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Levi’s to Cut Costs as Cotton Prices Bite

After boosting first-quarter profits 21 percent via cuts in selling, general and administrative costs, executives indicated more paring lies ahead.

Cost-cutting is back in style at Levi Strauss & Co.

This story first appeared in the April 11, 2012 issue of WWD.  Subscribe Today.

After boosting first-quarter profits 21 percent via cuts in selling, general and administrative costs, particularly in the areas of advertising and promotion, company executives indicated more paring lies ahead, and that it’s unlikely to be restricted to marketing spending.

“While we remain focused on delivering improved operating margins along with revenue growth, we will continue to be pressured by high cotton costs through at least the second quarter, and over the next few quarters we will incur organizational transition costs as we position the company for long-term profitable growth,” Blake Jorgensen, chief financial officer, told analysts at the conclusion of his prepared remarks during the company’s conference call Tuesday afternoon.

Pressed for specifics, Jorgensen replied, “I’d call it an evolutionary process versus [an] overnight process. It’s something that comes through controlling our spending as much as it is actively reducing spending….You’ll see it over the next 12 months versus all at one time because of the complexity and the geographic diversity of our business.”

Chip Bergh, Levi’s president and chief executive officer, noted, “We’re very focused on the notion of balanced growth and we recognize that we need to grow the bottom line faster than the top line, and one of the things that’s within our control are our own internal cost structures. So we’re looking for how we drive productivity, get more efficient and work the structure so that we get the most productivity out of our organization.”

That general approach was key to Levi’s first-quarter profit improvement, which followed profit declines of 48.8 percent and 11.9 percent for 2011’s fourth-quarter and full-year results, respectively, despite revenue growth of 4.2 percent and 8 percent.

In the three months ended Feb. 26, the privately held San Francisco-based jeans and sportswear giant registered net income of $49.2 million versus year-ago profits of $40.7 million. Overall revenues were up 4 percent to $1.16 billion from $1.12 billion in the 2011 period, paced by a 9.3 percent increase in volume in the Americas, to $647 million, which offset a 7.4 percent decline in Europe, to $289 million. Asia-Pacific sales rose 5.1 percent to $228 million.

However, reflecting a 9.5 percent jump in cost of goods sold, due principally to the higher cost of cotton, gross profit was down 1.6 percent, to $548.8 million, dragging down gross margin 270 basis points to 47.1 percent of sales. Consequently, nearly the entire improvement in net income came from a $20.5 million, or 4.5 percent, cut in SG&A, to $438.6 million. Lower ad expense accounted for much of the reduction as the company cut back or adjusted its promotional timing in weaker markets, like Europe.

Bergh noted that sales of Dockers were down in the quarter as the firm sought to stabilize the brand and experienced improvements in sales of some full-priced men’s bottoms. Same-store sales improved in Levi’s own stores, although the amount wasn’t specified, and, throughout the company, sales to off-price channels declined.

With 2011 revenues of $4.67 billion, Levi’s, once the largest U.S.-based apparel company, has been stuck below $5 billion since 1999 as other companies, like VF Corp. and PVH Corp., have used acquisitions and self-generated growth to move past it. Profits, which peaked at $464.9 million in 1996, were less than a third of that level last year. Levi’s went through a series of restructuring moves a decade ago and took charges totaling $338 million during a three-year period ending in 2004.

Bergh, who joined as ceo last September from Procter & Gamble, has been expected to undertake a substantial restructuring. In February, amid speculation that major cuts were about to begin, he appointed Anne Rohosy, president of Dockers brand, as president for commercial operations in the Americas and Europe and Aaron Boey, president of the Denizen brand, to the same post for Asia-Pacific.