NEW YORK — Momentum was on the side of Levi Strauss & Co. during the first quarter, but just barely.
Declines in its mass channel business in the U.S., negligible gains in Europe and a significant decline in two of the company's largest Asian markets took the shine off the San Francisco-based denim giant's otherwise notable earnings and sales gains for the three months ended Feb. 25.
"We had another good quarter for the company and we're off to a good start for 2007," said John Anderson, president and chief executive officer, during a conference call with analysts. "However, we still have some underperforming businesses and we're working to correct those issues."
Earnings for the quarter jumped 61 percent to $86.6 million from $53.8 million. Total revenues rose 7.2 percent to $1.04 billion from $967.6 million. Sales rose 7.2 percent to $1.01 billion from $947.9 million, with the Levi's brand accounting for 73 percent of sales. Licensing revenues rose 6.8 percent to $21.1 million from $19.8 million.
The privately owned firm releases its financial results because of its publicly traded bonds.
Management characterized the quarter as "solid," pointing to revenue increases in North America, Europe and the Asia Pacific region. North America, the company's largest business segment, was the only legitimate standout, with revenues rising 6.9 percent to $584 million from $546.4 million. Robert Hanson, president of the North American region, attributed the increase to a strong response in the men's and young men's U.S. Levi's business. Levi Strauss Signature, the company's mass channel brand, continued to decline "slightly" during the quarter, according to Hanson. Management seems wary of the strength of the U.S. market given the effects of retail consolidation and the uncertainty surrounding the housing and stock markets, as well as rising energy prices.
Revenues for the Asia Pacific region rose 4.3 percent to $188.1 million from $180.4 million. However, sales in India, China and Hong Kong offset a substantial slide in Japan and South Korea, the largest businesses in the region. Combined sales in Japan and South Korea declined 14 percent during the quarter, while sales were up more than 60 percent in China and India."Our Japanese business is working through a management and business process transition and the aftereffects, including inventory issues, of product and marketing misses in 2006," said the company in its quarterly filing with the Securities and Exchange Committee. "Korea is rebalancing its product architecture as sales of Levi's Engineered Jeans, which have driven growth in recent years, fell in the first quarter."
Management said a turnaround in the Japanese market isn't likely in the near term.
Results for the European segment suggested the company had turned a corner after a long stretch of declines in the region. European revenues rose 10.3 percent to $265.6 million from $240.9 million. A favorable exchange rate, however, benefited results by $22 million. On a constant currency basis, European revenues increased only 1.2 percent.
In January, Levi's appointed Armin Broger as president of the European business, and Anderson expects his background with brands such as Seven For All Mankind, Tommy Hilfiger and Diesel, to pay off in short order.
"He is quickly getting up to speed to continue building on the region's positive momentum," said Anderson of Broger.
The company's confidence in Broger has been backed up by a sizeable compensation package, the details of which were also provided in the company's SEC filing. Broger will receive a base salary of 725,000 euros, or $973,820 at current exchange; a company car; 30 days of paid vacation, and 2,500 euros, or $3,357, a month to pay for an apartment near the Brussels headquarters. Broger currently resides in Amsterdam. Levi's is paying the annual education expenses of Broger's children, currently estimated to cost 45,000 euros, or $60,444, a year. Levi's also will pay Broger up to 10,000 euros, or $13,300, for legal and tax advice he may have paid for in relation to his employment agreement. The contract stipulates that Broger must spend 35 percent of his time at the Levi's office in Brussels and the remainder of the time at the Amsterdam office.
In comparison, Robert Hanson, head of the company's largest segment, received a base salary of $631,154 last year. Hanson also received a bonus of $654,415, pushing his compensation to more than $1.2 million for the year.
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