By  on November 11, 2004

NEW YORK — Phil Marineau has set Levi Strauss & Co.’s sights on the crucial goal of cutting debt and improving profits after pulling the Dockers casual brand off the selling block because no buyers were willing to pay considerably more than the $650 million minimum set by bondholders.

“As we examine our opportunities for growth in late 2005 and beyond, we are going to be looking at the core jeanswear business that we’re in, just getting the right product, the right price, the right fixtures and the right doors,” Marineau, Levi’s president and chief executive officer, said in an interview.

For most of the next year, the company will remain focused on maintaining “a sustainable, strong economic model with reasonably stable sales,” he said. A turnaround of its seven-year sales slide has taken a backseat.

Levi’s also will start looking at ways of getting its brand name into other categories of merchandise “not very far away from jeans,” Marineau said, without offering more specifics. (See related story, page 9.)

From a sales perspective, the San Francisco-based company has fallen a long way. In the fiscal year ended November 2003 — the most recent full year for which data is available — the firm had $4.15 billion in revenue, compared with the $7.1 billion peak reached in 1996. Sales were up 0.8 percent through the nine-month period that ended Aug. 29.

Even with that momentum, which was somewhat diminished by an 8.2 percent slide in the third quarter, Marineau said he wasn’t “making any predictions” as to when Levi’s would break its slump. His interest is boosting margins and paying down debt.

At the end of the quarter, the firm’s long-term debt was $2 billion, $100 million less than it had been at the start of the year. Levi’s executives said they plan to continue paying down the debt, but offered no specific targets.

One of the firm’s major reasons for seeking a buyer for Dockers, which it put on the market in May and pulled on Oct. 18, was to pay off that debt, a legacy of the 1985 leveraged buyout the controlling Haas family used to take the company public. Levi’s bondholders had signed off on the potential sale so long as it paid off at least one-third of the company’s long-term debt. However, according to bond analysts who asked not to be identified, company officials had expected the sale to bring in $800 million to $900 million, more than the minimum amount.Jeans executives said Levi’s might have the right idea in putting sales growth on the back burner. They suggested it is possible Levi’s will never return to its peak size, given the fragmentation of the jeans market.

“It used to be that everyone wanted their jeans because it was the very best of not that many available,” said Michael Silver, president of Winnipeg, Manitoba-based Silver Jeans. “Now, with the selection available to everybody, it’s just too tall an order from a fashion perspective. It’s not as simple as changing the language on a can of soft drink.”

That was a clear reference to Marineau’s background at Pepsi-Cola, where he was president and ceo of Pepsi-Cola North America prior to taking the reins at Levi’s in 1999.

As an illustration of Levi’s scale, the $2.95 billion in total revenues the company has lost since 1996 is larger than the combined $2.7 billion jeanswear business of its biggest rival in the category, VF Corp., though VF’s total revenues come to $5.21 billion, making it the heftier company.

The Levi’s brand has $2.9 billion in sales in the last fiscal year, keeping it the largest name in the jeans business, trailed by VF’s Wrangler, which brings in about $1.3 billion in sales a year. VF’s jeans portfolio also includes brands such as Lee, Riders and Earl Jean.

“It’s not so bad a place they’re at, it’s just that they were at a different place before,” Silver said. “Half the world is still envious of their position….Most of us just dream to be doing 10 percent of what they do.”

The boom in demand for jeans that started in 2000 with the surge in popularity of low-rise styles prompted a flood of new names to enter the jeans market. Firms such as Seven For All Mankind, Citizens of Humanity and Paper Denim & Cloth jumped into the game, and succeeded in driving up prices.

“Levi’s problem is that they really are regarded as the basic commodity producer of blue denim jeans,” said David Wolfe, creative director at Doneger Group, the New York fashion merchandising and consulting company. “They simply had their turf invaded time and again by designer jeans, by premium denim, by novelty jeans, by different kinds of procedures like stonewash.”As other brands have sought to carve out niches, Levi’s took a shotgun approach, keeping its name on products retailing from $30 to $300 through a series of subbrands, including Levi’s Red Tab, Levi’s Premium and Levi’s Vintage Clothing. Last year’s introduction of Levi Strauss Signature at mass market chains such as Wal-Mart lowered the brand’s opening retail price point to around $20.

