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Costs, Weaker Sales Hit Levi’s Earnings

Weak U.S. sales and skyrocketing costs sent earnings for Levi Strauss & Co. tumbling during the second quarter.

Weak U.S. sales and skyrocketing costs sent earnings for Levi Strauss & Co. tumbling during the second quarter.

For the three months ended May 25, earnings plummeted 98.5 percent to $701,000, compared with $45.7 million in the same period a year ago.

Revenues fell 7.9 percent to $936.3 million from $1.02 billion, while sales slid 8.2 percent to $915.1 million from $997.3 million. Licensing revenues improved 11.6 percent to $21.2 million from $19 million. Further weighing on results was a significant rise in selling, general, administrative and restructuring costs, which increased $40.8 million, or 11.8 percent, to $385.6 million.

John Anderson, president and chief executive officer, said during a conference call with analysts that the company would likely face continued difficulties for the rest of the year as the economic pressures that have beleaguered the U.S. begin to show in key markets around the world.

“We’re now seeing slowing momentum in key markets in Europe and Asia, driven by higher fuel and food costs,” Anderson said. “We expect the operating environment to remain challenging for the balance of the year.”

Revenues for the Americas plunged 19.3 percent to $477 million compared with $591 million in the same period a year ago. Management chalked up the bulk of the declines to challenges encountered implementing a new “enterprise resource planning system” and a substantial slow down in U.S. Dockers sales.

Robert Hanson, president of the North American region, said issues with implementing the system were so significant that shipments were suspended for a week. Problems persisted after shipments resumed.

“Issues continued with respect to fulfilling customer orders in a timely manner, and this did result in some customer cancellations,” he said. Hanson also acknowledged that some retailers struggling to make sales may have taken advantage of the company’s delays to cancel orders. Sales were further affected by Goody’s Family Clothing Inc. filing for Chapter 11 bankruptcy protection last month.

Sales declines at Dockers were larger than anticipated as core items failed to entice consumers. New Dockers products are being introduced, but management warned the process will be slow.

“We have more work to do to improve our core product assortment and get the brand back on track,” Anderson said. The Levi’s and Signature by Levi Strauss businesses both turned in smaller declines.

European revenues increased 9.8 percent to $268 million compared with $244 million a year ago. However, without the benefit of currency exchange, revenues fell 4 percent. Management cited weak performance in the wholesale side of the business, offset by sales growth in company-owned stores.

Asia-Pacific revenues rose 5.5 percent to $191 million from $181 million. Again, excluding the positive benefits of currency exchange, revenues fell 1 percent. While developing markets like China and India continue to achieve revenue growth in the region, problems have continued in the key Japanese market.

Earnings for the first six months of the year fell 26.1 percent to $97.8 million from $132.4 million.

Revenues fell 1.7 percent to $2.02 billion from $2.05 billion. Sales declined 1.9 percent to $1.98 billion from $2.01 billion, and licensing revenues increased 7.6 percent to $43.2 million from $40.1 million.

Anderson said the core Levi’s brand is poised to take advantage of an economic rebound. However, it’s clear that management expects to see the economic pressures that have pulled U.S. sales down to pop up elsewhere.