NEW YORK — Breaking a 22-quarter slump, Levi Strauss & Co. eked out a third-quarter sales increase — its first since 1996 — and touted it as a key step in its long-awaited turnaround.
President and chief executive officer Phil Marineau, who was brought on board in 1999 to right the flailing company, described the quarter as an inflection point. He said the San Francisco-based jeans maker expects to see flat sales in the fourth quarter and to resume consistent growth next year.
"Our sales results this quarter and the strength of our retail orders for Q4 and the early reaction to the 2003 line holds the promise of doing what we said we would do: Stabilize sales this year and grow in 2003," he said in a conference call with bondholders and analysts. "There’s nobody who looks more forward to it than me."
The 3.5 percent revenue increase to $1.02 billion for the quarter ended Aug. 25 wasn’t enough to prevent an 8.7 percent slide in net income, which came in at $13.7 million.
Nine-month results were down. For that period, the company reported a $19.5 million net loss — largely the result of $124.5 million in pretax restructuring costs — compared with $88 million in net income a year earlier. Sales were off 4.9 percent, or $2.88 billion.
Fourth-quarter sales would need to spike at least 11.9 percent for Levi’s to avoid putting down 2002 as its sixth consecutive year of sales declines.
In an interview, Marineau said the company is pinning a lot of its hopes for 2003 on the broad rollout of its "Type One" variety of jeans — dark denim, with bright-colored stitching and an overall exaggeration in size of classic Levi’s elements, including the pocket arcuate and rivets. Next year will also bring the first major test of Levi’s new consumer segmentation strategy, through which the company will try to sell jeans that call on the same key design concept at retail prices ranging from $30 to more than $180.
"We’re very encouraged about Type One, and to use the high-end price points and distribution to act as an R&D lab, so when you get down to $35 this spring, we will be optimistic and confident about its ability to be successful," he said.The company rolled out the basic design idea for the Type One line through its high-end Levi’s Red label this spring and shipped versions of the jeans retailing for $85 to $95 bearing the Levi’s Premium tag to specialty stores and better department stores this fall. The company aims to continue selling the high-end versions of the Type One styles when it launches the line to mainstream department stores and chains in the spring.
Marineau said he believes the company will be able to balance the sales of similar products through different channels and at dramatically different price points.
"The great thing about our strategy is this is a consumer-segmentation strategy. It’s not a distribution strategy," he said. "In the past, we tried distribution strategies where we would call the same product by different names and price them at different price points."
He said differences in fabric, fit and finish clearly distinguish the levels of Type One jeans at each price tier.
"We’ve shown men’s and women’s styles from the top of the [price range] down to the $30 price point to all key customers, and people recognize that by price points there is a difference," he said. "The consumer who wants $85 jeans can definitely see why they pay $85 for that version versus a $35 version."
Marineau added that Levi’s is resisting attempts by retailers to carry Type One styles outside their core price points. When Levi’s officials have been asked by low-priced retailers about buying the higher-end styles, he said: "The answer has been, ‘No.’ Not because we won’t distribute it, but because people who want jeans like that and pay prices like that don’t shop in those stores. We fit our products to people who want specific products at certain price points and shop in certain stores."
The Type One styles are as significant a departure from Levi’s current core looks as was the Engineered Jeans line, which launched to the U.S. market in 2000 but never became a big seller here. Marineau said that experience hasn’t dissuaded him from major product changes.
"Engineered Jeans didn’t succeed in the U.S. because we didn’t get behind it as a company," he said. "It was during my first 10 days at the company, and I decided to launch on a global basis and the Asians and Europeans got behind the business and the U.S. didn’t."The Engineered style has become a strong seller in Europe and Asia, representing more than 10 percent of Levi’s sales in those regions. The company wants the Type One style to pass the 10 percent benchmark, as well.
Regionally, Levi’s saw its strongest results for the quarter in Europe, where sales were up 14.6 percent to $254.9 million. In Asia, sales rose 10.9 percent to $78.8 million. Sales in the Americas region were off 0.9 percent, to $684 million.
Factoring out fluctuations in currency exchange rates, sales would have been up 2.4 percent in Europe, 7.2 percent in Asia, 0.1 percent in the Americas and 1.2 percent companywide.
The biggest wildcard in Levi’s continuing efforts to turn its business around is the consumer economy. In 2000, shortly after he took the helm — and with the U.S. economy growing briskly after putting millennium worries behind — he said the company hoped to see its sales begin to rise as early as 2001. The slowdown in consumer spending took its toll on Levi’s and last year executives pushed the turnaround projections back, saying they expected no sales growth until at least 2002. Last year’s terrorist attacks in New York and Washington further dampened spending and the company’s results.
"We’re projecting, with a threatened war and all these things, that consumer spending is going to be pretty weak…probably flat at best," Marineau said.
Still, he said, he believes the company can rise above the overall economic situation, adding that "innovation in the product line, news of this type, can be an antidote to that weak retail environment."
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