My Blue Corduroy Levi's
I got my first pair of Levi's in the sixth grade. Light blue corduroys. I don't know why I chose light blue corduroys. The point was, they were Levi's. At that time, 1976, a young man could only wear Levi's. Yes, it's true, most boys chose jeans. But if you wore Wrangler or Lee, you would be made fun of. Toughskins might've gotten you beat up.
Girls could branch out and wear Chic jeans. And I vaguely recall the "YSL" logo of Yves Saint Laurent. Not the guys — to be cool, it was only Levi's.
I think my light blue corduroy Levi's cost $35. My mom was horrified that pants could cost so much. I only got one pair, but I got my money's worth... I'm sure I wore them at least four school days a week.
Today, I'm wearing a pair of Levi's jeans. They cost $55 a pair at Macy's, 57% more than when I was 12. I can't recall anything that hasn't quadrupled in price in 40 years. In 1976, a gallon of gasoline was probably $0.28. And I'm pretty sure a candy bar was $0.15. Today, it's more like $0.75.
You can blame inflation if you want, but that's not really the point. My dad wasn't making any more than $20K a year as a history professor in 1976. Prices and salaries tend to move roughly in tandem. Except for Levi's and other clothes. They've barely budged in price over the last four decades. Maybe you remember when Levi's offshored its production — in 2002, it had just two U.S.-based plants left.
My grandparents lived in Columbia, South Carolina. Our biannual visits took us through textile country in the Carolinas. It was a solid eight-hour drive from Richmond, the worst being the traditional stop at the Cannon towel outlet. I guess they were good towels. I know that's all we ever had in the house. But those stops were brutal. Some California billionaire bought Cannon in 1982, split the company up, and sold the bath and bedding division to another company, Fieldcrest, for $250 million.
Fifteen years later, in 1997, Pillowtex bought Fieldcrest-Cannon for $700 million. At that time, Pillowtex was a big supplier to Wal-Mart. Now, Wal-Mart has always been famous for squeezing its suppliers' profit margins in exchange for massive purchase contracts. And Wal-Mart reportedly told Pillowtex to move production overseas in order to cut costs. Pillowtex refused, lost the Wal-Mart contract, and entered Chapter 11 in 2000, just three years later.
It's funny, I hear a lot of people complain about companies moving their production overseas. But I don't hear too many people complaining about the money they save from cheap prices at Wal-Mart. Or the price they pay for a pair of Levi's.
What's the Value of a Brand?
A couple companies tried to resurrect Cannon and other textile companies in the Carolinas. Our current Secretary of Commerce Wilbur Ross' company International Textile Group bought up distressed textile assets from Burlington and others in 2003 and 2004. But to make it work, he had to offshore some production, too. (Ross did a lot better turning around some U.S. steel companies and selling them to Luxembourg's ArcelorMittal.)
The Cannon plants were demolished between 2005 and 2006. I think my mom still has a couple Cannon towels. But she doesn't care about the brand anymore. If she needs new towels, she'll buy cheap ones, though probably not from Wal-Mart. She doesn't like Wal-Mart. And it's only partly because she understands how Wal-Mart helped kill local businesses and drive production overseas.
She doesn't shop Amazon, either, even though she appreciates the fact that Amazon is doing to Wal-Mart what Wal-Mart did to so many other retailers. And really, Amazon is taking it to the entire bricks-and-mortar retail sector. Macy's, Target, Kohl's, Nordstrom... you name it, they are all hurting because Amazon is easier and cheaper.
On January 5, 2017, the holiday sales numbers started coming in. They were not good. Macy's stock lost 10% in one day after it announced 68 store closings, in addition to the 100 it announced in August. 6,200 jobs could be lost. Kohl's stock dropped 15% after it said sales were down 2.1% from the year before.
But Amazon? Amazon has a 39% market share for online sales, which totaled $92 billion for the 2016 holidays. So, $35 billion is nearly 50% more than Macy's does in a full year. It's double Kohl's annual sales.
Yeah, these stores are in trouble. But it's not just pricing. It's brands, too. I'm seeing evidence that people just don't care about retail brands as much as they used to.
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Sell Brands, Buy Value
PVH Corp. is a big brand company. It makes Tommy Hilfiger, Calvin Klein, Van Heusen, IZOD, Warner's, Speedo, Olga, and others. Now, I don't know who's wearing Speedos anymore — and I don't wanna know — but those others are pretty well-respected brands. But PVH was a $110 stock at the beginning of December 2016. Just a couple days ago, it bounced off of $85.
Ralph Lauren was a $112 stock around Thanksgiving. After its most recent earnings report, where the CEO announced he was bailing, the stock traded down 11%. Shares recently hit five-year lows into the $75s.
Under Armour's most recent earnings report was a complete disaster. The company had reported reported 26 straight quarters of +20% revenue growth. Fourth-quarter revenue growth was 12%. Apparel sales were up just 7%. And Under Armour said those numbers will persist at least through 2017. The stock dropped over 20% in one day. It's so bad that its debt got downgraded, too.
Michael Kors was a $50 stock in early December. It just bounced off of $35 after reporting that comps were down 6.4% over last year and licensing revenue was down 23%.
Whole Foods has been down for a while, but it just admitted it may not be getting up anytime soon. It's going the same route as others — attempting to retrench with store closings and layoffs. And it changed 2017 revenue estimates from 2.5%–4.5% growth to just 1.5%. That's basically not growing at all.
Even a restaurant brand like Chipotle seems to have permanently lost its luster.
It seems to me that we are seeing a very significant change in retail. It's not just about closing a few stores to control costs and compete with Amazon. The very idea that some retail brands are "better" than others and should command a premium is under attack.
So, I'm not looking to bottom-fish Macy's or Ralph Lauren. I think companies like these have a long way to go before they are good investments again. And I'm telling my Wealth Advisory readers to sell two of the three retail stocks we have in the portfolio this week (we're keeping Starbucks).
If you have any retail stocks, I advise taking a long look at why you want to keep owning them.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.