Levi's stock has jumped in trading on Wednesday, trending toward its highest level since late March IPO.
The trends noted by the company are encouraging to VF Corp. which filed a Form 10 document with the SEC on April 1 to spin off key denim brands Lee, Rock & Republic, and Wrangler into a new company called Kontoor Brands that will trade under the symbol KTB.
"Our teams across VF have made tremendous progress to prepare for the successful separation of Kontoor Brands from VF and this filing is a significant next step in this process," said Steve Rendle, Chairman, President and CEO of VF Corp. "We are highly confident that the separation is the best path forward for both organizations to achieve even greater potential and enhance long-term shareholder value."
The spinoff is scheduled to become effective in May if approved by VF's board.
"Today's filing marks an important milestone in the process of establishing Kontoor Brands as an independent company," said Scott Baxter, the newly named CEO of Kontoor Brands, upon the filing's submission. "As we prepare for life as a separate, publicly traded organization, I am confident that Kontoor Brands is strongly positioned to thrive as a leader in the global apparel industry and deliver long-term value for all of our stakeholders."
While the name might leave something to be desired as it obscures the iconic brands owned by the company, the road map ahead in terms of denim demand trends appears to be highly constructive.
To be sure, the first question for many investors would be whether the success of Levi's could cost Wrangler and Lee sales from the same customers. However, the macro data from market researchers indicates that there may be a big enough pie for each retailer to succeed.
According to Zion Market Research, the global denim jeans market in the U.S. is set to grow from $66 billion in 2018 to over $85 billion in 2025.
The trends abroad could even be more encouraging as many Asian nations warm up to denim wear and more expensive denim fashion becomes available to emerging middle classes across the continent. The trend is particularly noticeable among female consumers that appear to be following the fashion trends set in Western nations.
The inventory numbers charted by The EDITED, a retail technology company, reveal that retailers are hurrying to keep up with the demand.
"Denim is growing. There is 42% more product in stock so far this quarter than there was this time last year," the company's retail analyst Katie Smith said.
While her report shows that leggings are gaining steam and threaten the models of growth for the industry, it notes that coexistence is possible.
"Jeans are a huge category, double the size of leggings and still bigger than categories like blouses and coats," Smith said. "Of course leggings are still gaining - the apparel market is huge, consumers latch onto things at different paces and our lifestyles are more active. But what this shows is that doesn't have to come at the cost of jeans."
While the macro environment is encouraging, there may be issues at the Kontoor entity that separate it from the results reviewed by Levi's on Tuesday evening.
"There's some inventory given Sears bankruptcy, that's a little elevated, we're working to get that down or I should say the Kontoor team is working to get that down and they'll make progress on that by the end of the year," VF Corp. CFO Scott Roe said in January.
"Important to note on the supply chain, as you think about optimizing the supply chain for Kontoor going forward, we have historically had commingled products, we're moving products into Kontoor-only plants or vise versa and when you make those moves you have short-term disruptions which increase costs, your efficiencies go down, but that short-term and that's episodic, that has a beginning and an end," Roe added.
In short, while the jeans market may offer a great deal of opportunity for the newly formed retailer, it might take some time for the entity to fully capitalize on it.
As was the case with Levi's IPO, it may be prudent to wait for data points before investing.