Retail bankruptcies ‘tip of the iceberg’, says Levi Strauss boss

A spate of bankruptcies in retail is the “tip of the iceberg”, Levi Strauss’s chief executive has warned, as the fashion company seeks to capitalise on industry turmoil that is bringing about years of change within a few months.

Speaking days after two of Levi’s competitors in denim, Lucky Brand and the US arm of G-Star Raw, filed for Chapter 11 protection, Chip Bergh said “the list [of recent failures] is already pretty long and I expect it’s going to get longer”.

“What’s happened from a health and economic impact obviously is devastating. But our whole attitude on this has been, crisis creates an opportunity,” he added.

Levi has had big difficulties of its own during the pandemic. Its second quarter was the weakest in at least two decades, with net revenues 62 per cent lower than the same period last year.

While the company’s balance sheet is in better shape than distressed peers, with $1.5bn in cash, Wall Street needs to be convinced it will emerge as a winner from the crisis. Shares in the 501 jeans maker have lost 27 per cent since they listed on the New York Stock Exchange last year.

Column chart of Quarterly net revenues ($bn) showing Levi sales hit hard by pandemic

“There is a case to say that in a stronger market, with fewer competitors, Levi could do well, but the market share will not transfer automatically,” said Neil Saunders, retail managing director at the GlobalData consultancy.

Levi is far from alone in trying to make the most of the upheaval. Jay Schottenstein, American Eagle Outfitters’ executive chairman, said recently that the company was planning “some very aggressive campaigns” to capture a greater share of the fragmented denim business.

A resurgence of coronavirus in the US is threatening to further upset the sector. The vast majority of Levi’s near-1,000 company-operated stores are open, yet Mr Bergh said it was “almost a certainty” the company would close some outlets again in the hardest-hit areas if cases continued to surge.

“What makes this so difficult is you don’t know what’s around the next corner,” he added. “So much of this is beyond our control — how long or whether there’s a second wave, when a vaccine is going to come.”

The 62-year-old is nevertheless having to make big calls about the future. Retailers and clothing brands have to order stock months in advance, meaning they have to try to predict demand for the Christmas holiday shopping season about now.

Mr Bergh said he would prefer to have too little merchandise than be stuck with unsold goods. “I’d rather have a little bit of shortage and maintain our premium positioning. Marking a pair of Levi’s down to $14 to sell it at [discount chains] Ross or TJ Maxx is just not good branding.”

He recognised the conservative approach risked losing sales. “We may leave money on the table. But if demand turns out to be stronger than we forecast, we’ll do our very best to chase into it.”

“Our business is not as seasonal as many apparel brands,” he added.

Although the boom in working from home has spurred demand for casualwear, jeans have not proved as popular as sweatpants in lockdown. Denim has declined sharply in line with the broader apparel category, and US clothing store sales fell 23 per cent in June from the level last year.

“Not as many people wear denim around the house,” Mr Sanders said. “It’s a fashionable fabric, but it doesn’t give very well. It’s quite rigid.”

Mr Bergh has sought to reshape that perception in his nine-year tenure, revamping Levi’s line-up with softer and stretchier options. “Denim’s pretty darn comfortable,” he said.

He said that while the forced closure of Levi outlets and the third parties through which it generated about 56 per cent of net sales last year had hit the company, ecommerce sales in the second quarter has risen a quarter from a year earlier.

Rivals’ bankruptcies, he said, had been caused largely by too much debt — not an underlying lack of customer demand for jeans.

“It’s payback for highly levered companies,” he said, adding he saw a particular opportunity in the women’s business. “Most of the women’s speciality denim brands are relatively small and may not have the financial wherewithal to make it through this.”

Chip Bergh: ‘So much of this is beyond our control — how long or whether there’s a second wave, when a vaccine is going to come’ © AP

Levi has long been expanding beyond men’s jeans, including into tops and accessories, yet it has recently made an unexpected diversification: face masks, styled on its bandanna.

“Our initial focus was to make masks for our employees, but we realised there was a business opportunity here. So we’re in the mask business,” said Mr Bergh, adding that Levi’s coverings were the best selling on Amazon.

Levi is bringing further changes to its fashion line-up, including looser styles for the autumn, although it was planning this before the pandemic. “Looser cuts and fits are what’s trending right now — the classic 80s, 90s type of look.” The San Francisco company, which has long positioned itself as a champion of sustainability, is also planning to roll out “cottonised” hemp, an alternative to cotton.

“The days of fast fashion are gone,” Mr Bergh said. “We were already seeing it with Gen-Z, but [the trend] is going to go mainstream.”

Mr Bergh said Levi’s value brands, Signature and Denizen, would help protect the company if consumers reined in spending, although he said people were still paying for quality. “We took a 3 per cent price increase in the US in January, and it’s been passed through.”

Levi itself is keeping a tight rein on expenses. The company said this month it would cut about 700 corporate jobs to save $100m per year. Along with other retailers, The company has also sought rental relief from landlords.

“Most are understanding of the situation, and are inclined to provide some relief, but the degree varies.” As stores reopen from shutdown, he is calling for property owners to be less rigid with lease terms and link rents to tenants’ financial performance.

“What’s not clear yet is the wider commercial real estate fallout” of the pandemic he added. “That impact still has not been completely digested by the market.”

About 70 per cent of recent visitors to Levi.com had not visited the site before, he noted. “I think you’re going to see consumers be very cautious to go back to [physical] stores.”

“What would have happened over five to ten years has been compressed into six months.”