By  on April 12, 2006

NEW YORK — Levi Strauss & Co.'s first quarter was marked by ups and downs.

Operational improvements spurred double-digit earnings gains, but continued weakness in the European retail market and a significant pullback by Wal-Mart hobbled sales results.

For the three months ended Feb. 26, the San Francisco-based denim giant reported earnings rose 13.7 percent to $53.8 million, compared with $47.3 million in the same period a year ago. While the company made improvements on selling, general and administrative expenses, earnings gains were ultimately propelled by the absence of hefty charges from the early retirement of debt, which fell to $7,000 from $23 million.

However, warnings of a slow start to 2006 that management made when announcing year-end results in February proved prescient. Gains in licensing revenues did not overcome significant sales declines. Overall revenues for the quarter fell 5.8 percent to $960 million, compared with $1.02 billion in the year-ago period. Sales fell 6.5 percent to $940.2 million versus $1 billion in the year-ago period. Hans Ploos van Amstel, chief financial officer, noted that unfavorable exchange rates accounted for about half of the revenue decline.

Europe's poor retail environment was cited as having the biggest sales impact, which has been the case since the second quarter of 2005. European sales sunk 19.1 percent to $240.9 million.

"Since mid-February, I've been overseeing the turnaround efforts in Europe and leading the search at the same time for a new president of the region," Phil Marineau, chief executive officer, said during a conference call. "There's still a lot of work ahead through the balance of the year."

The key is turning around the core Levi's brand segment, which he said represents 90 percent of the firm's European business. Improvements are not expected until the second half, when new orders are placed and new stores are opened, Marineau said.

The U.S. market presented its own problems. The Levi's brand reported a 2.3 percent decline in the U.S., reporting sales of $277.1 million. Manage­ment had anticipated some weakness in the market heading into the first quarter. In an interview with WWD in February, Marineau said he expected retail consolidation to pose one of the biggest challenges to the core Levi's segment.While the core Levi's brand was facing issues of acquisition fallout, Wal-Mart had already dealt a huge blow to Levi Strauss Signature — Levi's mass channel brand that posted the largest sales gains of the firm's business segments in 2005. Management said at the beginning of the quarter Wal-Mart opted to devote more floor space to its proprietary George and Metro 7 brands. As a result, Signature sales in the U.S. fell 20.2 percent to $70.2 million from $87.9 million.

"The Levi Strauss Signature brand hit some choppy waters, with Wal-Mart's move to devote more fixtures to its private labels influencing our business," Marineau said. "We are now working closely with Wal-Mart to ensure that we have a strong and balanced presence on the floor as their premium jeanswear brand."

Marineau added that Signa­ture sales were down "slightly more than we expected" in Europe, as well, also owing to retailers' preferences for private label brands.

Management stressed that Wal-Mart's pullback centered on the women's segment and that other categories continued to show strength in the store. Regardless, there is no indication Wal-Mart will be returning to the brand and management said the focus is on expanding their share with other retailers, such as Target.

The firm's U.S. Dockers business proved to be a bright spot. Sales rose 4.8 percent to $158.7 million from $151.5 million.

Sales in the Asia Pacific market also continued to show strength, rising 8.9 percent to $172.7 million compared with $158.6 million a year ago. The Asia Pacific market "has become a significant part of our total business and continues to provide the company with a steady source of revenue growth and profitability," said Marineau. "We are investing in this region to ensure that we continue the positive momentum we've seen over the last six years."

The company reported a debt load of $2.24 billion, compared with $2.23 billion a year ago. The privately owned firm releases its financial results because of its publicly traded bonds.

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