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Fourth Quarter Slows Levi’s Momentum

Heavy promotions and a calendar quirk contributed to a 67.9 percent drop in net in the period.

Levi Strauss & Co.’s most profitable year since 2008 might have been even better if not for an “incredibly promotional” holiday season and a calendar that took a bite out of revenues and sharply reduced fourth-quarter earnings.

“I expected the quarter to be tough,” Chip Bergh, president and chief executive officer of Levi’s, told WWD, “but it turned out to be a bit tougher than I’d imagined. We’d already seen pre-holiday promotions kick in and it just kept getting worse as everyone struggled with declining traffic.”

Levi’s struggles with traffic — and with weakness in its women’s business in the U.S. — were answered with promotions of its own, resulting in lower margins but a relatively clean inventory situation, Bergh said.

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For the three months ended Nov. 24, five days before Black Friday, the San Francisco-based jeanswear giant registered net income of $17 million, 67.9 percent lower than the $53 million logged in the final quarter of 2012.

Revenues pulled back 0.2 percent to $1.295 billion from $1.297 billion. The company noted that, if not for the impact of currency fluctuation and the timing of Black Friday, which fell into the fourth quarter of 2012 but not the comparable 2013 period, revenues would have been ahead. The company will have two Black Friday weekends in its 2014 calendar.

Gross margin contracted to 49 percent of net revenues from 50 percent in the year-ago quarter.

Inventories finished the year 16.4 percent above year-ago levels, at $603.9 million, but 1.2 percent below their level of two years ago. “Our ability to deliver the gross margin we want for 2014 will come down in many ways to how well we manage our inventory,” the ceo noted. “In the fourth quarter, we experienced declining traffic everywhere and our retail business grew because we did a better job of converting traffic in the store and filling the basket, doing all the things that the talented people we have in the stores are trying to do.

“Every dime we put into advertising and promotion has to be to drive traffic and sales,” he stressed, “not the old focus on driving brand equity.”

Despite decelerating to a 4 percent growth rate in the fourth quarter, global retail revenues grew 9 percent for the year.

The firm, which has outsourced its e-commerce site in the U.S., will convert to a platform of its own around midyear, mirroring a move made in Europe during 2013.

Bergh said the decision to discontinue the Denizen brand in Asia had helped its profitability in the Asia-Pacific region and that business lost in markets such as India was being recaptured.

“We weren’t giving the Levi’s brand enough love,” he quipped, “and Denizen was never going to be a big, profitable business for us.”

Sales in Asia Pacific rose 1.1 percent in the quarter, to $188 million, while operating income in the region improved 66.7 percent, to $20 million.

Levi’s core men’s products, both Levi’s and Dockers, had a strong quarter, Bergh said, but women’s jeans were pressured as comfortable items like stretch yoga pants were picking up some of the business previously held by premium jeans.

“The athleisure category is on fire and that’s where a lot of the premium business has gone,” he said. “The women’s jeans business is pretty healthy at $30 and below, and we think that we can capture some of that, even though we’re a bit late” with concepts such as more moderately priced stretch fabrics. The higher-priced Revel collection, which features a proprietary fit, has performed well but remains limited in its distribution for now.

For the year, net income rose 59.3 percent to $229.2 million and revenues advanced 1.6 percent to $4.68 billion. Profits just missed hitting their 2008 level of $229.3 million. Cash and cash equivalents rose 20.5 percent, to $489.3 million, while long-term debt was reduced 9.9 percent to $1.5 billion.

“This is the first time in five years that we’ve delivered operating profit and sales growth at the same time,” Bergh said, “and it’s only the fourth time in 20 years we’ve done that. We haven’t done that in back-to-back years, and that’s the goal for 2014.”