Thomas George, owner of E Street Denim, a retailer in Highland Park, Ill., outside of Chicago, carries the Levi’s Premium and Levi’s Vintage Clothing labels, which respectively retail for around $100 and $200. He suggested the wide price spread of Levi’s brands had begun to confuse consumers.

“What’s the true value of the product?” he asked. “When you’re walking down at one end of the mall at Nordstrom and they have the $48 Levi’s Red Tab and you go to another store and they have Premium at $95 to $120, do you think the customer can justify the $50 spread in price? Not really.”

Joe Ieraci, principal of the denim consulting firm The Blue Hound and a former Burlington Industries executive, disagreed with that assessment.

“In the beginning, I thought that maybe they were diluting the name too much, between Premium and Red Tab and Signature,” Ieraci said. “But as I shop, Premium is still in the best stores, so consumers must be buying it. We sort of overscrutinize, but I think the [subbrands] aren’t diluting each other.”

While Levi’s has boosted its presence in the high-end jeans business, primarily through the Levi’s Vintage Clothing label, the premium market remains a sliver of the overall jeans business, although its visibility exceeds its sales. According to STS Market Research of Cambridge, Mass., just 2.6 percent of women’s jeans sold in the U.S. last year retailed for $50 or more. Jeans retailing for less than $20 represented 52.4 percent of all jeans sold, while 41.2 percent sold for $20 to $39.99 — core Red Tab territory.

Part of the problem is that the products in Levi’s core product lines haven’t offered much to entice consumers. Levi’s two major recent product innovations — the ergonomic Engineered Jeans launched in 2000 and the exaggerated Type One styles of 2002 — didn’t catch on with mainstream shoppers.“The average, run-of-the-mill Levi’s are just that — average and run-of-the-mill,” Silver said. “The best is the best and the cheapest are pretty darn great, but the middle is lacking.”

Levi’s remains privately held, with its stock controlled by a voting trust including retired chairman emeritus Peter Haas Sr.; his son, Peter Haas Jr.; current chairman Bob Haas, and San Francisco financier F. Warren Hellman, who according to published reports is distantly related to Levi Strauss, the company’s founder, but acquired his stake in the company at the time of its leveraged buyout. The four men personally own 65.8 percent of the firm’s stock.

Levi’s reports its financial results because some of its $2 billion in debt trades publicly.

When the company disclosed the third-quarter sales slide, it also noted that profits had improved so far this year. Through the first nine months of 2004, Levi’s posted net income of $49.8 million, compared with a $104.2 million net loss for the prior-year period and a net $349 million loss for all of last year.

Andrew Jassin, a consultant with New York-based Jassin-O’Rourke Group, said Levi’s might want to think about expanding its business beyond simply the Levi’s and Dockers brands.

He said Levi Strauss is facing issues “not unlike Jones or Liz Claiborne” have encountered — it is not always possible to generate consistent growth year after year at a company that is dependent on one brand. Both those firms have grown by adding other brands to their rosters.

If he were at the head of Levi’s, Jassin said, he would take a similar approach to diversification.

“I’d be acquiring other companies that could add to my sales, once I could stabilize by finances,” he said.

At a Glance: Levi Strauss & Co. (San Francisco)

  • Founded in 1853, received patent for riveted “waist overalls” in 1873.

  • Fiscal 2003 sales: $4.15 billion.

  • Peak sales: $7.14 billion in 1996.
  • Fiscal 2003 net loss: $349 million.

  • Owned by: Descendants of founder Levi Strauss, including chairman Bob Haas.

  • Employees: 9,500.

  • Long-term debt as of Aug. 29: $2 billion.

  • Major outlay: In May 2001, Levi’s paid $46,532 at auction for a pair of jeans it had manufactured in the 1880s. The firm lost its entire archive in the San Francisco earthquake and fire of 1906, and over the years has laid out vast sums of money to rebuild it.

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