Two denim stock launches this year suggest there's a hot style trend developing, but investors may want to watch out for a fashion faux pas instead. There are clear differences between Levi Strauss (NYSE: LEVI) and Kontoor Brands (NYSE: KTB), the owner of Wrangler and Lee jeans. And if new tariffs on goods flowing out of Mexico put the entire industry in turmoil, investors should tread carefully before jumping in.
Levi was first to market with a successful IPO in March. It priced its shares at $17, above the expected $14 to $16 range, and watched them open at $22 each. While the shares went as high as $24.50 in the weeks after their debut, they're trading now at around $20 a share.
Kontoor Brands' launch was decidedly less auspicious. Shares opened at just under $40 following its separation from VF (NYSE: VFC), but have fallen sharply and now trade at $29.
Image source: Getty Images.
The athleisure challenge
Although some analysts see the potential for denim sales to soar in the coming years, the fact remains the rugged attire has been under considerable pressure as the likes of lululemon athletica and others popularized athleisure clothing. Global jean sales rose only 3.5% annually over the last decade, slower than all other apparel, and Euromonitor International sees them getting weaker, to just 1% compound annual growth between 2018 and 2023.
Leggings and active bottoms are a $1 billion industry all by themselves, but the entire athleisure segment is seen hitting $355 billion in sales by next year. Some researchers expect the global denim jean market to hit $85 billion in the U.S. by 2025.
Looking for opportunities to grow
Yet while denim sales have been relatively lackluster, that hasn't necessarily been the case for Levis Strauss, which saw sales jump 13.7% last year to almost $5.6 billion. Sales were up over 25% in Europe, 10% in the Americas, and 8% in Asia.
Its men's jeans are the market share leader in the U.S., France, Mexico, and the U.K., and the third largest in Germany. It intends to expand further by opening new stores, improving upon its wholesale relationships, and building out online sales. It believes China represents a particularly big opportunity as the country accounts for 20% of the global apparel market, but only 3% of its own sales.
Kontoor Brands is a different story. It was spun off from VF because Wrangler and Lee sales slowed and it wanted to push its other apparel brands, which include North Face, Timberland, and Vans sneakers. Revenue fell 3.3% last year as Lee slid 6% and Wrangler was down 1% from 2017, hurt by the decline and eventual bankruptcy of Sears.
The denim giant sees numerous opportunities to expand as its rival does, though it views women as a key target since they currently only represent 15% of sales. It might also branch out into other types of clothing beyond denim, with CNN quoting CEO Scott Baxter as saying that's the reason the Kontoor name was chosen:
As we grow, we want to be more than just a denim company. We want to be an apparel company. So if we make an acquisition that's not in denim, we're not tied to that with a Lee or Wrangler name.
Harsh trade winds blowing
The wild card for both companies is the 5% tariff President Trump plans to impose on Mexican imports beginning June 10. Mexico is the largest supplier of men's and boys' jeans, representing about 35% of the total.
That could fall a little harder on Levi Strauss than Kontoor. About 15% to 20% of the products Levi's sells in the U.S. are made in China and Mexico, but much of Levi's wholesale growth last year was due to strong sales in Mexico. Kontoor isn't out of the woods, though, as 10 of its 13 factories are in Mexico, and 40% of the raw materials and finished products come from there.
Altogether, the denim market isn't so robust, though some analysts believe consumer preferences may switch back from athleisure to denim. If so, it would seem that Levi Strauss' dominant global market position would make it the preferential investment, though it may feel the effects of the expanding trade war a little more harshly than Kontoor Brands.
As a result, if you were going to invest in one denim player over another, go with Levi Strauss -- though overall, it seems to be a threadbare play.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- 20 of the Top Stocks to Buy (Including the Two Every Investor Should Own)
- What Is an ETF?
- 5 Recession-Proof Stocks
- How to Beat the Market