Spring started with a riveting moment for retail investors: after 34 years of absence from the stock market, Levi Strauss, the world’s most famous manufacturer of jeans, went public again. Initially priced at $17 per share, the stock soared to $22.2 on the first day of trading, giving the iconic fashion brand a price tag of $8.7 billion.
This was a resounding endorsement for a company with a turnover of $5.6 billion and profits of $285 million, resulting in a stock price of 20 times earnings. Investors must have been excited to not only wear jeans but to also own a slice of their future.
Such optimism for future growth is usually associated with technology rather than with a single fashion item which has been around for nearly 150 years, venerated by a diehard clientele more than by teeny internet influencers. What fed such optimism was not the US domestic customer but demand from emerging-market consumers in Brazil, India and China, where sales of the 501 and its brethren grow 13 per cent per annum.
My hunch is that investor enthusiasm was not only nurtured by hard figures but by sentiment too. Many technology star-performers’ focus on hardware and software we will never quite understand; and many hyped tech start-ups like Lyft – soon to go public – Uber or Tesla cannot be bothered about turning in a profit within our lifespan.
Far from ever being as prescient in our investment decisions as Warren Buffet, we nevertheless live his philosophy to only invest in businesses we understand. Or to be more precise, in businesses we optimistically believe to understand. This certainly extends to companies we all have, with satisfaction, experienced as consumers. Easy Jet comes to mind, Amazon, Apple or even loss-making Uber. A service that good cannot possibly fail, can it? We invest our money like we spend it.
When we think Levi’s, we treasure not only the company’s past but our own. The fabric may date to the 16th century, to ‘de Nimes’ (Denims), or the 17th century, ‘Genes’/Genua (Jeans). It may be associated with the Californian gold rush, when Jacob Davis and the Levi Strauss Company had patented the use of enforcing copper rivets to make sturdy clothing for cowboys and miners. But we all think of our own past, when James Dean wore jeans in Rebel Without a Cause and Marilyn Monroe in The Misfits. We think of pop culture, Vietnam demonstrations, Jesus Christ Superstar, punk and heavy metal. We think of our first pair of jeans, which perhaps had to be put on in a bathtub to shrink to fit and angered our fathers.
To understand how a worker’s garb became ubiquitously fashionable I have to just think of my father, an impeccable dresser, who I had never seen without a suit. Until one day, coming back from a business trip to Italy, he suddenly started to wear jeans to his tweed jackets. Still sporting a tie and bespoke shoes, yet combining it with jeans. He still belittled Coke as “Beaujolais de Texas”, but wore his jeans with style.
Since the 1960s the US has systematically eroded her brand value, increasingly so under the current administration.
Jeans became property of the world, without thinking too much of it as a US phenomenon
Yet jeans became property of the world, without thinking too much of it as a US phenomenon. In the heydays of Soviet communism the stubborn refusal of Gospan, its market planning authority, to allow jeans to be produced in the USSR created a black market in jeans rivalled only by hard currency moneychangers.
On a school-leaving trip to Russia I managed to swap my pair of blue jeans for an 18th century icon in the streets of Leningrad, not considering that I could have been arrested had I been found out at the border. When the Shah was ousted by the Islamic Revolution in 1979, students burned the US flag, not their jeans. And youths in the fatal Arab Spring uprisings, protesting at their ossified leaders’ cooperation with US power games, wore jeans as a matter of fact.
Since the 1980s it was no longer just Wrangler and Lee, putting up competition. Every fashion brand started to do their own denims, no matter how high brow: Calvin Klein, Valentino, Gucci, Yves Saint Laurent. Even Hermes, the baton bearer of tradition. Jeans were sandblasted, pre-rinsed and stone-washed to give them a worn look, and then holes were cut into them, to fake their age and to show knee. Jeans became baggy, or unisex, or were made from stretch material. They were made in 50 shades of blue and heretically indigo gave way to all colours of the rainbow.
Far from diluting the brand value of Levi’s, I firmly believe that such jeans inflation will buttress the esteem of the classic. Overburdened with choice we value tradition. We go for buttons, not the zipper. Yet we must not forget that apparel is a fashion item, not just a staple necessity. And fashion is fickle. We witnessed the fall from grace of popular brands like Benetton, Hennes & Mauritz, Topshop, Cardin.
There may be years to come when wearing a 501 is very yesterday, like riding a Harley Davidson. It would therefore be to an investor’s detriment to consider fashion a steady, uninterruptable growth story. I would be personally saddened, of course, as would be many proud supporters of the riveted originals, always hoping for a revival soon. But all along, my enthusiastic investment would suffer as trends come and go.
And there’s always the risk of social, environmental and governance misdeeds. Jeans are made from cotton, which needs lots of water to grow and is soil corroding. The fabric is bleached, washed and dyed, putting yet more burden on the environment.
Levi Strauss’ eye-watering valuation of 20 times earnings is not as perilous as it seems though. If a 13 per cent growth rate in emerging markets can be maintained, such valuations will become reasonable in a few years from now. Charles ‘Chip’ Bergh, Levi’s CEO since 2011, is a seasoned hand. He worked for Procter & Gamble for 28 years as a brand manager, overseeing the commercial success of Gillette. He is not only a highly qualified manager but is almost irrationally passionate about Levi’s.
The US trade wars will have only limited effect on Levi’s. All manufacturing has resettled overseas by now, serving the booming market in South East Asia – so far under the radar of Trump tweets. Chip Bergh, like Nudie Jeans, will most likely face down environmental concerns by offering jeans repair, fabric recycling and by going carbon neutral in transport and manufacturing. He will make sure that Levi jeans will be tailored in a humane environment too, excluding sweatshop contractors.
What limits his decision making, and what should make us as retail investors hesitant about putting our money into the pockets of our favourite jeans, is the fact that the direct descendents of Messrs Davis and Strauss, the fabulously wealthy Haas family, had sold only a small sliver of their shares to the public. Eighty per cent of all voting rights are still owned by them, which puts the corporate power of Chip Bergh in perspective.
They have admittedly done well in the intermittent years as a purely private enterprise, steering the company with steady hands through the rapids of fashion changes and major downturns. Yet we know by experience that inter-family feuds can wreak havoc with a company. No feuds are bloodier than inheritance disputes, or disagreements with a stubborn patriarch entrepreneur. Think Piech/VW, L’Oreal’s Bettencourt, Liebherr, or the bitter feud of the Ambani brothers.
As a retail investor with no say in the company’s affairs, I’d wish not to be caught in the middle.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
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