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U.S. Wholesale Woes Lower Levi’s Q1 Net

Dockers and women’s Levi’s business struggle as sales in the Americas fall.

Stumbles in its U.S. wholesale operations combined with the weight of restructuring charges to cut Levi Strauss & Co.’s first-quarter profits by more than half.

While reported revenues were up in Europe and flat in Asia, sales in the Americas declined 3.1 percent, to $627 million, and operating income in the region contracted 15.9 percent to $111 million.

“It was fundamentally a problem with our women’s wholesale business in the U.S.,” Chip Bergh, president and chief executive officer, told WWD. “The women’s portion of the Levi’s business is almost $800 million on its own and U.S. wholesale about $250 million of that. We’re striving for innovation and to get the product right, but I think we’ve got another 12 months ahead of us to do that fully.”

He conceded that the “shift to ath-leisure” — with women’s yoga pants migrating to the same ranks of social acceptability as premium jeans had previously — had taken a bite out of the women’s business.

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He said it had also been a tough quarter for Dockers. “I’m still bullish on the brand, but this was the first quarter in five or six in which Dockers was down” in the U.S., he noted. “We’re working on floor presentations now, and some of our wholesale customers are working on executing the brand head-to-toe, like they have in Europe. But even measured against a strong quarter a year ago, we lost ground.”

Among the strengths in the quarter was the performance of core men’s Levi’s product. “It continued to grow in every single region and, largely driven by retail, was up 3 percent overall,” Bergh said. “Our share grew there in the context of a market that’s down in the U.S. and in much of Europe.”

Retail also performed well, with sales of stores owned and operated by Levi’s up 10 percent. Even subtracting the effect of a shift in Black Friday sales — the key shopping day moved to the first quarter of the new year after taking place in the fourth quarter of fiscal 2012 — retail sales were up 6 percent.

“We had more than 350 store closure days during the quarter because of the weather and traffic declined, but we made up for it with higher conversion rates and good old blocking and tackling,” Bergh said.

In the three months ended Feb. 23, Levi’s net income fell 53.3 percent to $50 million from $107 million in the year-ago period. Excluding restructuring expenses, adjusted earnings before interest and taxes declined 9.5 percent to $158.5 million from $175.1 million in the year-ago quarter.

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Revenues slipped 1.5 percent to $1.13 billion from $1.15 billion in the prior-year period. The 3.1 percent decline in the Americas was offset by a 1 percent increase in Europe, to $300 million, and the flat performance in Asia-Pacific, at $203 million. Except for currency fluctuation, Asian sales would have risen, Bergh said.

Gross margin tracked down to 51 percent of revenues from 51.6 percent a year ago.

The restructuring laid out last month by the company, geared to generating annualized cost savings of between $175 million and $200 million, was “difficult,” Bergh said, “but something we knew we had to do. Even before I joined the company [in September 2011], there had been discussions about how we didn’t benchmark well against our peer group on [selling, general and administrative costs]. We weren’t as fast, responsive or agile as we need to be. This was in no way a response to a difficult quarter. It was something we needed to do.”

While declining to provide guidance for the second quarter, Bergh said that there had been some signs of improvement at retail in the most recent week, “but our expectation is that the year is going to be choppy.”