Levi Strauss(NYSE: LEVI) is an iconic fashion name, but not because of its high style. The company sells what is perhaps one of the most basic of basics: jeans. But management is pinning its future growth on what it calls the "denim apparel lifestyle business." That's a major shift in approach that should have investors concerned, particularly if you compare Levi Strauss to VF Corp(NYSE: VFC) and its own experiences.
What went wrong at VF Corp
At one point, VF Corp was one of Levi's biggest competitors, given that it owned jeans brands like Wrangler. However, the company made the decision to jettison its basics, including jeans, by spinning off Kontoor Brands(NYSE: KTB). It was a massive shift in direction for VF Corp, which was left with a collection of fashion brands, including Vans, The North Face, and Timberland, among others.
Image source: Getty Images.
Essentially, VF Corp went from a company with a boring stable of staple brands and a growing fashion portfolio layered on top to a company entirely reliant on fashion brands. To be fair, Wall Street tends to push companies to jettison stable but slow-growing businesses when they are paired with higher-growth businesses. The idea is to allow the slower business to focus its efforts on growth while freeing the growth-oriented business to be fully valued by investors.
But things don't always work out as well as planned. In the case of VF Corp, struggles in a number of its fashion brands forced the company to cut its dividend after decades of annual increases. The stock, meanwhile, has badly underperformed Kontoor Brands which, by the way, has managed to increase its dividend.
The big issue here is that basics are things that sell OK just about all the time. Fashion brands go in and out of favor, with hot sales in some periods and weak sales in others. Simply put, VF Corp went from a fairly stable company to one with material fashion trend-related risk. It didn't work out well for investors when those fashion risks came to the fore.
Levi's is getting more fashion-oriented
Levi Strauss shareholders should step back and consider VF Corp's reversal of fortune.
While Levi's is known for its jeans, and that's unlikely to change, it is leaning increasingly on fashion trends. For starters, it is shifting more toward a direct-to-consumer model, which means its own stores will have a larger effect on its financial performance. This is not a small change, with the goal to get direct-to-consumer sales up to 55% of the company's total sales, up from about a third of sales today.
A key part of that is the company's increasing focus on what management calls the "denim apparel lifestyle business." What does that mean? Levi Strauss stores aren't just selling jeans, they are selling fashion around a jeans-oriented culture. That's great as long as jeans are in fashion. But if jeans fall out of style for any reason, the denim apparel lifestyle business could be a hard sell with customers.
Even shifting back toward a basics approach probably wouldn't be all that helpful if the company's direct-to-consumer business grows to 55% of the total. Indeed, if the denim lifestyle is out of favor, people will probably avoid the Levi's store, given that it's basically a denim-focused retailer.
And that doesn't even take into consideration the increasing risk the company faces of making a simple fashion misstep (like ordering pink tops when the "in" color turns out to be green) that might force it to mark down products just to move them.
To be fair, Levi's isn't following the exact same business path as VF Corp. But directionally, it is going the same way as it increases its reliance on fashion trends. That said, given the sole focus on jeans and denim life, there could actually be more risk in what Levi's is doing, given that VF Corp at least has multiple different brands in its portfolio.
Be careful what you wish for
Investors often get caught up in growth stories, ignoring the old proverb about the tortoise beating the hare. When it comes to riding fashion trends, being a hare is very difficult while being a tortoise is boring, but at least it's a lot more predictable. Trying to run like a hare turned out to be a bad decision for VF Corp, and Levi Strauss investors should see that as a warning as this iconic jeans company looks to increase its focus on fashion, too.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Kontoor Brands. The Motley Fool has a disclosure policy.
