Why Levi’s is back in fashion
Denim powerhouse has resurrected fading brand by paying down debt, cutting costs and revamping its supply chain
Once dismissed as a ’90s fashion faux pas, jorts — a portmanteau of jeans and shorts — are staging a major comeback. So is jort purveyor and denim powerhouse Levi Strauss & Co.
The company’s stock is up more than a fifth this year, giving it a market value of $8.3bn. That makes it an outlier among apparel companies that are struggling to get inflation-weary consumers to spend more on new clothes.
Levi’s performance is all the more remarkable because the company has had a rocky ride since its heyday in the mid-1990s, when sales peaked at almost $7bn. A consumer shift towards leggings and yoga pants chipped away at sales. Then came the rise of skinny jeans in the early 2000s. The silhouette went on to dominate the market for almost two decades, leaving shoppers with little reason to update their wardrobes.
Over the past decade, though, Levi’s has orchestrated a remarkable brand resurrection under chief executive Michelle Gass and her predecessor Chip Bergh.
The company has sold off Dockers, its underperforming khakis business, and exited Denizen, its value-denim brands. It has paid down debt, cut costs and revamped its supply chain to reduce lead times. Efforts to transform itself from just a jeans maker into a “head-to-toe denim lifestyle” company have also borne fruit. With athleisure fatigue giving rise to a denim resurgence and the revival of ’90s and Y2K trends, Levi’s pulled in $6.4bn in net sales last year, the most since 1997.
A move to sell more directly to consumers has also helped improve profitability. The company’s gross margin hit a record high of just under 63 per cent in its most recent quarter. That compares with under 50 per cent at both Gap and H&M and almost 61 per cent at Zara owner Inditex.
Healthy sales growth and margin gains mean Levi’s has room to absorb most of the costs it faces as a result of tariffs. Less than 1 per cent of clothing sold in the US is sourced from China. So while it expects tariffs to result in a 20 basis points net impact, it is still expecting its gross margin to grow by 80bp this year.
Levi’s direct-to-consumer strategy is not without risk. Nike is a cautionary tale in the cost of building up such businesses, which involve intricate logistics. Levi’s operating margin — which stood at 7.5 per cent in its most recent quarter — is still less than half that of Inditex’s.
Nonetheless, Levi’s is back in fashion — as is the company’s stock, which, at more than 16 times this year’s earnings, has regained its premium to Wrangler jeans owner Kontoor Brands. Trends are fickle, of course. But Levi’s has widened its appeal beyond its ’90s products, and that’s a good look.