The Business Of Fashion/Cathaleen Chen: Why Levi's Is Worth $8: 9

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Why Levi's Is Worth $8 Billion

With a market capitalisation of $8 billion, the original blue jean maker plans to open new stores, develop fabric technology, offer more points of customisation for customers and improve its e-commerce experience.

Awaiting opening price the New York Stock Exchange | Source: NYSE
Awaiting opening price the New York Stock Exchange | Source: NYSE
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BoF Professional Exclusive
By Cathaleen Chen
March 21, 2019 23:34

NEW YORK, United States — Levi Strauss & Co. brought denim mania to the New York Stock Exchange Thursday morning, opening its initial public offering with an auspicious trading price of $22 per share — well above projections.

With its new market capitalisation of $8.1 billion — about 30 percent higher than the company’s own estimates — the original blue jean maker plans to open new stores, develop its fabric technology, offer more points of customisation for customers and improve its e-commerce experience.

Under the “LEVI” ticker, the brand had anticipated an IPO price of $17 per share as of Wednesday night. But after Thursday’s opening bell, that figure slowly climbed upward, sending the trading floor abuzz. The stock closed at $22.41 Thursday afternoon.

“I’m trying not to get too excited about it. It’s not so much where the stock trades on day one or day 30,” Levi’s chief executive Charles “Chip” Bergh told BoF. “We’re going to be a publicly traded company for a long, long time, and it’s about sustaining growth on our business and that will drive the stock price over time.”

The festive mood was heightened by the fact that the exchange temporarily lifted its ban on jeans. Instead of their usual navy jackets, 400 traders and stock exchange personnel donned head-to-toe denim in various shades of blue. They were fitted and gifted the outfits — and even given the opportunity to customise their trucker jackets — courtesy of Levi’s.

The appetite for IPOs remains strong well into 2019, even among fashion players. Levi’s follows Farfetch, the London-based luxury e-tailer that went public on the New York exchange last September to a raving reception. Revolve, another e-tailer based in the US, filed for an IPO in October last year but has yet to follow through.

    It’s about sustaining growth on our business and that will drive the stock price over time

This isn’t Levi’s first stint on the exchange. The company went public in 1971 and remained so until 1985, when the Strauss family took it private again. Despite high growth in the 1990s, the brand stagnated the following decade due to competition from fast fashion retailers and the rise of yoga pants.

But under Bergh, who joined the company seven years ago from Procter & Gamble, Levi’s has seen 11 consecutive quarters of growth in the US. Last year, the company reported a 14 percent increase in revenue, to $5.6 billion, and $283 million in net income. Outstanding debt fell to $1.05 billion from $1.97 billion in 2011. His turnaround tactics have amounted to one overarching feat: elevating Levi’s brand perception among consumers of all demographics and reviving its status as a classic American label. The IPO’s meteoric success Thursday is a testament to this achievement.

“The business hasn’t been this strong in more than 40 years,” he told BoF Thursday. “The strong [price] does signal investor appetite for this brand and our business results.”

When Bergh came to Levi’s in 2011, the brand had lost its cultural relevance. To tackle the slump, he began investing in product innovation. He hired Karyn Hillman in 2013 to be chief product officer, and she has since modernised the design of women’s products while growing the share of sales for non-denim categories. (The denim space, for its part, has also heated up in the past year.) Women’s tops have grown in the double-digits for the last couple of years, driven by T-shirts and trucker jackets, according to chief marketing officer Jen Sey.

“We still see so much opportunity beyond those categories,” she said Thursday.

To combat the athleisure trend that bloomed in the early 2010s, the brand took cues from that look and sensibility to create new styles.

“We went out and talked to consumers and asked, ‘Why are you wearing leggings to brunch on Sunday? What is it about that choice right now?’ And it was really one of comfort,” Sey said. “So instead of saying we’d enter the athleisure business, we tried to answer the question through comfort — softer jeans, better stretch fabrication.”

    The business hasn’t been this strong in more than 40 years.

The brand has been investing heavily in a laser technology called F.L.X. (“Future-Led Execution”), which uses lasers to allow for customisation on the finish of jeans. Traditionally, distressing a pair of jeans requires 20 separate steps using sanding blocks, thousands of types of chemicals and large amounts of water, according to Bart Sights, vice president of technical innovation at Levi's Eureka Innovation Lab, the product innovation arm of the company created by Bergh. By using lasers, this process cuts out the bulk of the manual labour and nearly all of the chemicals.

First tested last year, F.L.X. customisation will be available to all customers online in the fall of this year.

Under Bergh, Levi’s direct-to-consumer operation has also thrived, growing to comprise about one-third of total sales, through e-commerce and retail stores. The brand operates 800 stores and outlets worldwide, but operates only 30 mainline stores in the US, where it plans to open additional locations later this year. Meanwhile, e-commerce has seen consistent annual growth of about 20 percent. By driving direct sales in both channels, it could grow to be 50 percent of the business in the near term, said Sey.

Many of its retail locations feature tailoring shops that allow customers to add patches, pins and chain-stitch embroidery, capitalising on the preference among millennial and Gen Z consumers for personalisation. Levi’s new Times Square storefront, for instance, has four on-site tailors, plus T-shirt printing capabilities.

“Whether they buy from our site or ultimately go to a wholesale partner or retail door to buy, I’m kind of ambivalent. But I want that first port of call to be our website and I want that experience to be amazing,” Bergh said.

Levi’s network of wholesale partners ranges from Kohl’s and Urban Outfitters to Zalando and Saks Fifth Avenue. Earning fashion cachet has been another winning point for Levi’s, which has collaborated with the likes of Off-White and Re/Done. The brand was early to embrace jeans with a looser, high-waisted fit. Its “Wedgie” jeans came out of customer demand for non-stretch vintage jeans, which the brand modernised and mass-produced as a new model in 2016, instantly garnering Kylie Jenner’s endorsement on Instagram. (Levi’s is now a regular hit among celebrities, including Beyoncé and other members of the Kardashian-Jenner clan).

Analysts say Levi’s price point has contributed to its success. A pair of 501s costs $98 — more than H&M jeans but affordable compared to upscale brands like Current/Elliot and Rag & Bone.

The company’s 36.7 million shares floated as part of the IPO will largely generate value for existing shareholders, Bergh said, but about $150 million of the capital raised on Thursday will go toward corporate spending.

“As we made the rounds talking to investors, we said that we’d continue to increase our investments as a percentage of revenues in projects and programs,” he added.

“When I joined the company we were spending less than 2 percent of revenue on capital, and that capital was mostly to fix things that were broken. This year we’re going to spend 3.5 percent of revenue on capital and [most] of it will go toward things that will grow the business: new stores, e-comm, new technology, a new point of sales system — everything that will continue to drive growth for us.”

Related Articles:

As Athleisure Cools, Denim Heats Up

Denim Tailors and T-Shirt Tattoo Parlours: Inside Levi’s New Times Square Flagship

Inside Levi’s Comeback Plans
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