A couple of weeks ago I saw this article in Slate.com asking whether the so-called Denim-bubble was about to crash. Thinking it was some sort of joke, or just another misuse of the word "bubble" to describe something hot, I didn't read it at the time, but I should have. It's pretty interesting:
Last summer, when spending $200 or more on a single pair of jeans still seemed crazy, the stock of a small company called True Religion
traded at less than a dollar. But over the past year, as True Religion
jeans started hugging the butts of celebrities—the company's Web site
lists Jessica Simpson, Angelina Jolie, J. Lo, and the cast of Desperate Housewives
as enthusiasts—the rest of us began snapping up pairs. True Religion's
stock soared to over $17. If you looked at sales growth without knowing
anything else about the company—$22 million in the second quarter, a
fivefold increase from a year earlier—it would be easy to think that
True Religion had come up with a cure for cancer instead of a more
expensive pair of jeans.
Jeff and Kymberly Lubell, the
husband-and-wife team who run True Religion and own more than 40
percent of the company's stock, should enjoy this while they can,
because there is a denim bubble, and it looks like it's about to burst.
The $110 million "premium denim" market is beset by signs of excess.
Consider the $128 jeans—for toddlers. Or the 400 percent markup: A pair
that costs $60 to make retails for $300. Or the race to rush new brands
into the stores: Seven for All Mankind, followed by Citizens of
Humanity, followed by Stitch's
More:
The first signs are the price cuts. Already, it's pretty easy to
find most of the popular brands, including Sevens, on bargain Web sites
like Bluefly.com or even eBay—though the companies often claim that the
eBay jeans are knockoffs. Even Nieman Marcus recently marked down
several styles of Seven jeans from $242 to $169 and discounted some
Chip and Pepper jeans by 50 percent, to $92. And Urban Outfitters
recently cut 20 percent off several new styles of True Religion jeans
on its Web site.
The NPD Group, which tracks retail sales, says
that after two years of dramatic growth, the market for pricey jeans is
flattening and will settle at 1 percent of the $11 billion denim
market. With the average pair of jeans costing $25, it's hard to
imagine how many more people will be willing to shell out eight times
that much for some high-priced jeans, no matter how well they fit.
Interesting stuff. And today there's this article from Bloomberg which suggests that even the price cuts can't stem rising denim inventory:
The looming denim glut has
prompted Gap and Limited Brands to discount jeans. Responding to a
surge in popularity for torn, embroidered and paint-splattered styles
last year, retailers bought on average 10 percent more denim apparel
this season, said Legg Mason analyst Richard Jaffe in New York.
Record gasoline prices
also may hurt results, particularly at retailers catering to
lower-income shoppers such as Wal-Mart Stores. Sales in August and
September, the biggest-selling season after Christmas, are expected to
rise as much as 5 percent, down from an initial forecast of as much as
6 percent, according to the International Council of Shopping Centers.
"The back-to-school season so far has been pretty sluggish," said
Mike Niemira, chief economist of the New York-based ICSC, who uses a
U.S. Department of Commerce tally of spending at apparel, shoe, book
and computer stores to make his estimate. "Is it weather, is it the
economy, is it the energy price story? Probably all of it."
Companies loaded up on denim after teen retailers including
Abercrombie & Fitch Co. posted average quarterly sales gains of 29
percent in the past year. Abercrombie is displaying "destroyed" jeans
splotched with bleach and paint and torn in more than a dozen places
for as much as $80.
Trendy teen retailer Hennes & Mauritz announced Monday it will
begin selling a new brand of jeans, "&denim," in September, and
will include about 100 different varieties each season.
"They're very popular at school, but I just don't see why you'd buy
pants with holes in them," said Elizabeth Childress, a high school
senior in Greensboro, N.C., after buying two pairs of faded jeans at JC
Penney for $40. "They are very expensive."
They are expensive, and it must be disturbing for these companies to hear a high-schooler talk with such fiscal sanity. The potential fallout from this shift in trends seems like it could be significant since all the retailers and clothing companies seem to have made the same bet. Although, this doesn't necessarily represent anything long-term, so perhaps the fallout could create some buying opportunities.
Tonight on CNBC: IS THERE DENIM IN YOUR PORTFOLIO?
