A strong denim industry is good news for a Levi's IPO — if China or volatile markets don't spoil it
- CNBC reports in November that Levi Strauss & Co. is planning to go public in the first quarter of 2019.
- Analysts are optimistic about the future of denim, with sales growing faster than the overall apparel industry.
- Trade tensions with China, the IPO of rival VF Corp's denim spinoff and a volatile stock market could mean it raises less capital through a potential IPO than it reportedly wants.
Analysts are feeling optimistic about the denim industry. That's good news for Levi Strauss & Co. if the company goes through with an IPO in 2019.
In November, CNBC reported that Levi Strauss was planning to go public in the first quarter of 2019, aiming for a valuation upward of $5 billion. Levi's Japanese subsidiary is already publicly traded on the Tokyo Stock Exchange.
The company declined to comment for this story.
Denim sales have been outpacing the overall apparel industry. Research from The NPD Group has apparel growing 1 percent, while the denim industry is growing 5 percent.
Levi Strauss reported revenue of $1.39 billion for the quarter ending Aug. 26, up 10 percent from the previous year. The San Francisco-based company reports quarterly earnings because its debt is publicly listed.
Consumers were substituting their jeans for yoga pants and leggings, but it looks like fashion could be swinging back in favor of denim.
"I think that the outlook for jeans is positive," UBS analyst Jay Sole told CNBC. "Athleisure — performance apparel — that trend has changed a lot."
Nostalgia and streetwear have brought back styles from the 1980s and 1990s, benefiting iconic brands like Levi's. Analysts think a new style is on the horizon to unseat skinny jeans, the last big denim trend.
"It is an opportune time [for a Levi's IPO] if there is a denim cycle coming back," Macquarie Capital analyst Laurent Vasilescu said.
If not, shoppers will still be waiting two or three years to buy a new pair of jeans, instead of only one, like before athleisure dominated.
Levi's won't be the only new stock for investors looking to try on jeans this year. VF Corp, which owns rival denim brands Lee and Wrangler, announced in August that it would be spinning off its jeans brands into a separate public company called Kontoor Brands. The move will allow the company to focus on growing its other brands, such as Vans and The North Face.
VF Corp had been aiming to complete the spinoff in March. It filed the paperwork with the Securities and Exchange Commission in mid-December, but CFO Scott Roe told analysts on an earnings conference call in January that the partial federal government shutdown could delay Kontoor's market debut.
A volatile stock market could also mean that Levi's lands short of the $600 million to $800 million that it reportedly wants to raise through the IPO. Despite a resurgence in its Calvin Klein and Tommy Hilfiger brands, PVH Corp, which has a market value of $8.3 billion, is down 26 percent over the last 52 weeks. While VF Corp's stock, with a market value of $36.2 billion, is faring better thanks to its non-denim brands, shares are up only 3 percent in the last year.
Another factor with the potential to scare away investors is macroeconomic conditions. President Donald Trump and Chinese leader Xi Jinping signed a 90-day trade truce but still have not come to an agreement about what happens after March 1. That means that Trump could still levy tariffs on Chinese imports — including apparel. Any apparel tariffs could spell trouble for the industry's stocks.
"We're a big believer in free trade. We think that we've benefited, the U.S. consumer has benefited from free trade. But we've got lots of flexibility and lots of options if something does happen with China," Levi's CEO Chip Bergh told CNBC's "Squawk Box" in April, adding that the percentage of the company's product that is imported from China is in the single digits.