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3rd Time’s No Charm: Drop in 1st Qtr. Sales Dims Levi’s Recovery

Levi’s trip on the road to recovery hit a nasty pothole in the first quarter, but the Wal-Mart steamroller is coming soon to smooth the way.

Levi’s print campaign for its new Type One jeans will continue though the company wasn’t satisfied with its TV ad

Levi’s print campaign for its new Type One jeans will continue, though the company wasn’t satisfied with its TV ad.

Photo By WWD Staff

NEW YORK — Levi’s trip on the road to recovery hit a nasty pothole in the first quarter, but the Wal-Mart steamroller is coming soon to smooth the way.

The jeans giant reported a 6.4 percent decline in sales, following a two-quarter run of revenue increases. Rising interest expenses and other charges related to its debt also pulled the San Francisco-based company into the red for the quarter, with a $24.5 million net loss compared with $42.5 million in net income in the first quarter last year.

Sales for the three months ended Feb. 23 were down 6.4 percent to $875.1 million. Factoring out the effect of currency fluctuations, the dip would have been a sharper 11.2 percent.

Phil Marineau, president and chief executive officer of Levi Strauss & Co., blamed much of the decline on retailer efforts to recover from a holiday inventory hangover.

"We knew quarter one and the first half of the fiscal year was going to be a struggle," he said. "But quarter one was certainly more difficult than we planned. We didn’t expect sales to be as low as they came in."

Still, he said that Levi’s remains committed to breaking its six-year streak of sales declines this year, with overall revenue growth of 2 to 5 percent. That forecast factors out the effect of currency fluctuations.

Marineau contended the revenue shortfall was a result of retailers’ cutting back on ordering through January and February, as they tried to work off holiday backlog. But he emphasized that inventories of Levi’s merchandise are down at retail and cited market research that showed the company’s unit sales of women’s jeans in the U.S. were up 5 percent in December and January, at a time when overall sales in the women’s jeans category dropped 14 percent.

"Our retail trends are better than our wholesale trends, and sooner or later wholesale trends catch up with retail," he said in a phone interview.

He added that Levi’s expects a tough second quarter, but foresees a return to growth in the second half of the year.

One key reason the company expects its sales to grow in the second half is that’s when it will begin shipping the new mass market Levi Strauss Signature line to Wal-Mart Stores.
Company officials on a conference call with debt analysts declined to say whether that launch was the main reason they were confident overall sales for the year would be up. But they acknowledged that Levi’s is expecting growth in revenue on its existing brands to lag growth in unit volume.

That’s because Levi’s plans to cut its wholesale prices in June — a move intended to make the brand more profitable for other retailers at right about the time the company starts shipping the Bentonville behemoth.

Privately held Levi’s reports its financial results because of public bonds.

Another key new push for Levi’s this year is Type One jeans, a style featuring bright-colored stitching and other exaggerated details. The company plans to spend the entire budget for the Levis brand this year promoting those jeans. Levi Strauss said it spent $68.8 million on advertising in the first quarter, up 4.1 percent from last year. The corporate ad budget also includes spending on the Dockers brand.

Marineau told WWD he wasn’t satisfied with the company’s initial TV push for the Type One product — during the Super Bowl it ran an ad featuring a stampede of cattle through a postmodern city.

"I don’t think people are walking away from the commercial understanding what Type One jeans are all about and why they are different from a regular pair of Levi’s," he said. "We thought it was a little too serious and didn’t have enough fun and excitement. It might have been a little pretentious."

He added that the company has been pleased with its print ads for the new products and does not plan to resume broadcast advertising until fall, in keeping with its initial plan.

A bigger question than the public’s reception of the ads is whether consumers warm to the new style of jeans. Marineau said that the Type One styles have sold very well in Europe and Asia — in some cases outstripping the company’s ability to produce them.

On the conference call, analysts asked Marineau whether he feared Type One would mark a repeat of the company’s push for Engineered Jeans, which sold well in Europe and Asia but never caught on in the U.S.
"I wouldn’t say I’m that happy with the Type One in the U.S., but I’m not discouraged either," Marineau said. He added the women’s jeans have been selling better than men’s, and said that at the company’s recently opened store in Manhattan’s SoHo district they now represent 15 percent of sales.

He said the company’s plan is for Type One jeans sales to represent no more than 6 percent of revenue this year. The company had initially planned for Engineered Jeans to represent more than 10 percent of sales, a target it met overseas but didn’t come close to in the U.S.

He added that the firm plans to start encouraging consumers to try on the Type One jeans and to roll out more moderate washes to help shoppers "overcome whatever lack of courage they might have to try on something that looks as different as this."

Levi’s overseas operations continued to outperform its Americas unit in the quarter. Sales in the Americas fell 14.5 percent to $514.2 million. Sales in Europe rose 5.3 percent to $274.4 million and revenues in Asia climbed 18 percent to $86.5 million.

Levi’s balance sheet showed a buildup of cash, with cash and equivalents rising to $381.4 million from $96.5 million at the start of its fiscal year. The company has also put aside $244.3 million in restricted cash in anticipation of a debt payment due in November.

Marineau acknowledged that Levi’s, along with the rest of the fashion universe, faces a major question in planning for the year: what effect the war in Iraq will have on consumer spending.

"We’re encouraged that since the war began, the reports that we’ve gotten from our retailers is that retail traffic has not been affected," he said. "Most of our retailers have seen uptick after a bad February and [early] March. I hope that’s going to continue."

Another issue Levi’s faces is trying to get traction under its wheels at a time when consumer demand for denim is starting to erode after several strong years.

"Our plans for growth don’t presume strong category growth," said Marineau, adding that Levi’s might stand to benefit if retailers begin to trim back their denim assortments.
"You can get rid of everything else, but you still have to have Levi’s," he said. "We may have lost some volume over the course of the last couple of years, but we’re still the number-one brand."