Strong Sales Boost Levi’s Earnings

Levi Strauss posted a $47.3 million profit on 4.5 percent revenue growth in its first quarter, but retail consolidation tempered any robust predictions.

Levi's officials said the company's advertising budget, primarily for the "A Style for Every Story" campaign, was up $14 million in the first quarter.

Levi's officials said the company's advertising budget, primarily for the "A Style for Every Story" campaign, was up $14 million in the first quarter.

WWD Staff

NEW YORK — Levi Strauss & Co. posted net profits of $47.3 million on a 4.5 percent increase in revenues in its first quarter, but faced with a wave of retail consolidation, company officials backed off from any predictions as to whether 2005 would mark the end of the firm’s eight-year run of sales declines.

“Anytime you have transitions of this magnitude in this industry…the rhythm of the marketplace is going to be disrupted for a while,” Phil Marineau, the San Francisco company’s president and chief executive officer, said in a phone interview on Tuesday.

Several of Levi’s top customers have been involved in recent deals: Mervyn’s was bought last year by a group led by the private equity firms Cerberus Capital Management and Sun Capital Partners; Kmart Corp.’s merger with Sears, Roebuck & Co. was completed last month, and Federated Department Stores is expected to close on its acquisition of May Department Stores in the third quarter. Of all those retail firms, only Federated didn’t make Levi’s top-10 customer list last year.

However, Marineau noted that, even with the ongoing consolidation, “the largest single customer we have [J.C. Penney] only accounts for 6 percent of our business. We’re not dependent on any one retailer to a greater degree.”

He said the consolidation is changing the balance of power between retailers and vendors, though he asserted that neither the combined Sears-Kmart nor Federated-May would account for over 6 percent of Levi’s volume.

“We don’t see as much price competition as we used to,” he said. “But we see more and more people wanting us to hold the inventory and chase demand.”

With the price of oil, and thus gasoline, rising over the last couple of years and interest rate hikes expected — both of which would tend to dampen consumer spending — Marineau warned that the outlook is “unstable” for the retail industry as a whole.

“This just, I think, makes us naturally nervous,” he said.

The $47.3 million in profits for the quarter ended Feb. 27 compared with a $2.4 million loss a year ago. Last year’s loss included a $54.4 million pretax restructuring charge.

This story first appeared in the April 13, 2005 issue of WWD.  Subscribe Today.

Sales were $1.01 billion, up from $962.3 million in the year-ago period, although the firm warned that some orders that typically would have gone out in the second quarter were shipped during the first, somewhat inflating the figure.

The firm closed the quarter with $2.1 billion in debt. Last month, Levi’s refinanced more than $550 million of its long-term debt, retiring some bonds that had been due in 2008 and issuing new notes due in 2012 and 2013. The privately owned company releases its financial results because of its publicly traded bonds.

While Levi’s has posted eight consecutive years of sales declines — although it also recorded two quarters of sales growth last year — Marineau emphasized that top-line results weren’t his primary focus.

“We still have a great deal of debt and our focus is improving profitability and continuing to de-lever the company,” he said. “We know we have to grow the top line, but we’re not going to do it at the expense of growing profitability.”

In keeping with its recent pattern, the firm saw stronger performance in its foreign operations than in its core domestic business.

In the U.S., sales of the Levi’s brand were down 5.4 percent to $280 million, but operating profit was up 15 percent to $70.1 million. The firm noted that much of the brand’s revenue decline was the result of last year’s move to license its tops business and to a $4.6 million decline in sales to warehouse clubs. Marineau said sales of first-quality Levi’s branded products in the U.S. were up 2 percent for the quarter, with retail sell-throughs of Levi’s misses’ products ahead 13 percent and juniors’ sales up 8 percent.

The U.S. Dockers brand saw a 3.8 percent rise in sales to $147.2 million, with operating income increasing 33.3 percent to $33.4 million. The brand’s president, Bobbi Silten, will be stepping down from her post in June. Marineau said he’s been looking outside the firm for a successor. He noted that, while the Dockers men’s business has performed well, in women’s, “we’ve not offered enough reason to pay a premium over private label brands.”

On a conference call with bond analysts, Silten warned that Dockers’ women’s business would be “challenging” through the rest of the year, with plans to exit its largest core khaki program and relaunch the brand in the second quarter.

Sales of the Levi Strauss Signature mass market brand rose 0.9 percent to $87.2 million, with profits down 36.3 percent to $7.2 million.

In Europe, where Levi’s has been focusing on premium products retailing for $100 and up, sales rose 9.8 percent to $296.4 million, with operating profit up 61.8 percent to $90.5 million. Without the continuing rise in the value of the euro against the dollar, sales would have gained 4.5 percent, the firm said.

At Levi’s Asia-Pacific division, which also includes the Middle East, Africa and South America, sales rose 18.1 percent to $155.7 million, with operating income up 42.5 percent to $41.7 million. Factoring out exchange-rate fluctuations, sales would have gained 14 percent.