Despite the effects of higher costs and aggressive discounting, Levi Strauss & Co. was able to generate a double-digit increase in third-quarter profits.
For the three months ended Aug. 28, the San Francisco-based apparel giant tallied net income of $32.2 million, up 14.2 percent from the $28.2 million reported for the comparable 2010 period.
Sales and total revenues were ahead 8.6 percent, to $1.18 billion and $1.2 billion, respectively, from $1.09 billion and $1.11 billion in the year-ago period. The increase in revenues would have been more than halved, to 4 percent, at constant currency, the firm said. Revenues in the Americas expanded 6.7 percent to $718 million and were up 6 percent excluding currency fluctuation, while European revenues rose 6.2 percent to $275 million but fell 4 percent at constant currency. Regional performance was highlighted by Asia Pacific, where sales grew 19.2 percent, to $211 million, and were up 11 percent without currency effects.
Price pressures drove the cost of goods sold up 12.2 percent to $634.6 million, contributing to a decline in gross margin to 47.3 percent of revenues from 49 percent a year ago. Despite a 6.3 percent drop in operating income, to $80.9 million from $86.3 million, the bottom line benefited from a reduction in income tax expense to $13.6 million from $20.3 million in last year’s period.
“In the third quarter, we saw continued revenue growth from the Levi’s brand in markets around the world, but increased cotton costs continued to put pressure on the margins of all our products,” said Blake Jorgensen, chief financial officer.
He told WWD that concerns about global economic conditions led Levi’s to concentrate on limiting its inventory exposure, “continuing to discount when required to keep levels down. We’re most concerned about the ongoing economic situations in the U.S. and Europe and the pressure they’re putting on the value-oriented customer. As we’ve raised prices, we’re obviously seeing a much larger impact in the value channel.”
Jorgensen doesn’t expect substantial improvement in the price situation until the back half of 2012. “I don’t think we’re going to see 50 cents a pound again, but I don’t expect to see $2, either.”
While Levi’s excelled, Dockers was “clearly a challenge in the quarter,” Jorgensen said, with U.S. revenues down principally on price concerns, again focused on mass and middle-market shoppers.
“There’s a bit more flexibility in jeans, where prices range from $20 to $400, than there is in khakis, where prices, with few exceptions, are in the $20 to $40 range,” he said. “As we’ve learned in this cycle, the economy isn’t getting any better and higher prices don’t help that.”
The company cited the “expansion and performance” of its retail network for its contribution to sales growth. At the end of the quarter, Levi’s operated 499 stores, 43 more than it did a year ago.
Net income for the year to date was $93.8 million, up 33.8 percent from $70.2 million in the first nine months of 2010. Revenues grew 9.5 percent, to $3.42 billion from $3.12 billion, while gross margin dropped to 48.8 percent of revenues from 50.5 percent a year ago.
Asked by an analyst on the company’s conference call if Levi’s would consider an acquisition, Chip Bergh, who joined the company as president and chief executive officer on Sept. 1, said preservation of cash and further development of existing brands would remain the company’s priority.
“Doing a deal right now would be a distraction,” he said.