Levi’s: Growth in 2003

"We’re ready to roll again, both symbolically and in terms of product," said Phil Marineau, assessing the state of Levi Strauss & Co. at a conference with bondholders and financial analysts last week.

The San Francisco-based company has proven slow to turn around in the three years since Marineau became chief executive officer and president. But following its positive showing of sales growth in the third quarter —?ending a 22-quarter streak of declining sales — and with the upcoming launch of the Levi Strauss Signature line at Wal-Mart Stores, Levi’s executives are finally setting their sights on sales growth again. Their timetable is next year.

Bill Chiasson, senior vice president and chief financial officer, said the company expects to record sales gains of 2 to 5 percent next year. Presuming the company makes its target of flat sales in the fourth quarter that ends this month, that would leave next year’s sales up by about $80 million to $200 million.

Levi’s is looking for earnings before interest, taxation, depreciation and amortization to come in at 10.5 to 12.5 percent of sales, ahead of the 6.1 percent rate reported for the first nine months of 2002, but below the 13.1 percent recorded in 2001. Last year, the company earned $151 million on sales of $4.26 billion.

In fiscal 2003, Marineau said, Levi’s expects to "begin to grow again on a full-year basis and continue that growth over a multiple-year basis."

While the company expects 2002 to be the last of six down years for sales, Levi’s officials warned that the next three quarters might not be banner ones.

"The growth is going to come a lot on the mass channel entry," said Chiasson, referring to the Signature line due to hit Wal-Mart in July. "That mass channel entry is going to start in the third quarter. Most of the growth will come in the back half of the year."

While company officials have stressed that the mass launch is only a part of their turnaround strategy, the conservative growth forecast, coupled with Marineau’s projections of "hundreds of millions of dollars" in annual sales for the Signature line, suggests that sales improvement next year may hang on the performance of the mass line.Levi’s has pushed back its turnaround targets for a few years. In early 2000, a few months after taking the helm, Marineau said he believed sales growth might resume in fiscal 2001. However, the slowdown in the economy threw unexpected bumps in the company’s path.

Marineau also spoke candidly on the call about some of the missteps Levi’s has made in recent years.

"We were victims of our own success," he said. "Because we were so successful, because we had such a dominant position in the marketplace…we failed to react."

He noted that women’s product has traditionally been a weak spot for Levi’s, and said the company had needed to step up its efforts in the junior market where it faces "very aggressive competitors in LEI and Mudd."

Levi’s started to gain ground in that sector after launching Superlow jeans last summer, backed by a blitz of television ads depicting singing navels.

"Frankly, this was just to save our butts and stay in the junior market because we had become so uncompetitive," Marineau said. "It worked. The Superlows we introduced re-engineered our junior business and have given us permission to play again in that market."

The company was less successful with another launch in recent years. In 2000, it rolled out Levi’s Engineered Jeans around the world in an effort to reinvigorate the brand’s image. While the styles sold well in Europe and Asia, they never caught on in the U.S.

Marineau said he knew why: "It didn’t fit women well, except for the skirts and the jackets. The consumer had a product that really wasn’t as good as it should be for the women’s market."

Now that Levi’s has redesigned its core Red Tab styles and is phasing in its new Type One jeans, which feature exaggerated stitching and other details, Marineau said that has changed.

"As we go into the spring season for 2003, for the first time in the history of the Levi Strauss company, around the world, we will have a women’s jeans line that is equal to or better than the men’s product," he said.Levi’s plans to heavily promote the Type One styles. The entire advertising budget for the brand this year will be spent on Type One ads, including a 60-second spot to air during the Super Bowl. It’s part of the Levi’s strategy to roll out innovative styles at high-end price points, "seeing what works…and commercializing it as quickly as possible," Marineau explained.

The company’s most recent time frame for quickly developing new products for its high-end Levi’s Red and Levi’s Vintage Clothing lines and then knocking them off at lower price points is part of what Marineau calls a "customer segmentation strategy."

"The key is to get back to being the market leader, driving the styles, driving the trends…and focusing our advertising on that," he said. "Not focusing on a cool brand or a cool attitude or a cool approach, but focusing on product."

— Scott Malone

Isaacs Sees Loss

I.C. Isaacs & Co. Inc. warned investors Friday that the company expects to report a third-quarter loss as a result of lower-than-expected sales. The Baltimore-based maker of Marithé & François Girbaud jeans said it expects to report a loss of approximately $500,000 for the quarter ended Sept. 30. It expects to post revenue of $16.3 million, 35.3 percent below last year’s level.

"Sales failed to meet our expectations due to a sluggish retail environment and weaker-than-anticipated consumer response to our fall product line," said chief executive officer Robert Arnot in a statement. "We believe that the decrease in consumer confidence seen in recent months may result in increased promotional activity."

As of Oct. 31, the company’s order backlog had decreased to a level similar to that reported for June 30, 2002, which was down 47 percent from prior-year levels.

— Dan Burrows

Earl’s Limited Efforts

For spring 2003, Los Angeles-based Earl Jean is rolling out two limited-edition styles of jeans.

The two styles of jeans each bear the brand’s signature "E" embroidered on the back pocket; each pair bears a number from one to 500 — the maximum number of each style the company said it will produce. The jeans are packaged inside floral silk-screened denim bags.The first style, which the company calls "Hurricane Flowers" is inspired by nature. Designed to evoke a bed of flowers after a heavy spring rain, the jeans feature grommet accents and denim flowers strewn about on each leg.

The other style is called "White Lava." This style was inspired by the hot days and cool nights on Waikiki. The line features light washes, lightweight fabrics and vintage Hawaiian floral prints. The look of white lava on the jeans’ legs was created by using ultra-worn gray denim with white stitching.

The "Hurricane Flowers" jeans wholesale at $110 and the "White Lava" at $95.

— Julee Greenberg

Novel Denim Fades to Red

Higher costs and lower sales pushed Novel Denim Holdings Ltd. to red from black in the second quarter of its fiscal year.

For the three months ended Sept. 30, the Hong Kong-based denim, chino and twill manufacturer recorded a net loss of $3.6 million, or 40 cents per diluted share. That compares with last year when the company took profits of $3.6 million, or 39 cents per share.

Net sales for the period dipped 5.6 percent to $37.5 million. Of that, garment sales plunged 40.6 percent to $19.4 million, which was partially offset by a 153 percent jump in third-party fabric revenues to $18 million.

"During the past quarter we concentrated on improving our garment production efficiencies following events earlier in the year, by reallocating resources and reassessing production plans with the expectation of improving profitability within our garment operations," said chief executive officer K.C. Chao in a statement. "While garment production has not returned to expected levels, due primarily to a shortfall in garment shipments during September, we believe we are on the path toward recovery."

Greater efficiency has yet to show up on the bottom line, however, as costs grew markedly during the quarter. Costs of goods rose form 77.9 percent of sales to 87 percent, while selling, general and administrative costs rose from 11.2 percent of sales to 19.5 percent.

Overall, for the first half of the year, Novel reported a net loss of $9.8 million, or $1.07 per diluted share. That compares with last year’s half when the firm posted net earnings of $7.3 million, or 76 cents per share. Sales for the period ticked up 2 percent to $78.5 million.In other news, the company said it has recently opened a 120,000-square-foot garment factory next to its fabric plant in Cape Town, South Africa.

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