Denim Stocks Rise on Western Trend, TD Cowen Notes Challenges

Denim's comeback, driven by Western style, positions Boot Barn, Levi Strauss, and Ralph Lauren as market winners through 2024.

By Athena Xu

5/15, 13:04 EDT
Levi Strauss & Co
Ralph Lauren Corporation

Key Takeaway

  • TD Cowen highlights denim's resurgence, driven by Western style, boosting stocks like Boot Barn, Levi Strauss, and Ralph Lauren through 2024.
  • Cultural icons and fashion lines influence the trend, yet consumer spending amid price increases remains a concern for sustainability.
  • Despite optimism in denim stocks, mixed guidance from companies like Boot Barn underscores the challenges in forecasting fashion trends' market impact.

Denim's Resurgence Fuels Stock Optimism

TD Cowen's analysis, led by analyst Oliver Chen, has identified a notable trend in the fashion industry that is expected to impact the stock market positively. The resurgence of Western styles, with denim at its core, is anticipated to drive momentum in the market through at least the end of 2024. Chen's research points to Boot Barn, Levi Strauss, and Ralph Lauren as primary beneficiaries of this trend. "We see the recent momentum in the denim category as sustainable in the near to medium term," Chen stated, highlighting the influence of Western fashion and its potential longevity until at least the first quarter of 2025.

Key Players and Market Performance

The analysis by TD Cowen showcases Boot Barn, Levi Strauss, and Ralph Lauren as top picks in the denim category, with their stocks showing significant year-to-date performance improvements. Ralph Lauren, in particular, is noted for its efforts to elevate the brand, resulting in increased average unit revenue, gross margins, and return on invested capital. Levi Strauss' direct-to-consumer premiumization strategy is also underlined, especially with its cultural resonance evidenced by a mention in Beyoncé's "Cowboy Carter" album. Despite these positive trends, the market's expectations vary, with Ralph Lauren seen as having a potential upside, while Levi Strauss might face a slight pullback.

Cultural Influences and Consumer Spending

The denim trend's revival is partly attributed to its association with music icons and high-profile fashion lines, gaining further momentum from Taylor Swift and Beyoncé's recent projects. However, Chen cautions that the trend's sustainability could be challenged by consumer willingness to spend amid price increases. This concern underscores the importance of monitoring consumer behavior and spending patterns in response to the evolving fashion landscape.

Challenges and Outlook

Despite the optimistic view on denim, there are challenges ahead. Boot Barn's CEO, James Conroy, acknowledged the cultural support for Western wear but noted that data does not show a significant shift in buying habits due to Beyoncé's influence, though it could attract new customers. Boot Barn's recent earnings report exceeded Wall Street's expectations, yet the company provided mixed guidance for the upcoming quarter and fiscal year 2025. This mixed outlook reflects the uncertainties and complexities in predicting fashion trends' impact on consumer behavior and stock performance.

Street Views

  • Oliver Chen, TD Cowen (Bullish on denim stocks):

    "We see the recent momentum in the denim category as sustainable in the near to medium term... Our experts highlighted the continued growth of the Western fashion cycle likely until at least the end of the year until 1Q25."

Management Quotes

  • James Conroy, CEO of Boot Barn:

    "It’s just a fringe piece, or an icing on top of our typical customer database."