LEVI’S TO PUMP UP FUNDING FOR REVAMP OF U.S. OPERATIONS
Byline: Thomas J. Ryan
NEW YORK — Levi Strauss Associates Inc., facing increased competition from lower-priced private-label products, has substantially increased funding to revamp the way it does business in the U.S.
The San Francisco-based apparel giant, whose worldwide sales last year were $6.07 billion, now expects to spend at least $850 million under the plan, according to its new 10K filed with the Securities and Exchange Commission. That’s 70 percent more than the $500 million projected when the plan was first announced in 1993.
The plan focuses on improving customer service and building stronger relationships with key retailers and suppliers.
Levi’s said a strong consumer emphasis on value and price, as well as private-label brands, have affected sales of its Levi’s and Dockers brands.
“Increasing price-consciousness is putting pressure on brand and product loyalty,” Levi’s said in the 10K. The company cited the Arizona Jean Co. brand by J.C. Penney Co. and the Anchor Blue brand by Miller’s Outpost as specific examples of private labels offering increased competition. Miller’s Outpost, based in Ontario, Calif., is a sportswear specialty chain of around 350 stores, owned by Amcena Corp.
Nevertheless, Levi’s noted that it is seeing growth in the U.S. in its Levi’s brand women’s jeans, and they will be a factor in pushing unit sales in the U.S. slightly ahead in 1995.
Of the $850 million in total spending planned by Levi’s for the restructuring, more than $400 million is being used to realign its U.S. distribution network and expand systems, and for organizational and manufacturing changes. In 1993, Levi’s estimated that outlay at $300 million. The revised projection includes $290 million for the construction, renovation and retrofitting of new and existing customer-service centers.
Another $450 million was allotted for “transitional expenses,” including software costs, possible writeoffs of existing facilities and equipment, and training costs. Under the original plan, $200 million was slotted for transitional expenses.
About $150 million was spent last year on these projects, most of which are expected to be completed over the next two years, according to a Levi’s spokeswoman.
The revised spending projections include approximately $90 million to open approximately 190 company-owned stores in key markets within five years. Levi’s announced plans for these stores last year. They’ll include Original Levi’s Stores, Dockers Shops and separate outlet stores selling only Dockers and Levi’s products. In addition, Levi’s plans to enter a joint venture with Designs Inc. to open 50 Original Levi’s stores in the northeastern U.S. The company will own a 30 percent stake in the venture.
The Levi’s spokeswoman said some of the extra costs stemmed from the rebuilding or expansion of regional distribution centers with insufficient capacity. The distribution centers also will add technology that offers retailers floor-ready merchandise with bar coding, labeling and specialized packaging, she said. The spokeswoman added that costs involve moving employees closer to prime retailers and getting suppliers in line with Levi’s effort to build stronger alliances. The plan seeks to substantially reduce lead times and establish information systems that link the company to suppliers and retailers.
As part of its customer service initiative, Levi’s plans to rationalize its supplier base in the future and develop strong relationships with key suppliers going forward. The spokeswoman said Levi’s is determined that working with a vast number of suppliers “was both expensive and time consuming,” while developing strategic partnerships gives the company a better opportunity to spot market trends and offer more consistent quality.
Last year, Cone Mills Corp. was the largest supplier, accounting for 29 percent of the fabric for U.S. operations and 17 percent of non-U.S. operations. Burlington Industries supplied 14 percent of U.S. operations and Dominion Textiles supplied 8 percent for non-U.S. operations.
While business in Europe and some other international regions is booming, Levi’s business in the U.S. was stagnant last year and Levi’s expects it will remain sluggish in 1995.
U.S. sales in 1994 were flat at $3.7 billion in 1994 as a 5 percent gain in selling prices offset a 5 percent decline in unit sales. U.S. earnings, though, were up 22 percent as a result of lower production costs, reflecting reversals of workers’ health and safety cost accruals.
