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How $200 jeans can help your bottom line
Designer jeans -- preferably with that torn-up look -- are hot again, fetching $200 and more at your favorite boutique. Here are 3 stocks that cash in on this pricey trend.
By Jon D. Markman
A code that unlocks the secrets to sex, status and society is currently tattooed on the rear end of a 22-year-old woman near you. Not on her actual skin, mind you. But on her jeans.
For at a time when wages are stagnating and the economy is softening, women have decided -- for reasons known only to the fashion gods and their inner voices -- that it is time to splurge on denim. And so behold! The new era of the $200 pair of jeans.
Not just any jeans, mind you, but pants that have been ripped with screwdrivers, sanded with abrasives, washed with acid or beaten by stones. The more destroyed the denim, the better. So long as it has a fashion-forward loop of thread on the back pocket that signifies a chic and expensive brand, it doesn't matter that the pants are on their last legs. The tush code says that you are in the club -- and unafraid to spend two bills to put in your two cents.
These jeans are on display everywhere you look, if you know where to look -- and now you do. Check out the sports bar near your office, college campuses or any mall where moneyed kids congregate. According to Vera Van Ert, apparel analyst at brokerage Wedbush Morgan, high-fashion denim is the new "black pant." She means that women, who love the way soft new styles of Italian denim thread fit their gym-honed curves, are making once-lowly jeans a staple of their wardrobe.
Ask one why she decided to spend $200 or more per pair, though, and you get kind of a faraway look. Is it that most are made in the United States, or have superior smoothness, or are cut specially to hide faults and accentuate the positive? Is it because some of the offerings are lovingly distressed -- even "destroyed," according to catalog descriptions -- by hand instead of by machine?
Few can say, leading one to conclude that the urge to sashay into an elite circle hemmed with money is the untold answer.
'They do fit really well'
I only tripped on the concept when I expressed shock that my 19-year-old niece had bought a pair of $175 jeans -- and was coolly informed that was nothing. Indeed, as I proceeded to research this story by scientifically asking women how much they paid for their jeans, the receptionist at my office copped to owning 20 pairs of jeans purchased for $150 to $300. Said a colleague at MSN Money: "After you've bought one pair at that price, the shock value kind of goes away. And they do fit really well."
As you might expect, I'm telling you this because there are several ways for those of us whose taste in jeans runs more to $35 Levi 501s to make some money off this mania. There are three public companies at the center of the action -- two of them tiny, Innovo Group (INNO, news, msgs) and True Religion Apparel (TRLG, news, msgs), and one medium-sized, Liz Claiborne (LIZ, news, msgs). And, after reporting good earnings in the past month, they all look like a good fit for traders with a taste for speculation.
Of course it's not just the women. For the first time since the early-'80s heyday of Calvin Klein, Jordache and Guess? jeans, young men, too, have been swept into a public display of high-dollar denim. At my local high-end menswear shop, jeans ranged up to $400, and salespeople said they're selling as easily as a sweater or jacket of the same quality and price. The impulse may come from an evolution-wired compulsion to follow the herd. In the pages of all the celebrity mags, like People and Us, young male and female stars alike these days are being snapped by the paparazzi wearing ripped-up $300 jeans from popular companies with new-age names like Citizens of Humanity and Seven for All Mankind
A three-year trend
For investors, the good news is that it turns out fashion trends tend to be relatively long-lasting. According to Van Ert, the recent premium denim cycle began last fall and should have a three-year tail, like most fashion cycles. The size of the opportunity is not immaterial. Women's Wear Daily reports that the denim market is $12.7 billion at wholesale in the United States; Van Ert estimates the premium segment is 4% of that, or about half a billion.
While that's chump change to Nike (NKE, news, msgs), whose revenues top $13 billion a year, it's a big niche for small companies with the brains, imagination and energy to develop popular brands and push them into department and specialty stores. At last count, True Religion claimed that 600 fashion boutique stores were selling its jeans in addition to more mainstream outlets like Bloomingdales, Nordstrom (JWN, news, msgs) and Barneys in the United States, and Harrod's in England.
True Religion is emblematic of how apparel trends can amply fill out the bottom line of small companies. In late July, the company -- which is currently listed on the Bulletin Board but will probably move to the Nasdaq later this year -- reported that net sales increased to $22 million in the second quarter of 2005, compared with $4.1 million in the same period in 2004. Net income increased to $4.2 million, up from the year-ago level of $470,000.
With relatively little overhead due to its low-cost Los Angeles manufacturing operation and slim design staff, the company is comfortably profitable.
True Religion Chief Executive Jeff Lubell -- who took the company public via the shell of a mining company -- again lifted guidance for 2005, projecting earnings of 71 to 74 cents per share on $92 to $95 million in sales.
Innovo Group, meanwhile, is the company behind popular high-end brands Joe's Jeans, Betsey Johnson and the mid-range brand Indie. It also makes private-label denim products for major retailers such as American Eagle Outfitters (AEOS, news, msgs), Target (TGT, news, msgs) and Kmart (KMRT, news, msgs). In July, it reported sales up 15% year over year and second-quarter net income of $423,000 , compared with a loss of $6 million a year earlier.
Prestige for the masses
The compulsion to squeeze into pricey jeans has gone global, as the India Express reports that both college kids and members of high society in that country are spending freely on denim this year. The publication quoted designer Tarun Tahiliani, who has blinged up her 6,000-rupee (about $137) jeans with subtle sari prints, as stating: ''Making jeans, for designers, is just an extension of what we call 'mass-tige' -- reaching the masses with the prestige of a designer label."
The larger U.S. companies involved in the trend receive a relatively small portion of their income from fashion denim, though it accounts for a key portion of growth. For Liz Claiborne, as an example, the leading high-end brand is a small line recently purchased called Juicy Couture. Ditto for the big department stores desperate for new hits, such as Nordstrom and Saks (SKS, news, msgs).
Even U2's Bono is getting into the act, announcing this spring that he would launch a new clothing line called Edun with wife Ali Hewson. For your $168, you get a dose of social consciousness along with your rock-star chic: The jeans are made in family-run factories in South America and Africa under fair-labor practices (and come complete with Rainer Maria Rilke poems embroidered inside the pockets).
Perhaps this is all appropriate for a style of clothing that started as a staple for gold prospectors in the West in the 1870s. And it may be cause for elation among bulls. For as long as there's enough disposable income sloshing around to allow people to pay $200 or 6,000 rupees for a pair of jeans, the economy must be in, ah, pretty good shape.
Fine print
High-end denim really got started with actress Brooke Shields' once-controversial 1980 ads for Calvin Klein jeans, which carried the famous tagline, "Nothing comes between me and my Calvins." As you might expect, someone with too much time on their hands has compiled a historical record of all Calvin Klein jeans ads. . . . To buy your True Religion jeans online, visit RevolveClothing.com at this page. . . . On this page, you can see what a $285 pair of True Religion jeans looks like up close. . . . On this page, you can check out the $158 Citizens of Humanity jean at Revolve. . . . For Seven for All Mankind jeans you can check out this page at eluxury.com. Check out the "A" or curve design on the back pockets, for that's how you're supposed to tell that the person standing next to you has spent up to keep up. . . . Here are Juicy Couture jeans at Amazon.com.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held no positions in stocks mentioned in this column.
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