5 Companies Fighting for Denim Dominance


It's tempting to describe the battle for high-end denim superiority in terms of 1980s hockey fans, stonewashed blue from head to toe, swinging at each other outside the local rink. Actually, it's so tempting that we're going to run with it. Cars are overturned in the lot, unpredictable Joe's Jeans is taking half a hockey stick to an empty newspaper dispenser, while quiet stalwart Buckle (NYS: BKE) sits outside the violence, waiting for the cops to roll in. It's not always pretty, but if investors can dodge the flying Molson bottles, there are some great investments to be found in the wreckage.

The lay of the land
During the early part of the 2000s, denim got a bad rap. The '80s and '90s were wall-to-wall with acid and stonewashed jeans. The rapid growth of Gap (NYS: GPS) and its signature khaki trousers helped put the nail in denim's coffin. From 2000 to 2005, Gap revenue continued to increase as the world was blanketed in trousers. Lee and Levi's filled in the market with functional, if not fantastic, denim.

Then suddenly, things started to turn around for jeans. From 2005 to 2010 Gap's revenue actually fell, dropping 8% to $14.7 billion. Over the same time period, Buckle's revenue increased 90%. Now Gap features its 1969 jeans prominently on its website and in stores. Denim has risen from the ashes of fashion and is once more at the fore.

The old guard
Buckle first opened its doors back in 1948 in Nebraska. Since then, it has grown to a network of over 400 stores in 41 states. Last year, the company increased revenue 12%, same-store-sales 8%, and net income by 12%. For all this growth, the stock price has languished over the year, falling 2% since the beginning of 2012. It now trades at just 11 times forward earnings.

Guess? (NYS: GES) is in a similar boat. Last year the fashion line grew revenue 8% to $2.7 billion. The brand is working its way free of its old image, and it's now embracing a wider range of accessories and clothes. In addition to growing it's offerings, Guess? has made significant investment in international growth. The company opened 224 stores outside of the U.S. in fiscal 2012, increasing its international footprint by 27%. Last year, revenue from Asia grew 25% and accounted for 9% of total company revenue.

While Buckle and Guess? sit back in their Gretzky jerseys , True Religion (NAS: TRLG) and Joe's Jeans are jumping on top of cars and swinging at everything that moves. So far, True Religion seems to be making more contact, but Joe's is certainly giving its all.

The new school
If you haven't heard of Joe's, that's not a huge surprise. The company has just over 20 physical stores in the U.S., selling most of its goods through other retailers. Last quarter, 80% of the company's revenue came through its wholesale division. However, the company is also expanding retail division. Gross margins at retail outlets are incredibly high, having just passed the 70% mark earlier this year.

True Religion has a substantially larger footprint, and has increased its store count over the last year to 109. Its direct-to-consumer margin is similar to Joe's, and came in at 70% last quarter. The main distinction between the two is the nature of the business. Joe's has focused on wholesale operations, and is just now starting a meaningful retail program of its own. True Religion has a more established retail base, and is now able to focus on expansion and really solidifying its international business.

The bottom line
I like the slow-and-steady growth of Buckle and the rock-solid base that True Religion has in place. Along with its long history of growth, Buckle also has a great selection of leaders on its board and in management positions. Its CEO joined the company over 40 years ago as a part-time salesman, and has risen through the ranks.

While Joe's is tempting, due mainly to its low price, it's not stable enough for me -- yet. If I were a more risk-hungry investor, I think it would be an excellent play. I like its retail growth, and I think that the strong wholesale business gives it a great pipeline of cash to fund expansion in the future. But my personal preference for established stability puts me in the True Religion camp for now.

Guess? is last on my list, though I like its branding more than any of the other companies. I also love the fact that it's really digging into the international market. I think that there is a huge space for these sorts of luxury goods overseas, and first movers are going to have an excellent advantage. But international expansion isn't the end-all, be-all of business growth. The Fool has a detailed report explaining which companies are going to profit when the future is made in America. It's a free report, available for a limited time, so get your copy today.

The article 5 Companies Fighting for Denim Dominance originally appeared on Fool.com.

Fool contributor Andrew Marder does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Buckle and Guess?. Motley Fool newsletter services have recommended buying shares of Buckle and Guess?. Motley Fool newsletter services have recommended writing covered calls on Guess?. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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