By  on February 15, 2006

NEW YORK — Levi Strauss & Co. can celebrate a strong 2005, even though its executives are already expressing caution about the first half of 2006.

Booming sales in Asia and stabilization in the North American market helped the denim giant put the skids on eight years of declining sales in 2005, with an increase of 1.3 percent to $4.12 billion.

The 152-year-old San Francisco-based jeans giant also swung back to fourth-quarter profitability and finished the year with a triple-digit earnings gain.

"We set out to improve profitability and that's exactly what we did," said Phil Marineau, president and chief executive officer, during a company conference call.

For the quarter ended Nov. 27, the company reported earnings of $43.6 million, compared with a loss of $19.4 million in the same period a year ago. Sales for the three-month period remained flat, with the North American and Asian markets making up for double-digit declines in Europe.

Chief financial officer Hans Ploos van Amstel said the Levi's, Dockers and Levi Strauss Signature brands all made sales gains in North America during the quarter. North American sales rose 5 percent to $726 million, while Asian sales picked up 7 percent to $196 million.

However, a depressed retail environment in Europe that has existed since the second quarter of 2005 continued to weigh on results, a trend that management believes likely will carry into this year. European sales fell 17 percent during the quarter to $235 million. Management remains confident the company is positioned to experience gains once economies rebound in countries such as the U.K. and Germany.

"As we said before, we have the right strategic plan to stabilize that business, but it will take more time," said van Amstel, who pointed out operating income in Europe improved by 24 percent in the quarter.

The poor sales environment has made European retailers wary of taking any unnecessary risks.

"Consumer demand has been very soft for most of 2005 and this has forced retailers across Europe to be extremely cautious in investing in new product on top of existing high inventory levels," said Paul Mason, president of Levi Strauss Europe.For the year, earnings soared as the company shed $117 million in restructuring costs from the balance sheet and improved its margins. Earnings rose 413.2 percent to $155.9 million, compared with earnings of $30.4 million in 2004. The privately owned company releases its financial results because of its publicly traded bonds. The company reported total debt, excluding capital leases, of $2.33 billion, which was flat with last year.

North American sales rose 1.2 percent to $2.46 billion from $2.43 billion, a result of only marginal declines in the core Levi's and Dockers businesses, and a 7.4 percent sales gain in the Levi Strauss Signature mass-channel business. The Asia Pacific market buoyed results, with sales rising 14.1 percent to $689 million from $603.9 million. Again, Europe proved to be the lone problem region, with sales declining 5.9 percent to $981.1 million from $1.04 billion in 2004.

Year-end results also showed the first signs of stabilization in the core Levi's brand in the American market. U.S. Levi's brand sales slid only 0.4 percent to $1.25 billion for the year, the first time sales had been even in nine years, according to Marineau.

"We have experienced our highest advertising awareness in both men's and women's in six years," said Robert Hanson, president of Levi's U.S., referring to a major marketing campaign the brand launched in the second half of the year.

Levi Strauss Signature posted the largest gains for the year. U.S. sales rose 7.4 percent to $361 million from $336 million.

Marineau said a slowdown in the men's and women's denim market became apparent in the middle of the summer, which he attributed to a combination of high gas prices and the effects of Hurricane Katrina.

"We didn't see any pickup until the holidays," said Marineau in a phone interview.

For 2006, he predicted the denim market will experience growth of 2 to 5 percent.

The Dockers brand also achieved stability during the year, with sales sliding 0.4 percent to $646.6 million from $649.4 million. However, gains largely were made in the men's category, which accounts for 80 percent of Dockers sales. Marineau said he expects that to change with the next back-to-school season."We're introducing an overhauled product line in the back-to-school season," he told WWD. "In Dockers men, we have three different assortments and in women's, we have two new assortments. We're excited about this relaunch and we've gotten good reaction to the product line."

Despite the strong results, management warned that it expects the first half of this year to present several challenges. One of the biggest in the U.S. is retail consolidation.

"There will be door closures caused by the Macy's acquisition of May and the acquisition of Mervyns," Marineau said. "They're both significant Levi's customers."

The company plans to open 20 Levi's stores in the U.S., bringing its total to 38, in an effort to fill any holes left by the closings.

"Because Levi's and Dockers are destination brands, people will find other places to buy them," said Marineau, adding that he's not looking to leave the department store and chain store business. "Our own stores give you a full representation of the brand and the brand story, and it has a tendency to enhance our sales in the nearby stores that carry it."

A poor currency exchange environment and continued weakness in the European market will be the other major factors management expects could negatively affect first-half results. There are variables that cloud the U.S. market, as well.

"In the U.S., consumer confidence is at its highest, but we've also seen one of the lowest savings rates," Marineau said. "Then there's the high price of oil. There's so many conflicting pieces of data, it's very hard to predict anything. I've been pleased with the trends I've seen at retail since the holidays and I hope they continue."

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