U.S. unit sales of the core 501 family of jeans declined 5 percent from 1994 after falling 21 percent in 1993. The decline reflects strength in other jeans products, such as lower-margin Orange Tab and other Red Tab products, and the impact of higher unit selling prices for some 501 products.
In addition to the impact of private-label competition and growing price-consciousness, the decline in the 501 brand also reflects “counter diversion tactics” to prevent the selling of U.S-bought jeans at much higher prices outside the U.S. Operating margins in the U.S. were 14.9 percent of sales in 1994 versus 26.5 percent in Europe and 19 percent in other non-U.S. areas.
The Levi’s spokeswoman pointed out that in Europe and many other regions Levi’s, is viewed as a premium brand while many people in the U.S. wear the jeans to work. The spokeswoman said the company sees the prices “coming a little closer together” here and abroad partly due to efforts to increase prices in the U.S. Margins in the United States last year improved from 12.5 percent in 1993. Higher selling prices on some Levi’s brands in the U.S. led to record dollar sales for its men’s, women’s and youth-oriented Levi’s brand product lines.
Worldwide, jeans-related products accounted for 72 percent of sales last year.
In the U.S., the company expects sales under the Levi’s men’s brand, which accounted for 33 percent of sales in both 1994 and 1993, to be relatively stable in 1995.
Levi’s brand women’s jeans are expected to generate higher dollar and unit sales in 1995 due to the offering of more tops, Orange Tab products and special sizes. In addition, the line will add emphasis on the misses’ market.
The Levi’s jeans-for-women product line will be supported by a new version of “Women in Motion” advertising campaign. Levi’s said its women’s jeans are the number-one seller in the junior market.
Levi’s said the U.S. jeans market in total in 1994 was even with 1993 levels, and it expects no real growth for 1995.
Unit sales of Dockers slumped 21 percent in 1994 after slipping 4 percent in 1993. The Dockers product line decreased, reflecting limitations in finishing capacity stemming from the launch of wrinkle-resistant pants and the repositioning of the women’s Dockers line.
The company expects sales of Dockers products to be slightly higher in fiscal 1995 due to increased wrinkle-resistant product sales. The company said its wrinkle-resistant Dockers men’s products were widely accepted by consumers.
Levi’s expects dollar and unit sales for the women’s Dockers product line to be slightly lower in 1995. The company said women’s Dockers has been hurt by a “very weak retail environment for moderate sportswear products.”
For 1995, the company expects U.S. unit sales to be slightly higher than 1994 due to the strength of Levi’s women’s and Dockers’ men’s brands.
The Brittania brand, which targets the mass market, had slightly lower sales in 1994.
As reported, Levi’s posted net income of $321 million in the fiscal year ended Nov. 27, 1994, against $492.4 million a year earlier. The 1994 results included a noncash accounting charge of $236.5 million.
Disclosing other details of 1994’s results, the 10K states that total operating earnings in Europe rose 11.9 percent to $409.2 million while sales climbed 15.9 percent to $1.54 billion. Results were particularly strong in Italy and Germany.
In other non-U.S. regions — which include Canada, Mexico, Latin American and Asia Pacific divisions — operating earnings dipped 9.9 percent to $154.5 million, while sales slid 4.1 percent to $810.2 million. Sales were particularly soft in the Asia Pacific region, particularly Japan, due to a slow economic recovery, a market shift to lower margin products, and the introduction by competitors of lightweight rayon jeans. Sales in the Philippines and Korea increased.
Sales outside the U.S. primarily consist of basic jeans products. In 1994 the company rolled out its Dockers line in Europe and New Zealand and continued to offer Docker products in Philippines and Hong Kong. In 1994, the company commenced operations in India and plans to establish operations in South Africa this year.
The company said that outside of the U.S. it distributes to about 1,100 independent stores that sell only Levi’s brand products. The company opened one owned-and-operated flagship store in London in 1994 and plans to open two more flagship stores in Milan and Madrid in 1995.
In 1994, U.S. advertising expense was $233.5 million, a decline of 5 percent. The company spent $139.2 million in international advertising in 1994, up 7 percent from 1993.