The Denim Bubble

Is the $300-jeans market about to crash?

By Michelle Leder

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 …

Overpriced denim is an essentially fickle market. Companies are built, literally, on the backsides of celebrities—most of the premium jeans have distinctive back-pocket stitching that separates them from ordinary Levi's and, of course, each other. Today that means that every issue of InStyle showcases a hot new brand favored by Hollywood's elite. The August issue of InStyle, for example, spotlights five different brands ranging in price from a pair of $545 Stella McCartney jeans (favored by Gwyneth Paltrow and Kate Hudson) to a $176 pair of Earnest Sewn jeans that apparently grace Halle Berry's legs. But tomorrow (or next year), when Hollywood tires of denim—as it did of trucker hats—InStyle will feature no jeans of any kind, and the cool brands will be cool no more.

Though Alan Greenspan has yet to warn of "froth" in the pricey denim market, several analysts have been cautioning about a jeans glut since the beginning of the summer. With the big jeans-buying season under way—during a recent True Religion conference call, Chairman and CEO Jeff Lubell said third-quarter sales are historically the strongest, and he's projecting sales of $28 million to $30 million—analysts including the influential Stacy Pak at Prudential Securities say the demand for high-priced denim has already peaked.

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. True Religion's stock price had been posting month after month of double-digit gains, but it has fallen about 15 percent in the last two weeks. True Religion, which is expanding its line to jackets and other nondenim items, may well survive, but lesser brands will wash out and vanish. The high-end denim market won't crash, but it will do what its $300 jeans aren't supposed to: shrink and fade.