Levi Strauss & Co (LEVI) launched the first major IPO of the year this week, and it was a big success. But now comes arguably the harder part: following it up.
The 166-year-old denim brand saw shares rise another 2% on Friday, on top of the 32% jump in the stock on Thursday, its first day back on a stock exchange in 34 years. That made it worth $8 billion, more than Macy’s or Nordstrom. Investors were clearly impressed by how much Levi’s, iconic for its 501 jeans, has turned itself around since 2011, when former Procter & Gamble (PG)executive Chip Bergh took the reins.
Since then, he has focused Levi’s on its core product, jeans, by improving their quality. On top of that, he’s expanded the brand’s assortment of women’s clothes and its offerings of tops; think t-shirts and hoodies. All the while, he lowered Levi’s once-substantial debt by half, reduced its reliance on U.S. Department stores, and updated Levi’s own fleet of stores.
Yet predictably, some in the investment community were quick to rain on Levi’s parade. Reuters reports that a number of fund managers are skeptical about the prospects of a well-known, established brand like Levi’s growing enough to justify the share price. Apparently, a 14% increase in 2018 revenues has not persuaded them.
Still, Bergh recognizes Levi’s has a lot of work to do to hit its potential. Sales rose quickly last year, but still came in at $5.8 billion, below a $7.1 billion peak hit over two decades ago. And they remain well below the $10 billion mark Bergh has long aspired to. That’s a lofty goal; for comparison, Gap Inc’s (GPS)fast growing Old Navy is a currently an $8 billion brand.
“Ten billion dollars is my dream, but $7.1 [billion] is the next stop on the train,” he said, Bergh told Coins2Day in an interview at the New York Stock Exchange on Thursday.
Levi’s bread-and-butter business has long been men’s jeans. But the company is making big strides in women’s jeans and other apparel. Revenue in that category jumped 29% last year and now generates nearly a third of company revenues, compared to one-fifth when Bergh started. A few years ago, Bergh had an epiphany on an airplane, frustrated at how many women were boarding clad in yoga pants rather than denim. “We’ve lost our consumer and not listened to what is she telling us,” he recalls telling himself at the time.
So Levi’s worked with its mills to add softer, stretchier material, and in 2015, it relaunched its women’s business, which has now enjoyed 14 consecutive quarters of growth. Still, Levi’s is the No. 3 women’s jeans brand in the U.S., and Bergh says the category is one “we can own.” The company has made similarly big progress in tops, thanks to its batwing logo, which ranks up there with Coca-Cola and Ford among iconic American logos.
Down the line, Bergh says Levi’s will further build out its accessories business, which now generates 6% of revenue, with more items like backpacks, socks and underwear; one day that could even extend to shoes.
As for department stores, particularly those in the U.S., Levi’s has been reducing its exposure to them. In 2018, some 300 U.S. Department stores selling Levi’s products closed, pinching the company. As of now, 30% of Levi’s revenue comes from its own company-run stores and its web site, and Bergh thinks that could eventually hit 50% as it expands its own store footprint and builds up its digital business.
That’s not to say Levi’s is giving up on department stores: Bergh was quick to point out that chains like HBC’s (HBC) Lord & Taylor and Macy’s Inc’s (M)Bloomingdale’s chain were giving the brand more space for items priced $100 and up, an approach he says will lift the brand perception across the board, meaning it’ll also help sell less expensive stuff.
Another major plank for Levi’s is its international business: Bergh sees tons more overseas opportunities, particularly in markets like China. He’s betting on Levi’s all-American cachet to bolster the brand on the way to the $10 billion watermark.
“I’m sticking around,” Bergh said, “My job is not done.”