SIMON BROWN: I’m chatting now with Keith McLachlan, an investment officer at Integral Asset Management. Keith, I appreciate the early morning time to talk about your offshore portfolio, rather than the local one. A stock that you’ve been putting into that portfolio is Levi Strauss & Co. There are lots of angles on it. The first part, I suppose, frankly, is less formal wear. It’s not just that we’ve been stuck at home, it’s that we’re probably going to be wearing more jeans going forward, and it’s a really astounding stat that you’ve found: a third of Americans have changed their waist size during the pandemic.
KEITH McLACHLAN: Absolutely. Good morning, Simon and your listeners. Yes, a third of America has changed a waist size either up or down. That’s not discrimination, but what that does is create a wardrobe opportunity, just a shifting to the casualisation of the workplace and arguably the world in many senses. This actually goes back even further. If you remember many, many years ago you and I used to wear suits and ties to work, and then ties became optional. So it was just suits. And then slowly casual Fridays crept in. And now we have ‘smart casual’ in the casualisation of the workplace.
In fact, what’s happened with the pandemic is that it has accelerated that, because all one has to do is look smart from the waist up on a Zoom meeting. So what’s really driving us is that generations are changing.
There are millennials entering the workforce. They prioritise work-life balance. A key element of that is really the casualisation of work attire.
Now something like sweatpants – wearing them to work is still frowned on. This is a very nice niche played by jeans in terms of smart casual, but it’s even broader than that. Levi senses that’s only one element of a multi-pronged tailwind that’s potentially driving its growth for many years to come.
SIMON BROWN: Levi Strauss – it’s not like it’s been bankrupt or anything. It is a strong global brand, it has been growing the business. It is well-positioned in a sense. You almost make the case that it could be the next Nike, in terms of going omnichannel, in terms of starting to dominate a brand. I remember the whole idea that Lululemon (Athletica) could come in and take on Nike. It has a bit, but it was in the same category. This could be the casual-wear Nike equivalent.
KEITH McLACHLAN: Yes, Simon. You stole a lot of my thunder there, but Levi is really the model perfected by Nike in the athleisure space. It is using it in the casual wear space. Let me throw some stats out there because at the core Levi’s model is to grow the number of products, grow the geographies and grow the channels – particularly direct to the consumer, which is higher margin than wholesale and includes a strong e-commerce element.
But I’ll throw some stats out there. First of all, only a third of its products are sold to women. So if you can increase the female products, you increase the revenue. For the world’s number-one denim brand – understand, companies spend billions to get their brands recognised globally – Levi doesn’t need to do that. It is recognised globally. But over half of its revenue is generated in America, so there’s an entire global market just waiting for it to grow into.
At the same time, in terms of growing its channels and geographies, it has the ability to grow its product range with its brand. What I mean by that is over three-quarters of its products are still bottoms i.e. jeans. So there’s no reason one can’t grow tops, one can’t grow into different and related categories – and all of these at a 55% GP (gross profit) margin that is steadily rising as they grow the direct-to-consumer.
And what one gets is a very attractive pipeline of growth that is pretty low risk in my opinion, particularly as this casual-wear trend, the casualisation of the world and workplace, happens.
And off the back of, like I said, being the number-one denim brand in the world, and using an ungeared balance sheet to grow all of this on top of that. So it’s very attractive.
Perhaps the final thing to touch on is that Nike has done this in the athleisure space. [Nike is an] absolutely superb, mind-blowing company. It’s sitting on a 40 times forward multiple. Levi’s is sitting on a 20 times forward multiple and is 11 times smaller than Nike.
So it’s not just cheaper and playing in a different space, but I would argue more people on planet earth wear jeans than go for jogs in their spare time. So I think this is an even larger addressable market, perhaps than the one that Nike is going for.
SIMON BROWN: And the man sitting here [is] in jeans hasn’t jogged in his life. But I take your point. Nike used to just be shoes. Now Nike is in all those other components as well – shirts and bottoms and everything else. That’s the opportunity for Levi’s. And even if it only get it half right, and can push those volumes, it could get those margins even further and take what is a decent valuation and perhaps stretch it and give you two levers of upside.
KEITH McLACHLAN: Absolutely. This is not a demanding valuation at all and over a period in time where it has had a large number of their stores closed. Don’t forget, on the back of all of this Levi’s has been forced to accelerate their digitalisation and e-commerce strategies – which is actually a good thing, because in the long term those are the channels where you are growing your brand direct to consumer, and as you’re growing your brand direct to the consumer it’s giving you the ability to interact with the consumers and to grow the number of products that you offer them.
[Levi’s] has a pipeline from shoes to tops. And, don’t forget, in parallel, because the majority at this point is bottoms, sold in America, to men. So we’re talking male jeans in America, basically. The opportunity is, even if you just get the female categories right, you can double the size of the business, and then layer on the top of that multiple different products and multiple different geographies and what you really have is a 55 times gross profit margin on an ungeared balance sheet. You just have a huge amount of bottom-line coming down over probably the next five to 10 years.
SIMON BROWN: That’s Keith McLachlan, investment officer at Integral Asset Management. Is Levi Strauss the next Nike? We’ll see in time. But there certainly is a compelling story.
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