The cotton cost conundrum of 2011 is quickly giving way to the global consumer crisis of 2012, putting apparel firms’ sales and profits at risk.
Levi Strauss & Co. checked in as the most recent victim of slumping worldwide sales on Tuesday when it reported that its second-quarter profits dropped by more than a third as combined revenues in Europe and the previously firm Asia-Pacific region dropped at a double-digit pace, and operating profits in overseas markets receded more than 20 percent.
“Our second-quarter results reflect the intensifying macroeconomic headwinds around the world,” Chip Bergh, president and chief executive officer of Levi’s, told analysts on a Tuesday afternoon conference call. “As many multinational apparel and consumer goods companies have indicated, growth markets, particularly those in Asia, have begun to exhibit a broad slowing trend and conditions in southern Europe worsened.”
Although the torpid pace of European business had been expected, the slowdown in Asia was worse than anticipated and its effects magnified by a weak wholesale climate for Levi’s merchandise in the U.S., offset only in part by gains within Levi’s domestic retail network.
Bergh noted that the reduction in sales in Asia was the first the company had experienced in two years. Sales in China were up, but not enough to balance declines in India.
Discussing the situation in Europe, Blake Jorgensen, Levi’s chief financial officer, told WWD, “We do have a very balanced business between north and south Europe, but everyone’s caught the same cold there. The businesses in France and Germany are performing better than in the south, but you’re seeing caution everywhere.”
In the three months ended May 27, the San Francisco-based denim and sportswear giant registered a 36.9 percent decline in net income, to $13.2 million from $20.9 million in the 2011 quarter.
Revenues in the quarter were off 4.2 percent to $1.05 billion from $1.09 billion, with a 1 percent improvement in sales in the Americas, to $605 million, more than erased by respective declines of 9.6 and 11.7 percent in Europe and Asia-Pacific, to $254 million and $188 million. At constant currency, European sales were off 1 percent while those in Asia-Pacific declined 9 percent, Levi’s said.
Operating profits were down in all three regions, with the largest contraction in Asia-Pacific, off 26.3 percent to $18.8 million, followed by Europe, off 21.2 percent to $29.6 million. In the Americas, profit declined 13.7 percent to $71.3 million.
Sales of the Denizen and Signature brands improved along with those of Levi’s own stores in the Americas, while Levi’s and Dockers wholesale revenues declined. Company-owned stores in Europe also saw higher sales, although wholesale volume, both with Levi’s franchisees and traditional retailers, declined.
“Wherever we’ve been selling our premium products, whether in our own stores or high-end department stores, the product has continued to do well,” Jorgensen said. “We rely on the core, major retailers in the U.S., however, and where many have struggled, it’s impacted us.”
He cited the pullback in traffic at J.C. Penney as one example. On the conference call, Bergh noted that Levi’s would be among the brands to launch shops-in-shop at Penney’s for back-to-school, although the status of Dockers hasn’t yet been determined.
“They’re focused on the bigger brands first,” the ceo said.
Levi’s profit decline came despite an 8.6 percent reduction in selling, general and administrative expenses, to $435.1 million, while cost of goods sold rose 2.6 percent to $566.5 million. The revenue-cost disparity lowered gross margin in the quarter to 45.9 percent of sales from 49.5 percent in the year-ago quarter.
The bottom line was also hurt by an $8 million charge for the early extinguishment of debt, reducing net income by about $6 million. Long-term debt dropped to $1.69 billion from $1.82 billion at the conclusion of the 2011 fiscal year in November.
While capital restructuring is one pillar of Levi’s plan to cut costs going forward, it is but one of several means being explored. The company continues to implement a “pan-brand” commercial structure, seeking to eliminate operating redundancies that might exist between two or more brands in the same region. Jorgensen told analysts that associated severance and related reorganization costs will be outlined in upcoming earnings calls. He also noted that, despite the 360-basis-point drop in gross margin during the second quarter, to 45.9 percent, he expects to finish the year with a margin in the high 40s as cotton cost pressures abate and reductions are put in place. Margin for the first half of the year was 46.5 percent.
For the six months, net income was up 1.3 percent, to $62.5 million, as revenues declined less than 0.1 percent to $2.21 billion.
The Levi’s results add to the growing body of evidence that, for different reasons and to different degrees, the pressures on retail demand in larger markets have become virtually ubiquitous and the advantages generally afforded by globalization something of a risk, at least for the short term.
@margotrobbie steps out onto the red carpet wearing @miumiu. The actress is nominated for “Outstanding Performance by a Female Actor in a Leading Role” in “I, Tonya” at the #SagAwards. (📷: Stewart Cook) #wwdfashion
For @massimogiorgetti of @msgm, the Nineties are his favorite decade. “They had a huge impact on my personal growth. What I like of the Nineties is that they are not so precise in terms of style as other decades…there was actually a bit of everything,” he said. As seen on MSGM’s Spring 2018 show: tie-dye and a bit of grunge, two styles that are synonymous with the decade #wwdfashion #wwddecades (📷: @kukukuba)
Breaking News: @hedislimane joins @celine as its new artistic, creative and image director. One of fashion’s preeminent image-makers and trendsetters, Slimane is to join the LVMH brand on Feb. 1 and unveil his first fashion proposition for men and women next September during Paris Fashion Week. It marks a major homecoming for Slimane, who cemented his reputation – and influenced men’s tailoring for more than a decade – as the designer of Dior Homme between 2000 and 2007. He went on to reinvent and ignite the house of Yves Saint Laurent, which he rechristened Saint Laurent, between 2012 and 2016 – all the while maintaining a close relationship with the Arnault family, which controls LVMH and Dior. Read the full exclusive story on WWD.com. Link in bio. #wwdnews #wwdfashion
“Personally I believe the Eighties have been the richest and more vivacious period for international fashion,” Giorgio Armani said when asked what his favorite decade of fashion is. It was a moment of disruption and experimentation and only thinking back to the first years of that decade is always an emotion for me, for what they have meant to me and my work.” The influence is clear in @giorgioarmani spring 2018 collection, pictured here, which was full of bright colors and unexpected prints. Read more about which decades designers loved most on WWD.com #wwdfashion #wwddecades (📷: @aitorrosasphoto)
For Lady Gaga’s only Italian show on her “Joanne World Tour,” the singer wore a range of @versace_official outfits. The standout piece: this custom-made bodysuit inspired by the brand’s spring 2018 collection. #wwdfashion (RG: @ladygaga)
@_camillaruth_ is expanding on the wellness-craze concept with @westbourne – a new NYC restaurant that’s both a healthy-minded café as well as a business that gives back to the community. Marcus works with the Robin Hood foundation to give back to The Door, a non-profit providing youth development services, and also hires employees through The Door. Read our full interview with Marcus on giving back through food on WWD.com. #wwdeye (📷: @lexieblacklock)