‘Core’ Efforts Lift Levi’s Q1 Net

Expansion of retail operations contributes to improved bottom-line results in all three of its global regions.

Chip Bergh’s mission to bring Levi Strauss & Co. back to its core bore fruit in the first quarter.

This story first appeared in the April 10, 2013 issue of WWD.  Subscribe Today.

Profits more than doubled; margins improved; costs and debt fell, and all three of its geographic regions registered improved bottom-line results despite top-line erosion in Asia-Pacific and a flat quarter in the Americas. A 1.6 percent drop in quarterly revenues was attributed principally to the company’s strategic decision last year to exit the Denizen business in Asia and license out boys’ wear in the Americas, moves that contributed to the bottom-line and margin improvement.

Bergh, president and chief executive officer of the San Francisco-based company, told WWD, “There’s still a lot of work to do, but we’ve got one quarter of the year under our belt and we’re moving in the right direction.”

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For the three months ended Feb. 24, net income grew to $107 million from $49.2 million in the first quarter of 2012. Revenues declined to $1.15 billion from $1.16 billion, while gross margin — aided by lower cotton costs, favorable currency shifts and an increased share of sales emanating from higher-margin retail operations — expanded to 51.6 percent of revenues from 47.1 percent in the 2012 quarter.

Bergh noted that the Denizen business in Asia, unlike the brand’s ongoing U.S. business with Target stores, was not only unprofitable but “a distraction.” Like the previously in-house boys’ business, Denizen in Asia, according to the ceo, wasn’t likely to drive the “sustainable, profitable growth” that he has been seeking from all elements of the business since arriving at Levi’s from Procter & Gamble in September 2011.

Bergh has made continued growth of Levi’s retail operations one of the pillars of his strategy for the company, and noted Tuesday that its expansion contributed to profit and margin improvement in the first quarter. Direct-to-consumer activity was “about 20 percent of our business two years ago and it was about 24 percent in the quarter we just completed,” he said. “And e-commerce was up about 50 percent, but off a very low base. It’s still a low-single-digit part of our business on a global basis and could be much more.”

Bergh expressed satisfaction with progress made by both the Levi’s and Dockers brands during the period as the company saw good results in both the new nondenim versions of its 501 jeans silhouette and Dockers’ modern-fit Alpha Khaki and dressier Signature Khaki initiatives.

“We’re reintroducing some of our iconic items, and we’re focused on supporting them inside the store and out,” he said.

“We’ve seen it at the shops at J.C. Penney — if you get the consumer experience right, it can drive profitable growth,” he added in a positive reference to the retailer and its new store configuration. He declined direct comment on Myron “Mike” Ullman 3rd’s return to the ceo role at the retailer following Ron Johnson’s dismissal from the job on Monday.

He reiterated his conviction to return Dockers to its prior status as a more than $1 billion brand from the current level of about $600 million a year: “About 85 percent of the business is in the U.S. today, so there’s a tremendous potential,” said Bergh.

In the Americas, sales were flat at $647 million while operating income increased 65 percent to $132 million. European revenues rose 2.8 percent to $297 million while operating income grew 21.2 percent to $63 million. In the Asia-Pacific region, sales declined 11 percent to $203 million while operating income was up 19.5 percent to $49 million.

Cost of goods sold declined 10 percent to $554.8 million and SG&A costs were down 6.4 percent to $410.4 million. Net interest expense was also down, dropping 16.6 percent to $32.2 million from $38.6 million in the year-ago period.

While acknowledging that Levi’s, with nearly $1.6 billion in long-term debt on its balance sheet at the end of the quarter, remains “highly leveraged,” he pointed out that about $385 million in debt has been paid down since the end of fiscal 2011.

“We want to improve the financial health of the company so we can get some of that interest expense back and use it to improve our brands,” he said. “With more cash, we can open more stores, do more in-store for our customers and advertise more.”