Chip Bergh got serious about his drive to foster profitable growth at Levi Strauss & Co., pulling the company out of two high-maintenance, low-profit businesses.
The president and chief executive officer, who joined the firm in September 2011, disclosed the closure of the company’s Denizen business in Asia and the licensing of its previously in-house Levi’s boys’ business in the Americas. The moves impacted the company’s third-quarter results, which saw an 11.9 percent drop in earnings and an 8.6 percent decline in revenues for the third quarter.
During a conference call with analysts late Tuesday, Bergh said the exit from the Denizen business in Asia, launched there with much fanfare in 2010 before being expanded to Target stores in the U.S. last year, was made “to focus our energy and attention on our Levi’s brand in this region. While this strategic change has a short-term financial impact, the phase-out of Denizen in Asia will benefit our total company margins and bottom line.”
He emphasized that the move has no affect on the company’s business with Denizen with Target, which carries the brand in more than 1,700 U.S. stores and is taking it to Canada as part of the retailer’s expansion into that market.
Pressed by analysts, he declined to specify the volume or market penetration of the brand in Asia. A company spokeswoman said its contribution to revenues wasn’t substantial, with most of the business coming through franchise arrangements, such as about 270 small stores in India. According to Levi’s 2011 annual report, its Denizen and Signature brands together last year accounted for about 5 percent of total revenues, or just less than $240 million out of corporate revenues of $4.76 billion.
Bergh similarly described the existing boys’ wear business in the Americas as “relatively small. It consumed a fair amount of resources because it is fairly intense. We’ve got a licensee who we work with in other parts of the world and who we work with on other parts of the business who really is focused on licensing kids’ products….They’ve got scale in the kids’ business. It’s kind of their sweet spot.”
From a financial standpoint, “we give up the wholesale revenue, but take the licensing profit,” he added.
The licensee is The Haddad Apparel Group Ltd., a large children’s wear marketer based in New York which also has rights to Nike Inc.’s Nike, Jordan and Converse brands. Officials at Haddad, who requested anonymity, told WWD that the firm has had a 10-year relationship as a Levi’s licensee and also holds the rights to Levi’s girls’ wear as well as a number of accessories, hosiery and underwear classifications in children’s wear. While not global in scope, the add-on to the Haddad license, effective with fall deliveries, will incorporate some markets outside the Americas, Levi’s and Haddad said.
Levi’s had said that selective, strategic cost cuts were being studied during its first-quarter earnings call in April.
In the third quarter ended Aug. 26, Levi’s net income fell 11.9 percent to $28.4 million from $32.2 million in the 2011 period. Gross profit fell 8.6 percent, to $520.7 million, with the Denizen decision subtracting $25 million from the total and the negative effects of currency translation eliminating another $45 million.
Revenues fell 8.6 percent to $1.1 billion from $1.2 billion in the year-ago quarter. By region, revenues dropped 5.4 percent in the Americas, to $679 million; 3.3 percent in Europe, to $266 million, and, reflecting the Denizen exit, 26.1 percent in Asia-Pacific, to $156 million. At constant currency, revenues were down 4 percent in the Americas, up 12 percent in Europe and down 21 percent in Asia-Pacific.
Kevin Wilson, interim chief financial officer, blamed the double-digit Asia-Pacific dip on “the increasingly deteriorating conditions” in the area, as well as the impact of reducing its Denizen inventories.
Bergh sounded a distinctly positive note about the San Francisco-based company’s business with J.C. Penney, noting that the 700 units with Levi’s shops-in-shop in remodeled stores had experienced “dramatic positive improvement” while those not yet converted had, like the business in the renovated stores prior to remodeling, fairly closely followed “the overall J.C. Penney decline.” In the second quarter ended July 28, Penney’s same-store sales fell 21.7 percent.
For the first nine months, Levi’s net income dropped 3.2 percent, to $90.8 million, as revenues slid 3.1 percent to $3.31 billion. While gross margin was flat at 47.3 percent of sales in the third quarter, it declined 200 basis points to 46.8 percent of sales for the nine months.