Investing in Western-style denim stocks may provide a boost to your portfolio, according to analysts at TD Cowen. The jean-fabric category has been identified as a strong performer that is expected to maintain its momentum through at least the end of 2024. Among the key players in this trend are Boot Barn, Levi Strauss, and Ralph Lauren. Analyst Oliver Chen believes that the recent momentum in the denim category is sustainable in the near to medium term, with experts predicting continued growth in the Western fashion cycle until at least 1Q25. This growth is being driven by trends such as head-to-toe denim dressing and the popularity of artisanal garments, which are leading to higher spending in this category.
The resurgence of Western fashion, particularly denim, has gained popularity through its association with music icons and recent fashion lines. Attendees of Taylor Swift's Eras tour have been seen emulating her early days in the country genre, showcasing the trend towards denim dressing. Similarly, Beyoncé's “Cowboy Carter” album, which features a chart-topping country sound, has further popularized the Western fashion trend. However, a key risk to this trend is whether customers will continue to spend on these styles despite potential price increases in the market.
Beyond the Western fashion resurgence, analysts see additional reasons to be bullish on specific companies within the denim industry. Ralph Lauren has seen an increase in average unit revenue through brand elevation efforts, leading to record high gross margins and return on invested capital. The brand's strong heritage in Americana and Western styles also positions it well for future growth in the U.S. Levi Strauss, on the other hand, has been focusing on direct-to-consumer premiumization efforts, enhancing its brand's cultural position. Both companies have outperformed the market in 2024, with investors showing varying levels of optimism for their future performance.
While companies like Boot Barn are experiencing a boost in sales related to Western fashion, it is unclear if there is a specific catalyst driving this growth. Boot Barn's same-store sales are expected to reaccelerate due to increased interest in Western wear, but CEO James Conroy notes that cultural events like Beyoncé's album have had minimal impact on customer buying habits. Although the company surpassed Wall Street expectations for its fourth-quarter earnings and revenue, guidance for future performance remains mixed. While revenue for the current quarter is expected to exceed estimates, earnings per share may fall short. The company's outlook for fiscal year 2025 also falls below analyst predictions, despite a 40% increase in share value since the beginning of 2024.
The denim sector presents an interesting investment opportunity amidst the current Western fashion renaissance. While certain companies like Ralph Lauren and Levi Strauss show promise for future growth, challenges such as changing consumer preferences and pricing pressures may impact the overall performance of the sector. Investors should carefully consider these factors before making decisions related to denim stock investments.