NEW YORK — Despite production snafus, less was generally more for Levi’s in the third quarter.

A relentless focus on cost-cutting — including a 22.8 percent reduction in headcount over the past 10 months — allowed Levi Strauss & Co. to swing back to profitability in its third quarter ended Aug. 29, despite a drop in sales. The firm has cut its staff substantially, to 9,500 from 12,300 at the start of the year, executives noted.

The San Francisco-based jeanswear giant posted net income of $46.6 million for the quarter, compared with a $4.3 million net loss a year earlier. Sales fell 8.2 percent to $994.6 million from $1.08 billion.

The privately held firm’s profits came in well ahead of what analysts had expected — one analyst, who asked not to be identified, said the results exceeded his “wildest dreams.” Levi’s reports its financial results because its bonds trade publicly.

Levi’s executives acknowledged their focus on cutting inventories contributed to the sales decline, since the firm wasn’t able to fill all orders.

“We entered the year with a goal to dramatically reduce our inventory,” said Phil Marineau, president and chief executive officer.

Levi’s inventories stood at $539.1 million at the end of the quarter, down from $680.1 million when the firm’s fiscal year ended on Nov. 30, 2003.

“Our plan was to only produce to the order file we had from our retailers,” Marineau said in a Tuesday interview. “We beat their plan for us and tried to chase down some of that demand…We’ve had some issues in terms of linking supply and demand from a contract manufacturing standpoint.”

The problems were partly caused by overly conservative projections, Marineau said. He added that Levi’s had made organizational changes including having sourcing and sales personnel collaborate more closely to ensure that the contract factories that produce its goods are up to speed on what sales projections are, and that the sales projections are more accurate.

Not being able to meet retailers’ orders has taken a toll on Levi’s in the past. In the mid-Nineties, the firm chronically undershipped, prompting many buyers to order more goods than they actually needed. That led to huge inventory gluts when Levi’s manufacturing abilities caught up to demand and set the stage for the seven-year sales slump in which the firm is now mired.

This story first appeared in the October 13, 2004 issue of WWD.  Subscribe Today.

Marineau said ironing out the supply issue was a “top priority of the management team,” and added that Levi’s expected to resolve the problem by the end of the fiscal year.

Still, interim chief financial officer Jim Fogarty — who also works for the turnaround firm Alvarez & Marsal, which is advising Levi’s — said slight inventory shortfalls are manageable.

“We are a heck of a lot better off on this side of the problem than on the other side, of having too much inventory,” he said.

Marineau said, “Our goal going forward is to always be conservative in the amount of inventory that we carry.”

Executives said revenues from the Levi’s and Dockers brands in the U.S. and Europe were down for the quarter, which reflected a shift to more licensed products, a reduction in sales to the off-price channel and the inventory shortfalls.

“Without these limitations, we believe we would have seen revenue from our core product lines increase in the third quarter,” said Robert Hanson, president of the Levi’s brand in North America.

Hanson noted that sales of misses’ products were up 21 percent in the quarter, with junior jeans sales ahead 6 percent, driven by strong demand for boot-cut, flared and tinted jeans.

The growth in women’s has boosted that segment to 30 percent of Levi’s sales, with men’s making up 70 percent. That’s up from a historic ratio of 20 percent women’s to 80 percent men’s at the firm.

At the company’s mass market brand, Levi Strauss Signature, which was launched last year as a way for the firm to return to revenue growth, sales were down 37.6 percent in North America for the quarter, to $87.7 million. Executives attributed the decline to a difficult comparison with the third quarter of 2003, when the brand was making its initial fixture-filling shipments to Wal-Mart’s 3,000 U.S. locations.

Scott LaPorta, president and general manager of the brand, noted on a conference call with bond analysts that the brand has since added distribution to Target, Meijer, Fred Meyer and Pamida stores, and is now making initial shipments to 225 Kmart locations and shipping it internationally.

The brand has also started running print ads in publications including Latina, Budget Living, Lifetime and Glamour magazines.

When Levi’s first disclosed its plans for the mass brand in 2002, executives at the firm said the Signature line would not be promoted outside of stores. Marineau asserted Tuesday that the plan had been not to advertise the brand “for the first year.”

“It’s important that we build a distinct point of view and personality for that Levi Strauss Signature brand,” he said, noting the bulk of the firm’s ad budget still goes to the flagship Levi’s brand, which gets 10 times as much advertising money.

Executives declined to comment on the ongoing effort to sell the Dockers brand. As reported, investment concern Vestar Capital Partners and former Sun Apparel executive Eric Rothfeld are said to be leading candidates to buy the casual pants brand. Neither Rothfeld nor Vestar has commented on Dockers.

The firm reported that its long-term debt stood at $2 billion at the end of the quarter, compared with $2.1 billion at the start of its fiscal year.

For the nine months, Levi’s reported net income of $49.8 million, compared with a $104.2 million loss a year earlier. Sales were up 0.8 percent to $2.92 billion from $2.89 billion.

Marineau said the firm wasn’t “making any predictions” as to whether the fiscal year ending in November will mark the end of its sales slump.

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