NEW YORK — In a business environment that executives at Levi Strauss & Co. describe as highly deflationary, the company has been intensely focused on cost cutting, and it started to show some results in the third quarter.
Levi’s reported Tuesday that for the three months ended Aug. 24, third-quarter net income almost doubled, while sales rose 6.3 percent.
This does not include cost-cutting activity in the past month, in which the San Francisco jeans maker disclosed plans for multiple rounds of job cuts that will result in the elimination of 2,650 positions and mark the end of Levi’s domestic manufacturing operations.
In the third quarter, Levi’s reported net income of $26.7 million compared with $13.7 million last year. Prior-year results included $16.6 million in restructuring charges. Sales were $1.08 billion, up from $1.02 billion. The results were in line with the preliminary guidance the company released last month. Privately held Levi’s discloses its financial results because it has publicly listed bonds.
“Within the context of the overall worldwide apparel business, we’re satisfied with the results in the third quarter,” Phil Marineau, president and chief executive officer, said in a phone interview. “The initiatives we’ve taken relative to our restructuring…allow us to be able to sustain our margin levels for the foreseeable future, which is the next 12 to 24 months.”
On a conference call with financial analysts, company officials acknowledged that the July launch of the Levi Strauss Signature line at Wal-Mart Stores was the reason for the company’s sales growth in the quarter. The additional volume from that business — coupled with the effects of fluctuations in exchange rates — could put Levi’s on track this year to post its first year-over-year sales growth in since 1996.
But don’t expect them to be popping corks at the firm’s Battery Street headquarters. Levi’s officials have said they will consider sales that fall within 2 percentage points of last year’s mark — after exchange-rate fluctuations are factored out — to be flat.
Marineau said he expected to see “sales growth in the low- to mid-single digits” next year.
Further, chief financial officer Bill Chiasson warned on the conference call that this quarter’s volume of Levi Strauss Signature brand included large orders intended to fill the fixtures being placed in Wal-Mart’s more than 2,800 U.S. retail units.“It’s hard to have a clear picture of the run rate of this business at this point,” he said.
At the same time that the Signature launch was providing new revenue, Marineau acknowledged that it hurt the company’s U.S. sales of its core brands.
“Shipments were below a year ago because U.S. retailers are certainly managing their Levi’s and Dockers inventories very conservatively in the face of the Levi Strauss Signature launch,” he said. “They are worried about cannibalization of the Levi’s brand.”
However, Marineau said the firm has tracked retail sales of those two brands at wholesale accounts within 7.5 miles of 1,000 selected Wal-Mart units and found no evidence of cannibalization.
Looking at the core Levi’s brand, Marineau said sales to female shoppers are picking up. He said junior sales in August rose 7 percent on strong performance of the low-rise 518 and 519 fits, and that “we’re beginning to see the misses’ business begin to improve,” as well.
The company devoted all of its ad budget this year to the launch of Type One jeans, a style featuring oversized pockets, dark washes and other exaggerated design details. The initial line of Type One products did not meet company expectations in terms of sales, though executives claimed that it played a valuable role in making consumers think more about Levi’s as a fashion brand. The line has since been toned down, with the dark, rigid fabrics being replaced with more mainstream stonewashed looks.
Marineau said Levi’s would be moving on from its Type One focus in ads.
“We don’t need to have a Type One message because I think people have gotten the message now that this isn’t the old Levi’s,” he said. “Now we want to focus on the fits and finishes that are more mainstream than Type One was.”
He noted that holiday ads would promote core styles, including the 501, and that the company would be running spots promoting the Levi’s and Dockers brands together and inviting consumers to enter a sweepstakes by using retailers’ private label credit cards.
By regional division, Americas sales were up 9.4 percent to $748.6 million, and European sales were down 4.6 percent to $243.2 million, though they would have plummeted 17.6 percent if it weren’t for the slide of the dollar versus the euro. Asian sales rose 14.2 percent to $90 million, though they’d have been up only 10.1 percent without fluctuations in exchange rate.For the nine months, the firm recorded an $11.2 million net loss, compared with a $19.5 million loss the year earlier. Sales gained 0.4 percent to $2.89 billion.
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