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Levi’s Earnings Climb as Sales Slip

A one-time benefit related to the planned closure of a U.S. distribution center caused earnings to spike for Levi Strauss & Co. in the third quarter, offsetting sales declines in several key markets.

A one-time benefit related to the planned closure of a U.S. distribution center caused earnings to spike for Levi Strauss & Co. in the third quarter, offsetting sales declines in several key markets.

“We’re where we expected to be at this point of the year, given the numerous challenges we faced that have put pressure on our revenue performance,” said Phil Marineau, who will complete his tenure as chief executive officer at the end of the year, during the company’s conference call.

Those challenges included the adverse impact of Wal-Mart devoting more of its women’s apparel space to private-label brands; retail consolidation; a sluggish European retail environment, and a sales dip in the Japanese market.

For the three months ended Aug. 27, the San Francisco-based denim manufacturer saw earnings climb 28.8 percent to $49.3 million, compared with earnings of $38.2 million in the year-ago period. Much of the increase was attributed to a $29 million gain stemming from the planned closure of a distribution center in Little Rock, Ark. The company already has eliminated 186 jobs at the center and intends to lay off a total of 315 employees by early next year.

Revenues for the period fell 1.3 percent to $1.02 billion from $1.04 billion. Sales fell 1.5 percent to $1 billion from $1.02 billion, while licensing revenues rose 9.2 percent to $19.3 million from $17.7 million.

Wal-Mart’s decision during the first quarter of the year to reclaim shelf space in its apparel area for its proprietary brands has stifled the momentum of the Levi Strauss Signature brand. U.S. Signature sales fell 10.9 percent to $92.8 million during the quarter from the prior year.

Scott LaPorta, president of the U.S. Signature business, said the entirety of the Signature sales decline resulted from a decrease of $13 million in women’s sales at Wal-Mart. The Signature brand has run into problems in the European market, as well.

“As you probably know, last month we announced our intention to stop selling the Levi Strauss Signature brand in Europe after the spring 2007 season,” said Marineau. “The brand has sold well where it is distributed in Europe, however, the European value retail channel currently does not offer us sufficient expansion opportunity.”

This story first appeared in the October 11, 2006 issue of WWD.  Subscribe Today.

The core Levi’s brand also experienced softness in the U.S., with sales for the quarter sliding 1 percent to $345.1 million.

“This is a solid performance, particularly when considering the mixed performance of our retail channels and competitors,” said Robert Hanson, president of the U.S. Levi’s brand.

Hanson noted that, immediately following the merger of Federated Department Stores and May Co., Macy’s had opted to drop the Levi’s women’s business from its stores. Most, but not all, of the Macy’s regional divisions now have taken the Levi’s women’s business back, said Hanson.

Sales of the Dockers brand in the U.S. rose 2.8 percent to $175.1 million from $170.2 million, driven by a 15 percent sales increase in the women’s business. For the year to date, the U.S. women’s Dockers business has increased 21 percent.

The company continued to make progress in its campaign to turn around its European business. Sales fell 0.9 percent to $215.4 million from $217.3 million during the quarter. Marineau, who has been running the European business since February, said the key to reviving business in the European market is to improve sales of the Levi’s core brand, which represents 90 percent of volume in the region. Management also hopes to capitalize on the success of the Dockers brand in Europe. Marineau said a new head for the European business likely will be named in the first quarter of next year, shortly after his departure.

Revenues in the Asia-Pacific market were weighed down by an unexpected downturn in Japan. Revenues fell 2.8 percent to $145.5 million from $149.7 million. John Anderson, the head of the Asia-Pacific division who will succeed Marineau as president and ceo, said a Levi’s advertising campaign had “weaker-than-expected results.”

Coupled with this was a faster-than-expected fashion shift toward skinny fits and clean washes, ultimately leaving retailers with excess inventory. Management indicated that Japanese retailers likely will continue to work through that inventory during the fourth quarter, which will negatively impact sales. Excluding Japan, Anderson said the segment would have posted double-digit sales gains fueled by strong sales in Turkey, Malaysia, Hong Kong, India and China.

For the nine months to date, earnings expanded 27.6 percent to $143.3 million from $112.3 million. Revenues for the period fell 2.7 percent to $2.94 billion from $3.02 billion. Sales fell 3 percent to $2.88 billion from $2.97 billion, while licensing revenues increased 13 percent to $55.5 million from $49.1 million.

Again, the U.S. Signature brand experienced significant losses during the nine-month period, with sales falling 12 percent to $236.5 million from $268.9 million. U.S. Levi’s sales held steady, falling only 0.5 percent to $874.1 million. U.S. Dockers sales rose 6.2 percent to $510.9 million from $481.1 million.

North American revenues were essentially flat, coming in at $1.76 billion. European revenues plunged 13.2 percent to $652.7 million from $752.2 million, while Asia-Pacific revenues increased 3.5 percent to $520.8 million from $503.4 million.