Lots of jean brands have come and gone over time but it’s fair to say that “Levi’s” has endured as the brand most people think of when it comes to jeans. Now investors will have a chance to own shares of this iconic brand. The company is offering 37M shares (NYSE: LEVI) with a proposed price range of $14-16. Pricing is expected next Wednesday or Thursday.
Levi’s strategy over the last few years had been simple and effective. To grow revenue they have leveraged their core position men’s jeans to expand into women’s jeans and men’s and women’s tops. As shown in their progression they see more areas like footwear and children’s items as areas to expand into. Meanwhile, the newer categories continue to do well – women’s and tops are both key drivers to total topline growth.
On the other side of the P&L, the company has made gains in efficiency and improved margins. This has been driving net income growth of 18% per year.
Levi’s has some other minor brands. Two to provide lower-cost options to partners like Target and Walmart and other niche companies like Dockers. Dockers seems a bit passe these days so it’s not clear how non-Levi brands will contribute to company growth over time.
The RLX Innovation
When you’re in a retail business, particularly one with physical stores, managing inventory is critical. The key to generating profits is “turns” which improve if you can keep inventory low. But nothing is worse for a business than stockouts, especially at the store level.
Consumers have developed preferences for the styles and finishes they want in their jeans. The retailer always has to manage sizes (waist/inseam) and with Levi’s there are quite a few style choices (501, 505, 511, etc.) and fit options (skinny, slim, taper, athletic, relaxed, etc.) to pick from. Taken together these options yielded 467 jean options just for men on the company shopping website.
When you begin to add “finish” the problem multiplies further. Levi’s has come up with a cool technology innovation called RLX that enables them to take a pair of truly vintage jeans with wear marks, tears and even holes, renders them digitally into and then use a laser to apply the exact same to a new pair of jeans.
Right now we’re viewing this more as sizzle than actual steak but we’ll see how the company performs vis a vis inventory turns and gross profits in the coming quarters by using this and other inventory management technologies.
We do like apparel companies with a technology angle. That’s why StitchFix (SFIX) is in our Named Candy portfolio. I wonder if LEVI could start some kind of subscription-based service for their customers?
Valuation & Stock Conclusion
The LEVI story is as straightforward as their clothing. For investors looking at the IPO valuation certainly plays a role. Equally important is whether LEVI will be seen as “just another casual clothing company” like Gap (NYSE: GPS) or a “growth consumer brand” like Canada Goose (NYSE: GOOS). The truth lies somewhere in the middle – especially giving the huge valuation spread.
We put some comp tables together and also ran our PFV model on LEVI. Based on the comp table LEVI shares could be valued anywhere from 1.5x to 2.5x sales. One way to look at it as these guys are better than UA but not an NKE. That would tighten up the range to 2.0x to 2.5x or $11.2B to $14B or $29 to $36/share. The company has a remarkably clean balance sheet with just over $1B in debt but cash close to the same amount.
Our FPV is less applicable to mature companies but it suggests a fairly close $36 share price.
Overall this is a quality deal institutions will like. I expect they will raise the pricing range and price strongly but the shares should still trade up. A buy under $30 is probably a good one.
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