By  on July 12, 2006

NEW YORK — Strong U.S. sales helped buoy Levi Strauss & Co. results in the second quarter, but a full return to top-line growth in the company's European business isn't likely until 2007.

Phil Marineau, who announced last week that he would depart as president and chief executive officer of the San Francisco-based denim giant at the end of the year, said during a conference call on Tuesday that signs of improvement in Europe will begin to show in the second half of 2006.

"Our net sales in Europe began to trend up in the second quarter," said Marineau, who has been overseeing the European business since February, and leading the search for a new president for the region. "I'm encouraged by these trends, but we still have a lot of work to stabilize sales."

Earnings for the three months ended May 28 shot up 50 percent to $40.2 million, compared with $26.8 million in the same period a year ago. However, the improvement was largely the result of a one-time income tax benefit stemming from a change the company made in the ownership structure of some of its foreign subsidiaries.

U.S. sales of the core Levi's brand and its Dockers division prevented a downturn in Europe that has persisted since early 2005 from weighing too heavily on results. Revenues for the quarter fell 0.9 percent to $953 million from $961.6 million in the year-ago period. Licensing revenue dropped 9 percent to $16.3 million from $18 million. Sales slipped 0.7 percent to $936.7 million from $943.7 million.

The Dockers brand made some of the largest gains domestically and in the European market, attributed to the success of new women's product offering and the strength of the new Docker San Francisco marketing campaign. Dockers sales rose 11.2 percent to $177.2 million in the U.S., up from $159.4 million in the year-ago period.

"Women's net sales increased by 50 percent compared with last year," said John Goodman, president of the U.S. Dockers business. "Retailers had lost confidence in our women's products. Last year, we overhauled our women's line...and their renewed confidence is evident in our results."

The U.S. Levi's brand increased 2.1 percent to reach $251.9 million compared with $246.6 million. Robert Hanson, president of the U.S. Levi's brand, said the growth was significant given recent store closings because of retail consolidation. The growth, however, was driven by the men's and young men's segments, while the junior category "is struggling," Hanson said.A 4.3 percent sales decline of the Levi Strauss Signature brand in the U.S. was cause for some relief since the loss was less than anticipated. During the first quarter, Wal-Mart opted to devote more of its women's apparel retail space to its private label brands. As a result, sales of Signature plunged more than 20 percent. The losses were stemmed because of improved sales of men's product at Wal-Mart and through increased selling at other retailers carrying the line. Management is "cautiously optimistic" about the brand's performance in the second half of the year.

"We're growing in all regions except Europe," said Hans Ploos van Amstel, chief financial officer.

Marineau shed more light on some of the difficulties in the region that trimmed European sales 17 percent during the quarter to $196.5 million from $237 million.

"The key here is to turn around the European Levi's business," Marineau said.

European retailers "pre-book" orders, he said, and the difficult retail environment, combined with what management believes may have been a poor selection of product mix by retailers, has resulted in smaller orders being placed.

"Once you sort of fall down, it takes two to three selling seasons to get up and running again," said Marineau, adding that the company is in its second season of "really terrible pre-booking."

For the first half, earnings rose 26.9 percent to $94 million from $74.1 million. Revenues fell 3.4 percent to $1.91 billion from $1.98 billion. Sales declined 3.7 percent to $1.88 billion from $1.95 billion.

Dockers posted the largest gain for the first six months, rising 8 percent to $335.9 million in the U.S. Levi's U.S. brand sales were essentially flat, falling just 0.2 percent to $529 million. Domestic Levi Strauss Signature sales fell 12.7 percent to $143.7 million from $164.8 million. European sales plunged 18 percent for the first half of the year.

Marineau said during the conference call that the company's board would make an announcement regarding his successor, suggesting the move would come well before the end of the year. In an interview with WWD, Marineau indicated that John Anderson, who last week was promoted to chief operating officer and has assumed day-to-day operations of the company, is his logical successor.Marineau pointed out that Anderson has been with the company 27 years and is the only executive reporting to him who predates his arrival seven years ago.

"When I started, we were certainly not the product innovation leader we are today," Marineau said. "John is a strong product person. He knows how to pick good product people and drive innovation in the product assortment."

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