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Silver Lining, Gray Clouds: Levi’s Improves but Outlook Gloomy

Levi’s is reporting a 9.7 percent first-quarter sales gain and a narrowed loss, but ceo Phil Marineau said he’s swimming against the economic tide.

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Phil Marineau

Phil Marineau

Photo By WWD Staff

The signature line.

Photo By WWD Staff

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NEW YORK — Phil Marineau’s latest nightmare is $3 a gallon gas prices.

The president and chief executive officer of Levi Strauss & Co. has been struggling to right the ship of the world’s leading jeans brand, which has seen seven consecutive years of sales declines. With Levi’s reporting a 9.7 percent first-quarter sales increase and a narrowed loss, Marineau said Tuesday he is well aware that he’s trying to turn things around at a time when the macroeconomic tide is against him.

“What is really going on here? Is January, February and March a little wind in the sails or are we going to see a $3 a gallon gas price come in and cut discretionary spending?” he asked rhetorically in a phone interview. “Honestly, we are assuming things are going to be more negative than positive.”

The San Francisco-based company reported Tuesday that, in the quarter ended Feb. 29, it posted a net loss of $2.4 million, which included $54.4 million in pretax restructuring charges. The loss came a year after a $58 million loss, which had been boosted by a $3.1 million reversal of previously taken charges. Sales in the first quarter were $962.3 million, up from $877 million a year earlier. Factoring out fluctuations in currency exchange rates, sales would have gained 3.5 percent.

Levi’s had two business segments to credit for the improved sales performance. One was the rollout over the past year of the mass market Levi Strauss Signature brand, which brought in $93.3 million in sales in the U.S., Europe and Asia in the first quarter, compared with essentially no revenue last year.

On a conference call with debt analysts, Levi’s officials acknowledged that in the U.S., in addition to Wal-Mart and Target stores, the company had started shipping test batches of Signature product to ShopKo and Meijer, the Midwest chain.

Marineau said that with the addition of those chains, “We are nearing full distribution here in the U.S. But there are plenty of other opportunities” overseas, he added, with the brand currently expanding into Canada, France, the U.K., Germany, Japan and Australia.

Scott LaPorta, president of the Levi Strauss Signature brand, added that, after some initial inventory backups last year, from the holiday period through the end of February, the brand had cut its inventory backlog by about 20 percent.
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The company’s other growth area was the Asia-Pacific region, where sales were up 31.2 percent to $131.8 million. Factoring out exchange rates, sales for that region would have been up 19.5 percent.

John Anderson, president of the company’s Asia-Pacific operations, said, “It’s not a one-product concept driving our growth, but a variety of products backed by good investment in advertising.”

Levi’s core brand in America remained an area of weakness, with sales dropping 5.2 percent to $295.9 million.

Robert Hanson, president of the Levi’s brand in the U.S., said despite weakness in the men’s business — representing about 70 percent of sales — in women’s he has seen “double-digit sell-through increases for our low-rise, stretch, boot-cut and flare programs. Levi’s has been outpacing the category in our core channels, particularly in the junior segment.”

He also noted that this month the company is breaking a new consumer ad campaign, called “A Style for Every Story,” which he expects will help improve sales performance.

In the face of continued sales declines and recent losses, Levi’s officials acknowledged the company’s debt had risen slightly, to $2.16 billion at the end of the quarter, up from $2.11 billion when the company’s fiscal year ended in November. The privately held company releases its financial results because of publicly traded bonds.

However, chief financial officer Jim Fogarty noted that overall inventories stood at $611.9 million — down 10 percent from yearend — and that inventory turns in the quarter rose to an annualized level of 3.5 times, up from 3.3 times at the end of the year.

Fogarty took on cfo duties on an interim basis when Levi’s hired his firm, turnaround specialists Alvarez & Marsal. On Tuesday, he disclosed the first restructuring steps Levi’s will take since bringing him on board in December: The company will lay off about 200 staffers in May and will leave another 75 open positions unfilled. At the end of the quarter, Levi’s employed 10,885 people worldwide.

He added that additional cuts may be on the way this year and said, “We are continuing to explore additional ways to reduce our costs, increase cash flow and improve our structure.”
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As part of the overall campaign to cut costs, Levi’s officials said they were streamlining assortments, reducing the number of styles offered and eliminating unprofitable product lines. Marineau added that Levi’s also was repositioning its Silver Tab line, which is priced slightly higher than the Red Tab brand. Last year, he said, the Silver Tab line sold poorly after being given an urban feel, so the company is pulling it back toward Levi’s core mainstream American look.

Marineau added that the company will continue to consider opportunities to license out product categories. Levi’s early this year licensed the rights to knit and woven tops and women’s jackets to Hong Kong sourcing giant Li & Fung, and is in talks about licensing men’s and boys’ shirts to the company. It also has licensed women’s tops to Van Nuys, Calif.-based Jerry Leigh.

“Our strategy is to really focus on being a bottoms marketer for men and women of casual pants and jeans,” said Marineau. “Our expertise is not in tops and it’s not in kids’, and in general, we are going to license where it isn’t a core expertise of the business.”

Overall, he backed away from making any promises about the company turning around sales in its core Levi’s brand this year, citing overall economic concerns and what he called a softening apparel market.

“There is a huge opportunity on the core Levi’s business for the balance of the year,” he said. “It’s highly dependent on the market conditions that we face.”

Marineau said macroeconomic factors — such as the steep rise in fuel prices — would continue to take a toll on spending for discretionary items such as apparel.

“Given the number of people who drive a car to work every day,” he said, “high prices at the pump will affect them.”