- Levi Strauss & Co. is finally returning to the public markets.
- The “Levi’s” brand and double-digit profit growth could boost the stock.
- Slower revenue growth could hurt the stock in later years.
Levi Strauss & Co. will return to the public markets Thursday under the ticker “LEVI.” The San Francisco-based clothing company best known for its riveted blue jeans will issue 36.7 million shares priced between $14 and $16 per share. If sold at $15 per share, the offering would raise about $550.5 million. The current range also values the company at between $5.4 billion and $6.2 billion.
Levi’s first went public in 1971 only to return to private hands in 1985. The company specifies that they have returned to the public market to raise cash for “general corporate purposes.” Whatever the reasoning, LEVI presents a possible opportunity for traders. But investors should weigh the pros and cons before opening a position in Levi’s.
Levi’s Advantages: Growth and Proven Adaptability
The primary advantage hinges on the “Levi’s” brand. This company opened its doors 166 years ago and holds a name recognition advantage unmatched by any peers. Over time, it has boosted its popularity — and its revenue — by adapting its pants to current consumer tastes.
Moreover, it continues to change its image according to consumer tastes, and that has spurred sales growth over the past few years. The company’s compound annual growth rate currently stands at over 11 percent. In 2018, the company reported a net income of $285 million on $5.6 billion in revenue. About 45 percent of its revenue comes from outside of the Americas.
Finally, Levi’s wants to venture beyond men’s “bottoms,” the traditional clothing line that drives most of its sales. Now it wants to focus more on tops and apparel designed for women. If successful, this could provide a source of much-needed revenue growth.
Levi’s Disadvantages: Slow Revenue Growth, and Stock Control to Stay in the Family
Investors should understand that the company will issue A shares counting for one vote each. Descendants of founder Levi Strauss will hold B shares which are worth 10 votes. Hence, control will remain with the founding family. Moreover, the company’s long history offers little more than name recognition. Any clothing maker can manufacture blue jeans, and clothing remains a fickle business where customers can switch to competing brands.
Sales from wholesalers accounted for 27 percent of company revenues in 2018, but these arrangements do not depend on long-term contracts — meaning they could disappear at any moment.
And despite double-digit profit growth, revenue has increased by an average rate of only 2.3 percent. The slow revenue growth rate implies the company has achieved its double-digit profit increases through methods such as cost-cutting. In the long run, revenues will have to increase at a faster rate if the company wants to maintain double-digit profit growth. Hence, investors will likely pay close attention to how well Levi’s apparel sells outside of its core market in men’s blue jeans.
Should You Invest in LEVI?
Offering stock means that Levi’s will join other popular clothing brands such as Nike and Gap Inc. on the public markets. Pent-up demand to invest in this venerable label as well as recent profit growth rates could drive Levi’s stock higher soon after the IPO.
However, unlike the tech companies based in its local area, Levi’s has seen slow revenue growth in recent years. Moreover, it remains unclear whether consumers will take to Levi’s clothing beyond men’s blue jeans. This industry remains highly competitive, and any failure to stay current with consumer tastes could hurt its already modest revenue growth.
Consumers have turned to Levi’s blue jeans for decades. Although traders might initially welcome Levi’s stock onto the trading floor, momentum could fade like a pair of old blue jeans once the initial excitement dies down.
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