SALES SLIP BUT LEVI’S NET GROWS

Byline: Scott Malone

NEW YORK — Lower interest expenses and currency fluctuations helped Levi Strauss & Co. report a 47.4 percent increase in net income for its first quarter, though the company’s sales decline continued.
Phil Marineau, president and chief executive officer of the San Francisco-based company, said he expects tough economic conditions to continue into the second quarter, but said he remains confident the company will see its sales once again rise in 2003. The firm’s revenues have declined five years in a row and are expected to do so again in 2002.
For the quarter ended Feb. 24, Levi’s recorded net income of $43.6 million, up from $29.6 million in last year’s first quarter. Sales were off 6.1 percent, to $935.3 million.
The Americas region remained the company’s weak spot, with revenues slipping 9.2 percent, to $601.3 million. Sales in Europe were up 1.3 percent, to $260.6 million. In Asia, where revenues were substantially hurt by currency fluctuations, sales slipped 4.7 percent, to $73.3 million. Factoring out currency changes, Asian sales would have been up 3.3 percent and results in the Americas and Europe would also have been better.
The privately owned firm releases its financial results because it has publicly traded debt. It has $1.85 billion in long-term debt.
Marineau said he thinks the low point of the year is ahead of Levi’s.
“We’re seeing a second quarter which we expect will be the most difficult one we’ll face this year,” he said in a conference call with fixed-income analysts. “During the second half, we expect to stabilize at the top line and, by the end of the year, be prepared to grow in 2003.”
While he acknowledged there are signs that the U.S. economy is improving, he said the effects have not yet been felt in the apparel market.
“We have retailers that are very cautious. They’re still working through closeouts from last year, particularly on their private label merchandise,” he said. “That inhibits their ability to buy.”
In a phone interview following the conference call, Marineau said he believed retailers’ nervousness about the economy is somewhat more intense than consumers’ worries.
“We’re operating on the proposition that as we hit the back half of the year, based on consumer confidence, that retailer confidence will be stronger,” he said. “There is a caution out there that is appropriate.”
On the conference call, chief financial officer Bill Chiasson said that while U.S. revenues were off, unit sales at many of the company’s accounts showed improvement as the result of a more aggressive price promotion strategy in the quarter.
Marineau explained the firm had decided to loosen up its procedures regarding discounting.
“We were too hard to deal with, in terms of how complicated all our processes and procedures and funding were related to promotions. We’ve simplified our whole way of doing business,” he said. “That provides [retailers] the flexibility to promote when they want to promote, not when we want to promote.”
The company lowered its advertising spending in the quarter to accommodate the increased promotions, according to Chiasson. Ad expenses came to $66 million, or 7.1 percent of sales, compared with 8 percent of sales a year ago, which would have been $79.7 million.
Marineau said the increased promotions did not reflect an intent to lower Levi’s opening price points in the U.S. The company is planning to introduce new merchandise to sell at lower opening price points in Europe and Asia, where most of its products retail for substantially higher prices than they do in the U.S.
“What we’re focusing on is improving our retailers’ margins on that product line [Levi’s Red Tab]. We’re not trying to drive it down any further,” he said. “What most retailers want from Levi’s and Dockers is the opportunity to sell more at a higher rate. We’re trying to hold the price points that we’re at and promote smartly.”
The company also plans to trim its assortment by about 40 percent over the rest of the year, to make for a less confusing product offering.
“It edits the line to make buying a pair of Levi’s more easily understood in terms of fit and style,” the ceo said. “We have a lot of product codes that duplicate other parts of the line. All we’re doing is eliminating, as time goes on, some of the duplication.”
He said none of the brand’s keystone styles, such as the 501, 550 and 505, would be eliminated as a result of the cutback. Instead, he described a “soft conversion,” in which selected products would slowly be dropped out of the line over the next nine months.
The company remains in talks with the apparel union UNITE about closing some of its eight U.S. factories and expects to make a decision on closings by the end of May, Chiasson said. Levi’s also is in talks to close two plants in Scotland.
Marineau also clarified Levi’s thinking on the possibility of selling its products to mass market retailers. As reported, there has been speculation that the company might begin selling to Wal-Mart Stores Inc. While Marineau did not rule out that possibility, he said Levi’s would not sell its core Red Tab line in the mass channel.
“Our commitment is to restore the luster to Levi’s Red Tab as the premiere jeans brand in the U.S. in our current channels of distribution,” he said. “We have no intention of selling Levi’s Red Tab outside of the channels of distribution we’re in today.”
But he acknowledged that the company might sell other lines to mass merchants, saying: “There are 50 million pairs of jeans sold in discount stores and we’re in the business of making pants. We’d be crazy not to be looking at other Levi Strauss & Co. brands that could be sold in those channels.”
Still, the mass option is something the company will consider more seriously after it’s stemmed its sales slump — Levi’s expects to see its sixth consecutive year of revenue declines in 2002.
“We need first and foremost to restore the growth back into the Levi’s Red Tab business. That is going to happen in 2003,” he said. “Then we’ll look at other things.”

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