic has forced high-end jeans maker True Religion to declare bankruptcy, the second time since 2017 it has needed to do so. The retailer said it had little choice but to seek court protection after government shelter-in-place orders forced nonessential businesses to close their doors, creating a liquidity crisis for the company.
While the pandemic has revealed numerous businesses with shaky financial foundations, True Religion's bankruptcy might have investors wondering whether there could be something endemic to the denim industry that could cause other jeans makers like Levi Strauss (NYSE:LEVI), Wrangler and Lee jeans owner Kontoor Brands (NYSE:KTB), or even J. Crew's Madewell to also go under.
A declining department store channel
There are certainly some similarities that give rise to concern. Retailers, regardless of the niche they service, are in real trouble as mandatory store closures drag on. While the financially weakest will be the first to succumb, it's not going to take much longer for more dominoes to fall without any revenue coming in.
Part of True Religion's problem was that its jeans were sold in department stores like Macy's and Neiman Marcus, which themselves are vulnerable because their balance sheets were already in precarious condition before the pandemic. Neiman Marcus may soon file for bankruptcy as well, according to Reuters.
Macy's is working with bankers at Lazard to help recapitalize the company, while hiring restructuring lawyers to handle its debt, but it may be too late for Neiman Marcus, which has reportedly begun missing payments to bondholders.
Not all department stores are equal
Both Kontoor Brands and Levi Strauss are also exposed to the weak department store channel. Some 56% of Levi's revenue comes through the wholesale channel, which in the U.S., its largest market, is primarily chain retailers and department stores.
It blamed the weak U.S. market for the decline in wholesale revenue last year. Despite having an iconic brand name, Levi Strauss still suffered from financially troubled retailers and substantial numbers of businesses closing down stores. Fortunately, no one outlet accounts for more than 10% of revenue, so even if one or several of its partners went under, the hit might not be too severe.
The same might not be able to be said of Kontoor Brands, whose Wrangler and Lee brands are also sold primarily through department stores. It's biggest customer is Walmart (NYSE:WMT), which represents 34% of annual revenue.
Having its jeans in the retail king is a plus because, since they also sell groceries, Walmart stores are deemed essential and remain open. But as Costco (NASDAQ:COST) has recently said, that's not translating into apparel sales. Where the warehouse club saw grocery sales surge by mid-20% ranges last month, apparel sales tumbled by a like amount.
Kontoor may find that simply having its Wranglers on Walmart shelves during the pandemic isn't enough.
Not made for this market
Madewell is different from its rivals since 87% of its revenue comes from direct-to-consumer sales, 41% of which is e-commerce. It also operates 138 stores, which tend to be near shopping malls, but not in them. The rest of its revenue comes from its wholesale partners, including Net-a-Porter, Nordstrom, and Stitch Fix.
Unfortunately, J. Crew no longer plans to spin off Madewell because it couldn't reach a deal with its creditors. The financially troubled firm had been counting on the IPO to infuse its balance sheet with money, but Bloomberg reported last month that bondholders were concerned over the retail environment and the onset of the pandemic.
A quick resolution is needed
The biggest concern investors have at the moment is that retail stores aren't open, so most of the denim makers aren't generating revenue, even with their e-commerce platforms. Consumers just aren't as concerned with clothes at the moment as they are with finding food and basic necessities.
While other jeans makers have some parallels with the plight of True Religion, this is ultimately a case of a manufacturer of an overpriced pair of pants seeing demand shelved as soon as times turn tough. Its finances also weren't sound, and while Madewell would have made for an interesting opportunity for investors, J. Crew needs its profit-making operations just to survive, though it may revisit the decision in the future.
Levi Strauss and Kontoor Brands, on the other hand, ought to be able to ride out the storm, presuming it doesn't rage on too long.