Four years ago when Procter & Gamble veteran Chip Bergh took the helm of the then-troubled Levi Strauss & Co. as its president and chief executive officer, he was compelled by the heritage of one of America’s oldest and most iconic brands.
Sure, annual sales had dropped to $4 billion in 2003 after peaking at $7 billion during the mid-1990s, but Bergh was riveted by the company’s deep history, and how people everywhere seemed to have a story or two about their first pair of Levi’s. It was a brand with staying power. And besides, after 28 years at P&G, he craved a legacy project to call his own. In its most recent annual report, total revenues were $4.8 billion for 2014.
Today, after committing to turn the company around and elevating the business to a significantly more stable position, Bergh is just as smitten with Levi’s. And he says there’s still a lot of work to be done.
To hear him talk about the brand, the business and its people, one would think that Bergh is in a perpetual state of honeymoon with the company.
“It’s an amazing brand,” he told WWD, pointing out that the over the past four years, the company has engaged in a clear and strategic approach that focused on its core business — mostly men’s bottoms — while also expanding into tops and significantly growing its women’s business as well as investing in its retail and e-commerce businesses, both here and abroad.
The outcomes include two consecutive years of consistent top- and bottom-line growth (at constant currency rates) and a reduced debt load. And it’s that consistency that piqued the interest of Fitch Ratings, which upgraded Levi Strauss & Co.’s debt ratings this past Thursday, and pegged it with a “positive” rating outlook.
“The upgrade reflects Levi’s continued earnings before interest, taxes, depreciation and amortization growth and Fitch’s increased comfort in the company’s ability to drive low- to mid-single digit EBITDA growth over the next 24 to 36 months,” the analysts said in their ratings report.
The ratings firm said the positive outlook reflects the company’s “better than expected benefit” from its cost-cutting initiatives and debt pay down efforts (using its free cash flow). “Levi has produced stable-to-improving top line results, with low-single digit growth expected in [fiscal year] 2015 following 3 percent growth in [fiscal year] 2014 [at constant currency],” the analysts said adding that top-line results will dip – as expected – while the company experiences a fiscal calendar year shift as well as the “transition of the Dockers women’s business from wholesale to a license model.” But beyond that, Fitch sees continued growth.
Bergh, who spoke with WWD while on a visit to New York City, said the cost-cutting initiatives will result in savings of $175 million to $200 million each year. And the ceo said any additional savings realized would go right back into the business to fuel further growth. “And there’s plenty of runway to grow our brands,” Bergh contended. “We’ve got plenty of liquidity, so we’re in a much better place. But there is more work to be done. The last time I checked, Levi’s didn’t have 100 percent market share.”
Bergh, a former U.S. Army air defense officer who was stationed in then-West Germany during the 1980s’ Cold War, acknowledges the challenges ahead. From mass market and fast fashion to athleisure and active wear, the denim business is under attack, fragmented and in flux.
“Which is why we have to innovate,” he said. “And that means meeting a consumer’s need for comfort and style – but that still looks and feels like denim.”
“But we’re not chasing fast fashion,” Bergh said. “In fact, we’re the antithesis of fast fashion.”
Which is why the ceo, early on, moved the company’s product development lab from Turkey to San Francisco – near Silicon Valley (and its tech-savvy workforce). It’s at the lab, named “Eureka,” that ideas are formed, tested and launched – worldwide. This push toward innovation also nudges up the price point, and gross margins as well.
Late last month, the company shored up its women’s business via a high-end capsule collection that was designed with Web site Jean Stories. Levi’s x Jean Stories Collection features 100 pieces, and has a retail price point of $250 each.
Bergh also sees broader growth opportunities for Levi’s in the high-end denim business. Is it truly premium denim? “We call it innovating up,” Bergh said, adding that “we’ve been successfully moving price points up in the U.S.” through washes, finishes and stretch technology. Interestingly, Levi Strauss & Co. could have been a leader in the high-end denim business years ago.
“Offering jeans at $150 during the premiumization of the business, well — that should have been us,” he said. But market conditions changed, which included a consolidation of the wholesale end of the business. And the growth of mass retailers and private labels also hamstringed the company’s ability to thrive.
It’s noteworthy that as a private company with public debt, Levi Strauss & Co. doesn’t face the same scrutiny of Wall Street as companies with a public stock. However, Bergh said he does have to answer to the company’s private shareholders – decedents of the company founders. And there is discipline, he added, around reporting quarterly results and holding earnings calls.
Will Levi Strauss & Co. get caught off-guard again like it did in the later 1990s? Will it miss the mark? Bergh might have the right balance of discipline (thanks to the U.S. Army) and optimism (“I am generally optimistic about the denim business overall; look at all the denim during the recent spring collections — that will trickle into the market,” he said). He certainly has enough nostalgia and love of the brand.
Bergh recalls a time while stationed in Germany when he took leave, and travelled to Norway. Like most travellers in the country who stay at local hostels, Bergh would wash his clothes while he was wearing them in the shower. One day in Bergen, the second-largest city in Norway after Oslo, Bergh washed his clothes — including a pair of Levi’s — and hung them to dry. This time, though, he left his wallet near the drying jeans and returned to his room.
Sometime later, he realized the mistake, and rushed back to get his wallet — fully expecting it to be gone. No, it was there, but the jeans were gone. “Levi’s were currency back then,” he laughed, then mused if the brand could again trade with that same equity.
“We’re focused on the long term,” Bergh said. “There’s a lot competing for the share of the consumer’s wallet. Look at the price of rent in [major markets]. It’s challenging, especially for Millennials. So this will take work, but we’ll get there.”