NEW YORK — Complaining that the Levi’s brand is facing “continued erosion,” Designs Inc., which operates a chain of 100 outlet stores selling Levi’s and Dockers closeouts, said Wednesday that it plans to shutter almost half those stores.
This story first appeared in the August 8, 2002 issue of WWD. Subscribe Today.
The move is part of a campaign to reduce its dependence on Levi’s merchandise, which just two years ago was all the Canton, Mass.-based Designs sold.
“Our Levi’s [and] Dockers business reported a 15 percent decrease in comparable-store sales for the second quarter,” Dennis Hernreich, senior vice president and chief financial officer, said in a statement. “We have reevaluated the performance of this business, due to the continued erosion of the Levi’s brand in the marketplace and Levi Strauss & Co.’s consistent inability to provide a balanced assortment of product for our Levi’s and Dockers stores, and therefore have re-strategized the business.”
San Francisco-based Levi Strauss is on track to record its sixth straight year of sales declines in 2002 — last year’s sales were $4.26 billion, well off the company’s $6.7 billion peak in 1995. But most of Levi’s turnaround efforts over the past few years have been focused on issues that would tend to reduce the amount of merchandise it needed to clear out through outlet stores, which are not the company’s prime retail market.
“The improvements we have made to our product lines and our tighter inventory management this year have reduced the quantity and assortment of products available for the outlet channel,” said Gregg Hammann, Levi’s chief customer officer, who heads U.S. sales. “Our first-quality product sales are improving and at the same time, we’re seeing fewer markdowns and returned goods. Our better product mix naturally has an impact on outlet-channel sales.
“For the past year, we have encouraged Designs to diversify their business so that they are not dependent solely on our outlet goods for their success,” he continued. “We are pleased to see that they are continuing to diversify. Designs remains an important business partner for the sales of our products in the outlet channel.”
In a phone interview, Designs president and chief executive officer David Levin said: “We applaud them for getting their inventory more in balance. But of course, it does impact us.”
In May, Designs acquired the 472-store Casual Male chain in a bankruptcy court auction. Management expects that move to more than double its annual revenues to about $500 million, compared with $195.1 million last year. (A related story on Designs Inc. appears on page 15 of the Flash section.)
Hernreich said Designs plans to close from 34 to 40 of its Levi’s and Dockers outlets, combine six to eight others and reduce the size of 20 to 25 more. The first 15 to 20 store closings are to come within the next 18 months, he said.
“Once the downsizing is complete, the Levi’s business will represent less than 20 percent of our combined sales, while maintaining a favorable level of profitability,” he added.
Levin said the cutbacks also reflect the fact that some of the outlets in question are too large — they average 12,000 square feet — and in shopping centers with too little traffic.
“When the brand was much stronger, we could afford to exist in centers that aren’t as strong, and now it really takes a very strong center to keep our stores open,” he said. “A lot of centers don’t have the critical mass for us to support it.”
For the quarter ended Aug. 3, Designs sales were $115.2 million, up from $47.7 million a year earlier. The sales increase was a result of the $73 million in sales brought in by the Casual Male chain. That chain’s comp-store sales were up 4 percent for the period from May 14 — when it was acquired by Designs — to Aug. 3.
The company said the planned Levi’s and Dockers store closings and the move of Casual Male’s distribution center and offices to Canton will result in pretax charges of $11 million to $12 million in the second quarter.
Levin explained that the Casual Male acquisition has made it possible for Designs to look at its other operations with a more critical eye.
“We have started to view our Levi’s stores more from a profitability point of view, and over the last several years we have not been able to stop the negative [comparable-store sales] that go hand-in-hand with the brand,” he said.
The Casual Male acquisition was Levin’s biggest strategic change in the company since taking the ceo reins in April 2000, as the result of a proxy battle initiated by current chairman Seymour Holtzman. But it isn’t his only diversifying move. He has also signed deals for the company to begin operating Candie’s and Ecko outlets.
Designs has reported mixed financial results since Levin joined the company. Last year, it recorded a $7.9 million loss, compared with $3.2 million in earnings the prior year. Last year’s sales were up a hair, at 0.3 percent.
Phil Marineau became president and ceo at Levi’s in September 1999, and while Levi’s has been profitable each year of his tenure, its sales have continued to slip at high-single-digit percentage rates.
Prior to Marineau’s joining the company, production problems had left Levi’s unable to fill retailers’ orders fully and on-time for several seasons. That led buyers to order more merchandise than they wanted, in hopes of getting as much inventory as they needed. However, that over-ordering left Levi’s with a heavy buildup of inventory, as sales of the brand continued to slump — forcing it to clear that excess inventory through the outlet channel.
Marineau has made keeping inventory levels low a key theme of his tenure, particularly over the past year as the economy has slowed. At the end of May, Levi’s inventories stood at $673.5 million in goods, down 13.6 percent from a year earlier.