Java In Your Jeans

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Holy Grail of beauty solutions is getting rid of cellulite, the bane of most women older than a tween. In an unusual twist toward the trend of functional clothing, V.F. Corporation (NYSE: VFC), the world's largest apparel company, is bringing to market jeans infused with cellulite diminishing compounds like coffee and seaweed extracts. This is big for VF Corp as it could give its lackluster Wrangler jeans brand a needed caffeine jolt (pun intended). Functional clothing is nothing new. There are items infused with sunscreen, anti-microbial or anti-stink clothes from Lululemon (NASDAQ: LULU) and Under Armour apparel with its sweat wicking properties.

You may scoff, but the cellulite industry is a billion dollar industry with creams, cosmetic surgery, salon wraps and snake oil remedies that have various degrees of success eliminating or reducing the appearance of cellulite. According to Dr. Mehmet Oz, they are just fat cells, filled with fat, that hang out with other fat cells in clumps thus giving a cottage cheese look. If it sounds unattractive, it is and beauty editors will fall all over themselves over these jeans as Harpers Bazaar and Vogue already have.

Frankly, I'm surprised lululemon athletica isn't offering a variation as it seems a natural extension of their fabric research since they already compete with a yogawear line from VF Corp. Notch one for VF Corp. But one style of jeans, big seller though it will be, isn't enough of a needle mover for VF Corp as it has five main brand divisions: workwear (uniforms), outdoor & action sports wear, jeanswear, VF imagewear, and contemporary comprising 35 different brands. Another thing about the pants;  although they were tested and found to be 69% effective it entailed a 40 hour wear week for six weeks. And the cellulite concoction has to be resprayed on the jeans every so often. Maybe it ends up being a razor and blade model.

VF Corp is a Dividend Aristocrat having raised dividends for over 25 years and at the last earnings release in October raised it 21% for a 2.30% yield They also raised guidance with an expected 17% rise in EPS predicted for the full year and gross margin expanded to 46.7%. The current P/E is 16.77, but the stock is down more than 10% from its 52 week high.

Competition everywhere

VF Corp has been on its own shopping spree snapping up Timberland, trying to elbow out other shoppers for Billabong, acting like a Bridezilla at Filene's wedding dress sale. As Fool Andrew Marder points out in a post about the Billabong bid, VF Corp needs these purchases. Much more than my daughter needs yet another pair of 7 For All Mankind jeans, one of VF Corp's most successful brands. VF Corp's biggest threat is the abundance of competitors for all its different brands, especially their heritage brands, Lee and Wrangler.

Youth denim in particular is a very fickle industry. At least they have the high end 7 For All Mankind brand, which continues to be an aspirational, must have brand. GAP (NYSE: GPS) is considered one of their largest competitors and the two are running neck and neck on P/E, PEG, and net income. But with less than half the 132,000 employees at Gap, VF Corp is bettering them on margin and yield.

I could list a hundred boutique companies with jeans brands but there's also competition on VF Corp's most successful brands, the Outdoor and Active Sports lines, like privately held Patagonia, Columbia Sportswear, etc.

Pros and Cons

What I see as the most serious competitive threat overall is PVH Corp (NYSE: PVH), a global apparel maker with two big brands under its belt, Tommy Hilfiger and Calvin Klein, responsible for 83% of 2011 operating profits. PVH bought Warnaco on October 31 to add Speedo, Warner's and Olga to it heritage brands portfolio of Izod, Bass, ARROW, and Van Heusen.

PVH gross margin at 50.8% is slightly better than VF Corp and the five year earnings growth estimate at 12.53% also slightly better than VF Corp at 10.50%. But VF Corp has the higher yield with PVH's at a minuscule 0.10%. PEGs are close for PVH and VFC at 1.49 and 1.53 respectively.

Both PVH and VFCorp are moving into Asia Pacific in a big way with VF Corp targeting $2 billion in revenues by 2017. Both are ramping up direct-to-consumer e-commerce. The thing is neither is doing anything exciting (except the cellulite pants) to differentiate one from the other. Performance wise, PVH is at a 52 week high so sentiment is more bullish for them with two of the more popular men's brands. It's too much like the pros and cons list friends used to make up about their boyfriends only in this instance they cancel out each other.

Of these three PVH, Gap and VF Corp I'd have to like VF Corp the most mainly because it is a Dividend Aristocrat and at least has one product that is sure to create some buzz in the next month or so. Lululemon athletica has the best growth rate of 15%, better than these more established apparel companies and despite Gap's athleta line and VF Corp's Lucy line in only a few short years Lululemon has garnered brand recognition that takes most companies decades to accomplish. I wish I could be more excited about Lululemon but it, too has its drawbacks with CEO Christine Day announcing at the ICR XChange Conference that certain products had not hit it off with the public and that same store sales growth was slowing.

The final takeaway

Retail just isn't that jazzy this January. Maybe it's the weather or maybe I need to pull on some caffeinated jeans (they should sell real well in Seattle). There are other stocks out there that are more interesting in the short term, but long term I'd have to say VF Corp and Lululemon are the better ones of these names.


leglamp has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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