Two years ago, the premium denim market was booming. Then the recession hit and must-have $400 jeans became conspicuous consumption virtually overnight. Two months into 2010, the economy is slowly pulling itself out of the gutter, leading me to wonder what's in store for the denim business.
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Consolidation Must Happen
The denim business is overly fragmented. Several thousand companies compete for global sales. But the denim market, while lucrative, is extremely crowded and something has to give. Not all of its tiny niche businesses will be able to survive indefinitely, especially if brand powerhouses like LVMH decide to up the ante and start buying brands like True Religion (Nasdaq:TRLG) and Paige Premium. It's only a matter of time before the consolidation begins in earnest.
Private Equity Circling
Former Jones Apparel Group (NYSE:JNY) CEO Peter Boneparth joined private equity firm Irving Place Capital in 2009. His job was to find investment opportunities in the apparel business. On February 4, he found one, partnering with Creative Artists Agency and Star Avenue Capital. The group, headed by former Fenway Partners executive Mark Genender, bought 60% of J Brand, a Los Angeles-based premium denim company, for $85 million. According to J Brand founder Jeff Rudes, the company's sales increased 30% in 2009 to $50 million. This would give J Brand a $142 million valuation, or 2.8 times sales. Let's look at how this compares with some of the publicly traded denim companies.
Top 4 Denim Brands
|7 For All Mankind - VF (NYSE:VFC)||$8.2B||0.96|
|Lucky Brand - Liz Claiborne (NYSE:LIZ)||$550M||0.17|
|True Religion (Nasdaq:TRLG)||$485M||1.45|
|Joe\'s Jeans (Nasdaq:JOEZ)||$123.9M||1.28|
The best comparison in terms of size to J Brand is Joe's Jeans, whose 2009 sales grew 15.8% to $80.1 million. More impressive is the company's fourth-quarter increase of 42%. Joe's is growing and its recent signing of nine leases with the Premium Outlets division of Simon Property Group (NYSE:SPG) is proof there's more to come. If one were to apply the same multiple to Joe's that Star Avenue Capital applied to its purchase of J Brand, you'd have a market cap of $224 million - approximately $100 million greater than its current valuation. If you're into micro caps, this is worth serious consideration. Applying the same principle to True Religion, you get a share value of approximately $37, a 90% increase from its current value. These are the two stocks to look at if you're interested in a denim investment. If you want a larger cap with less risk, VF is the call. Lastly, if you're a speculator, Liz Claiborne is an interesting selection. I'd like to see Lucky Brand sold to someone who cares about the jean business. There's still value in the brand and if CEO Bill McComb were smart, he'd unload it now while people still care.
Because the industry is so fragmented, there are few publicly traded opportunities. That will change with oncoming consolidation. Keep your eye on the changing landscape - there's money in those jeans! (To learn more, see Analyzing Retail Stocks.)
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