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Levi’s vs. Wrangler’s

Both Levi Strauss & Co. and Kontoor Brands began trading this spring, so I thought it would be interesting to compare both companies, to see if the casual clothing segment is worthy of investment and whether one company has an edge over the other.

Right off the bat, this is a low-energy industry. The P/S (Price to Sales ratio) of the S&P 500 is right around 2, while the P/S of LEVI is 1.5 and .76 for KTB. It is also a labor-intensive industry. LEVI has 15,100 employees that generated $5,575,440,000 in revenue, last year. That’s just $369k per employee. KTB is even lower, with 17,000 employees responsible for its $2,763,998,000 in revenue, for just $163k per employee.


Revenue

Levi StraussKontoor Brands
2018$5,575,440(+14%)$2,763,998(-2%)
2017$4,904,030(+8%)$2,830,106(-3%)
2016$4,552,739$2,926,464

When you look at the annual revenue figures reported by both companies, it is easy to see why LEVI is enjoying a higher multiple than KTB. LEVI grew revenue 8% in 2017 and 14% in 2018, while KTB revenues shrunk each year. This does not mean that KTB isn’t a good investment – spinoffs tend to outperform the stock market, so KTB might catch LEVI's 1.5 P/S multiple if they can demonstrate sales-growth.

Cost of Revenue

Levi StraussKontoor Brands
2018$2,577,465(+10%)$1,638,135(-1%)
2017$2,341,301(+5%)$1,655,144(-2%)
2016$2,223,727$1,692,819

LEVI is growing costs at a lower rate than they are growing sales, which is a good sign. KTB’s costs are roughly in line with sales, so one thing worth watching is whether KTB can turn their sales around without exploding the budget.

SG&A

Levi StraussKontoor Brands
2018$2,460,915(+17%)$772,136(-4%)
2017$2,095,560(+13%)$807,303(1%)
2016$1,859,310$803,013

SG&A growth for LEVI does not paint a pretty picture. 14% sales-growth in casual apparel is impressive, but not when it costs 17% growth in SG&A, which was a whopping 44% of the entire year’s revenue. It’s not just a one-time thing, either. SG&A grew double digits from 2016 to 2017, when revenue only grew 8%. By comparison, KTB’s SG&A numbers are sitting at a much more respectable 28% of revenue and have declined 4% between 2017 and 2018. Prior to 2018, KTB has held their SG&A at 29% of sales, so they definitely demonstrate fiscal discipline and a good financial model. Can they grow sales?

Operating Income & Margin

Levi StraussMarginKontoor BrandsMargin
2018$537,0609.6%$353,72712.8%
2017$467,1699.5%$367,65913.0%
2016$469,70210.3%$430,63214.7%

KTB's fiscal discipline shows up on the bottom line, where they are banking about 13 cents out of every dollar in sales. If they could grow sales 4-5% while maintaining that 13% margin, I would be pretty impressed with the management team. LEVI on the other hand, seems satisfied with their growth, at the expense of profits. I believe that this is evidence of too much growth. Maybe in casual apparel you can't grow at 8-10% a year without spending money faster than you're bringing it in - I don't know the business. I suspect LEVI and KTB know it really well, though, and they are on two distinctly different paths.

-- Scrib