Analyst Sees Levi’s Well Positioned for ‘Favorable Denim Cycle’

Vicki M. Young
·6 min read

Levi Strauss & Co. is positioned favorably for global growth.

“We believe Levi’s is in the early innings of a favorable denim cycle of new fits and styles driven by younger, fashion-forward consumers,” said Oliver Chen, TD Cowen’s luxury and retail analyst who initiated coverage on the brand on Wednesday. “Its ‘icon’ status as a heritage brand is evident, and TD Cowen’s proprietary Denim Survey results suggest superior brand awareness within an attractive $93 billion global denim space.”

More from Sourcing Journal

He said the resurgence of interest in denim among younger consumers has centered on wider and looser fits, as well as vintage-inspired looks. TD Cowen’s proprietary research indicates that denim is the “most desirable bottoms category.” Denim also has a high purchase frequency rate at 3.1 times annually among buyers, with the majority noting they buy four-plus pairs in a year.

Looking ahead, the analyst said that wider, baggier, comfort-maximizing silhouettes, along with genderless fits, will help drive the new denim cycle among younger consumers. Also resonating with the demographic is the idea of sustainable manufacturing practices and fabric choices. One example Chen cited was Levi’s Cottonized Hemp line launched in 2021, a new take on legacy denim styles using less water and causing less damage to soil in the production process. Another was the “Circular 501” jean in 2022, with 50 percent of its content from recycled denim fibers.

He believes the company is well positioned to grow direct-to-consumer (DTC) engagement, international presence and a lifestyle assortment beyond denim, while still continuing to take share in its core jeans business.

He cautioned on possible near-term impact in the third quarter from U.S. wholesale weakness, softer low-income consumer demand, gross margin pressure from price cuts and weaker fall traffic trends. But the fourth quarter could see a recovery, he said.

In addition, the store opening pace of 80 new doors annually exceeds the historical average of 70 stores a year, along with continuing high single digit growth rates—at 7 percent sales on a compound annual growth rate (CAGR) from 2022-2025—in Asia and Europe. Chen also raised the possibility of mergers and acquisitions opportunities in under-penetrated areas, citing footwear and accessories as examples.

Looking ahead, Chen said Levi’s has the number one position in market share in a global denim market that is still growing in the mid-single digits. He’s projecting direct-to-consumer penetration moving to 48 percent by 2028 from 38 percent currently, supported by store growth from 1,026 to 1,550 company-operated doors. Globally, there are more than 2,900 locations, with the balance operated as franchise, shop-in-shop and commission-based models operated by retail partners.

And growing a robust DTC business will give the company better control over the brand. Chen says DTC should be the primary channel for growth, given that Levi’s gross margin profile is 58 percent versus 48 percent at its denim peers. He believes that over time, DTC could represent 48 percent of sales in Fiscal Year 2028 from its current 38 percent in Fiscal Year 2022.

Chen added that focusing on DTC would give Levi’s greater control of customer engagement, realize a vision of a lifestyle and multi-product brand, as well as better manage inventory flow and speed. Loyalty programs and a unified customer data platform will keep long-term engagement. E-commerce will also be a growth opportunity for the company. Currently at 7 percent of Fiscal Year 2022 revenues, the company’s target is 15 percent by 2027. Levi’s in January brought Jason Gowans on board as its new chief digital officer. He was previously senior vice president of digital commerce at Nordstrom Inc.

Also boosting overall growth will be international expansion fueled by mid-single to high-single digit annual revenue growth in Europe and Asia, and general rising exposure to higher growth and margin categories that include tops, women’s and activewear.

Chen’s base scenario is a 1.6 percent sales growth rate for Fiscal Year 2023, follow by an 8.2 percent rate in Fiscal Year 2024. Using the company’s proprietary data, he said the U.S. denim jean bottoms market is close to $20 billion in size. TD Cowen’s estimate is that Levi’s U.S. bottoms business has an 11 percent market share.

Chen believes Levi’s move beyond its denim-only roots, noting that the company is undergoing a rebranding now by expanding into under-penetrated higher-growth categories that include women’s, tops and activewear.

“We view these businesses as natural extensions of the Levi’s brand, which remains primarily a men’s and bottom’s focused business at 65 percent and 67 percent, respectively,” he said.

Chen noted that the women’s franchise is now one of the fastest growing categories, and has outgrown men’s over the last several years. Another benefit to the bottom line is that women’s carries higher price points. While tops have lower price points than bottoms, the category is expected to be a “key gauge of overall brand heat,” he said.

Chen also noted that Beyond Yoga—which Levi’s acquired in 2021—provides Levi’s with access to the premium activewear market and younger, female Gen Z consumers. Approximately 50 percent of sales are from customers new to the brand, he said. Levi’s also owns the Dockers brand.

Chen thinks new store growth should focus on the more profitable, digitally-enabled NextGen experiential store format. The smaller 2,000-2,500 square foot locations—versus 9,000 square feet at mainline—features curated assortments based on locale. The analyst noted different “micro assortments” in Milan and Rome, where a 1 or 2 degree temperature difference could impact customer preferences.

The concept’s digital infrastructure enables in-app purchasing and includes “tailor shops” where stylists and expert tailors can customize items with seasonal graphic options. “We see tailor shops as an important long-term strategy for maximizing customer lifetime value,” Chen said, noting that customization promotes self-expression, which resonates with Levi’s younger customer base and encourages them to return to the store for additional embellishments or size alterations, while driving purchase frequency. The tailor shops were piloted in Europe and Asia, with 136 NextGen doors rolled out in 2022.

For the second quarter ended May 28, Levi’s net losses were $1.6 million—against net income of $49.7 million a year ago—while sales fell 9 percent to $1.3 billion. The quarter was hampered by U.S. wholesale woes. The company is set to post third quarter results on Oct. 5.

Michelle Gass, formerly CEO at Kohl’s Corp., joined Levi’s in December 2022 and will succeed Chip Bergh as CEO when he steps down in May.

Click here to read the full article.