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Favorable currency exchange and a $215 million onetime tax benefit boosted Levi Strauss & Co. revenues and earnings for the fourth-quarter and year-end periods, but they were offset by steady declines in North America and continued difficulties in key Asian markets.
“Overall, we are pleased with our progress,” said John Anderson, president and chief executive officer, during a conference call with analysts.
Despite being unable to spur sales in key markets, Anderson was upbeat about management’s efforts to reduce debt, lower interest expenses and continue investing in expanding retail operations.
“Though we faced challenges as the economy weakened, we improved our financial strength,” he said.
Owing to the noncash income tax benefit related to the company’s improved performance and revised income tax expectations, earnings spiked 179.1 percent to $267.1 million for the three months ended Nov. 25, compared with earnings of $95.7 million in the same period a year ago. Quarterly revenues inched up 1.6 percent to $1.26 billion, compared with revenues of $1.24 billion in 2006, and sales rose 1.3 percent to $1.22 billion from $1.2 billion.
But excluding the benefits of currency exchange, revenues decreased 2 percent from the 2006 fourth quarter, which the company attributed to falling sales during the second half of the year in North America. Revenues in the region fell about 3 percent to $744 million during the quarter.
“I would say we saw a drop off as the quarter progressed,” said Anderson of the North American market. “We are starting to see some stabilization in the first quarter.”
Robert Hanson, president of the North American region, pointed to the difficult holiday sales season and the continued decline of the Signature by Levi Strauss & Co. mass channel brand as key elements of the decline. Hanson said some retailers had chosen to “deemphasize our [Signature] product” during 2007. The company has had difficulty capitalizing on the strength of the core Levi’s brand in the women’s market, as well. Anderson said the U.S. Levi’s business posted a solid performance over the year due to strength in men’s and boys’ product.
“The much smaller U.S. women’s Levi’s segment had disappointing business for the year, but we did begin to see signs of improvement in the second half,” said Hanson.
The European segment posted strong gains, but Anderson acknowledged that a “substantial benefit” was realized from the strength of the euro against the dollar. European revenues rose 16 percent to $285 million during the quarter. Without the exchange benefit, revenues were up 5 percent. Revenues in the Asia-Pacific region rose 3 percent to $227 million. Without the exchange benefit, revenues would have decreased 4 percent, owing to problems in Japan and South Korea.
“I think in Japan we saw a similar situation take place toward the end of the fourth quarter as the one that we saw in the U.S.,” said Anderson. “We think the Japan business will remain challenging in 2008 because the economy is challenging there, as well.”
For the year, earnings shot up 92.6 percent to $460.4 million, compared with earnings of $239 million in 2006, with the onetime tax benefit buoying results.
Revenues increased 4 percent to $4.36 billion from $4.19 billion, but declined 1 percent excluding benefits realized from currency exchange. Sales rose 3.9 percent to $4.27 billion from $4.11 billion.
North American revenues finished the year with a slim 0.3 percent gain to $2.54 billion from $2.53 billion. Europe proved the best performer, with revenues increasing 13.2 percent to $1.02 billion from $898 million. Without currency exchange benefits, European revenues would have increased 4 percent. Asia-Pacific revenues gained 5.7 percent to $804.6 million from $761.4 million.
Levi’s reports its sales and earnings because of its public debt. Refinancing efforts helped bring the company’s debt to less than $2 billion for the year, with total debt declining 11.6 percent to $1.96 billion in 2007, compared with debt of $2.22 billion in 2006. According to filings with the Securities and Exchange Commission, the company’s debt repayment plan will leave Levi’s with $1.7 billion still to repay after 2012.