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Chip Bergh isn’t letting a difficult second quarter affect his expectations for second-half strength at Levi Strauss & Co.
This story first appeared in the July 9, 2014 issue of WWD. Subscribe Today.
Bergh, president and chief executive officer of the San Francisco-based jeans and sportswear giant, continues to view an acceleration in Levi’s advertising and promotional cadence, driven by its new “Live in Levi’s” campaign and the opening of Levi’s Stadium as the new home of the San Francisco 49ers, to be among a series of factors that will help the firm rally from a challenging first half.
“I feel very good about the products and marketing we have coming up,” he told WWD after the company disclosed lower top- and bottom-line results for the second quarter ended May 25. “When you look at the external environment, we’ve been through a difficult quarter but we hung in there and saw some signs of progress.”
Among them was a 6 percent increase in the firm’s retail sales and a boost in the Levi’s brand’s men’s business worldwide. These, however, were more than offset by declines in the women’s business at wholesale in the Americas, weakness at wholesale in general in Europe, decreases for Dockers and a series of charges for the company’s cost-reduction efforts and early extinguishment of debt.
All told, second-quarter net income declined 76.2 percent to $11.5 million from $48.1 million in the second quarter of 2013. Stripping out one-time charges, adjusted operating income fell a more modest 6.5 percent to $92.6 million from $99 million a year ago.
Revenues declined 1.6 percent to $1.08 billion from $1.1 billion in the 2013 quarter and were down 1 percent at constant currency. By region, sales were off 3.2 percent to $645 million in the Americas, up 3.2 percent to $261 million in Europe and down 2.2 percent to $176 million in the Asia-Pacific region. Operating income performed similarly — down 8.4 percent in the Americas to $109 million, up 2.7 percent in Europe to $38 million and down 27.3 percent to $24 million in Asia Pacific.
Gross margin dropped to 49 percent of sales from 49.9 percent a year ago.
Year-to-date profits fell 60.4 percent, to $61.4 million, while revenues receded 1.5 percent to $2.21 billion.
Bergh said that, while Levi’s mammoth men’s jeans business grew in the quarter despite overall softness in the category, implying market share increases, the smaller women’s jeans business at Levi’s was unable to overcome what he termed “dramatic” declines that have continued to hit the category in the U.S.
He laid some of the blame for the poor performance in women’s at the company’s feet, saying it had failed to respond to the trend towards “soft, stretchy denim,” a shortcoming that has since been addressed.
“It’s troubling that there’s very little tangible evidence in the U.S. that things have gotten better,” he cautioned as he reiterated his belief in improving trends in the back half of the year, a view shared by many apparel and retail executives. “At this point, I just don’t see improvements in the economy translating into more people going into the stores and doing more shopping.”
Bergh noted that traffic counts in Levi’s own stores were lower in the second quarter than in the first, “and despite continued strong conversion, our U.S. retail traffic declined year-on-year.”
That’s made it even more incumbent on the company to continue to increase conversion rates among shoppers going into its own stores and those of its wholesale customers, an imperative he expects to be aided by the new ad campaign.
Levi’s, he said, earmarks about 5.9 percent of its planned sales for marketing, meaning that advertising and promotion are slated for increases above both the first half of 2014 and the latter half of last year. He’s confident that the “Live in Levi’s” campaign will help not only Levi’s business but the classification as well.
“I’m very bullish about the ‘Live in Levi’s’ campaign,” he said. “For one thing, it’s going to put us back on television in markets like France and the U.K. where we haven’t advertised on television in two or three years. It’s a big idea, focused on product, inclusive, derived from real consumer insight. It could be the sort of message that helps the entire category.”
The global campaign includes television, cinema, digital, print and outdoor elements and marked Levi’s reunion with Foote, Cone & Belding after a long association with Wieden + Kennedy. Levi’s also is working with The House Worldwide, an independent agency.
Some of Bergh’s confidence is derived from the calendar. With a fiscal year ending in late November, the company this year will have a 53rd week and the benefits of two Black Fridays as bookends to its calendar versus none last year.
He’s also hopeful about Levi’s e-commerce business. Levi’s-owned sites have gone live in Australia and New Zealand and a site in China will do the same later this month.