NEW YORK — When in doubt, mark it down.
In an effort to win retailers’ hearts by fattening their wallets, Levi Strauss & Co. has begun to abide by that theory by lowering its wholesale prices and increasing the promotional support it offers stores to help raise their margins.
But Phil Marineau, Levi’s president and chief executive officer, said Thursday he wants to make it clear that the move he described as “a transformative economic change” for the San Francisco-based company should not be seen as the opening shot of a price war.
“What we’re not trying to do is use this to lower retail prices,” he said in a Thursday interview. “What we want [retailers] to do is have better margins.”
With the company halfway through the sixth year of its sales slump, Marineau said the company is starting to implement the next element of his turnaround plan, namely making it more profitable to sell Levi’s.
To do that, the company is lowering wholesale prices on key styles, increasing its offering of higher-margin products and adopting what Marineau called “a more flexible and generous promotional support to the retailers, so that they can use the funds that we provide them in a way that meets their merchandising and operating requirements and rewards them for selling more.”
In other words, a vendor that was once seen by retailers as uncooperative on markdowns and promotions is ready to bend.
Marineau declined to quantify the wholesale price reductions, saying only that Levi’s realized “we have not been giving [retailers] the margins they were looking for and we will start doing that.”
In a conference call with fixed-income analysts, he emphasized the reduced wholesale prices “are not going to impact our overall financial performance.”
“We’re going to be able to fund them by continued cost control and the further benefits associated with plant closings,” he added.
That will be key for a firm in the midst of a financial slide. Levi’s posted an $80.9 million net loss in its second quarter, as a result of $141.1 million in pretax restructuring charges for its already reported plans to shutter six plants in the U.S. and two in Scotland. That loss compares with $43.4 million in earnings a year ago. Levi’s net sales in the quarter were off 11.5 percent to $923.5 million.
The privately owned company discloses its financial results because it has debt that trades publicly.
The plant closings, which included the Thursday shuttering of a plant in Blue Ridge, Ga., are part of a campaign by Levi’s to shift more of its sourcing to low-cost factories abroad, a move most of its competitors in the apparel industry made years ago.
Marineau said a similar rationale prompted the company to drop its agreement with Cone Mills Corp. that made it the sole supplier of fabric for the iconic 501 style and allowed only Levi’s to buy that fabric.
“This is about global economics,” he said. “Our relationship with Cone Mills is really evolving in line with the changing industry.”
While Marineau said he expects the drop in Levi’s wholesale prices to help drive up the number of units the company sells, he acknowledged that during the phasing in of the lower prices, the drop will pinch the company’s top line.
Sales in the Americas region were off 12.5 percent in the quarter, to $596.7 million. Marineau attributed two-thirds of the volume erosion — about $55 million — to lower selling prices.
Levi’s sales in Asia rose 0.4 percent in the quarter, to $85.5 million. However, sales in Europe — where the brand had been growing aggressively in recent quarters — fell 12.8 percent, to $241.4 million.
“This was relatively unexpected on our part,” said Marineau, who attributed the sales drop to a surge of low-priced jeans into the European retail market, which undercut Levi’s sales in the region.
“It’s a market that is just flooded with denim,” he said of Europe. “There is no store window that you can look at and not see denim. So you see a real increase in competition and it ranges from very high-priced goods to a lot of low-priced denim out there.”
While he said the current state of the European jeans market might be a reflection of a trend having overheated at retail, he suggested that over time, the region’s jeans shoppers — who have been more willing to buy expensive jeans than mainstream U.S. shoppers — might start to change their buying patterns.
“Apparel deflation is a phenomenon that, while it may be more intense in the U.S., we are assuming will spread through the world,” he said.
Marineau also noted that the company has overhauled its core Levi’s and Dockers product lines in the U.S. and Asia and has a variety of products coming to market that he described as “category-leading innovation,” which include the upcoming Type One jeans and stain-resistant khakis.
As reported, Type One jeans feature dark denim, bright-color stitching and exaggerated details, and are planned for a spring 2003 retail launch. He said these product changes, along with the wholesale price breaks and a more targeted marketing approach, have brought the company to an “inflection point” in its long-awaited turnaround.
“We have put the operational issues that we’ve had behind us and are now rolling out into the marketplace a full reflection of our growth strategy, which is superlative fit, fashion and finishes by Levi’s and Dockers in men’s and women’s,” he said. “We plan to stabilize Levi Strauss & Co.’s sales by the end of the year and to grow them in 2003.”