Levi Strauss & Co.’s chief executive officer believes the wild currency swings of the recent past could become part of a “new normal” in global finance.
This story first appeared in the April 15, 2015 issue of WWD. Subscribe Today.
“There’s no saying that this type of volatile activity couldn’t become a regular part of doing business in the years ahead,” Chip Bergh, president and ceo of the San Francisco-based jeanswear giant, told WWD as the company, hit by severe currency headwinds in Russia and throughout Europe, reported lower sales and earnings for the first quarter ended March 1. “We can’t do anything to control it, but we can take actions to counter it and make sure that we’re prepared to respond to it.”
In Russia, the company already has reacted, raising prices as the value of the ruble has plunged about a third from year-ago levels against the dollar. “And we may have to take price again in order to protect and preserve a business that we’re very bullish on in the long term,” Bergh said.
A weak wholesale business in the U.S. and the absence of Black Friday at the start of the quarter, as opposed to the presence of one at the beginning of last year’s period, combined with currency challenges to lower overall results.
Net income dropped 23.2 percent to $38.4 million from $50 million in the 2014 quarter. Adjusted operating income fell at a similar pace, down 24.5 percent to $120 million, while operating profit, which doesn’t include $36 million in foreign currency losses, grew 14.7 percent to $107.4 million.
Revenues dropped 6.6 percent, to $1.06 billion from $1.13 billion, and were down 1 percent at constant currency. Gross margin fell to 50.9 percent of sales from 51 percent in the year-ago period. Without the effect of shifting currencies, the figure would have risen to 51.3 percent because of lower negotiated product costs and a streamlined supply chain, the company said.
The currency effects were greatest in Europe, where revenues were down 7.7 percent, to $277 million from $300 million, while rising 9 percent at constant currency. Exchange rates pulled $46 million out of the European revenue number. Operating income in Europe fell 18.3 percent, to $58 million, with $12 million being subtracted from the income figure by currency impact, without which the decline would have been trimmed to 2 percent.
Revenues in the Americas pulled back 8.5 percent to $574 million from $627 million with softness in the U.S. wholesale channel, the absence of Black Friday at the start of the quarter and the transition of the women’s Dockers business to a wholesale model weighing on results.
Asia-Pacific sales rose 4.3 percent to $204 million from $203 million.
Overall, the company’s retail sales were up 4 percent in the quarter, offset by the larger wholesale business, which declined 3 percent. The retail business continued to experience lower traffic levels, as it has for the past 18 months, but managed gains because of “doing a better job of conversion and having the right product,” the ceo said.
E-commerce grew to more than 10 percent of the retail business and the company continues to look for ways of building more functionality into its Web site, including the testing of Fit Finder, and continued development of its business with both the Web sites of its wholesale customers and e-commerce pure plays.
“I’m agnostic about whether consumers buy on levis.com, jcpenney.com or macys.com,” Bergh said, adding that Amazon has now grown into one of the company’s fastest-growing accounts and ranks among its 10 top customers globally.
He is encouraged by the performance of the Live in Levi’s ad campaign and by both recently introduced denim products and those in the pipeline for later this year. The slim-fit 511 and athletic-fit 541 are “off to a very good start” in the men’s market, and the 501CT — standing for “customized and tapered” — is being received well by both men and women. The company, which missed the early stages of the trend toward what Bergh termed “supersoft, stretchy denim,” has now caught up and is among the leaders in the women’s market in the return of the “boyfriend” jean, often offered in destructed denim.
But the company’s ongoing push for “newness and innovation” will be put to the test in the second half of the year, when Levi’s plans a “women’s reset” in which its women’s jeans will be assigned model numbers based on fits and silhouettes to be presented prominently in its own stores and in those of its customers.
“It’s already got a lot of miles on it,” Bergh said. “We’ve been testing it around the world and putting it in some of our stores. By the time it hits full force this summer, we intend to execute it brilliantly.”