LEVI’S SLOWED BY ECONOMY
Byline: Scott Malone
NEW YORK — The shaky economy proved an unstable base for Levi Strauss & Co. to advance its turnaround efforts in the first quarter, with a slowdown in shopping causing sales to slip 8 percent and cutting net income in half.
However, executives with the San Francisco-based jeanswear giant were adamant that they would stem the company’s sales erosion this year.
“We believe we are on track to do exactly what we said, which is stabilize the company’s sales in 2001,” Phil Marineau, president and chief executive officer, said in an interview. Levi’s defines stable sales as within two percentage points of last year’s results, on a constant-currency basis.
Worries about the broader economy lent a different tone to the company’s Tuesday conference call with fixed-income analysts than the one two months earlier. At that time, Levi’s officials said they were ahead of where they expected to be in their turnaround and were expecting a healthy quarter.
William B. Chiasson, senior vice president and chief financial officer, said: “As the U.S. retail market softened and economic concerns mounted, the latter part of the quarter became particularly challenging for us.”
For the quarter ended Feb. 25, net income was $29.6 million, down from $65.2 million in the first quarter of 2000. Net sales were $996.4 million, down from $1.08 billion.
The privately held company discloses its financial results because of a public debt issue.
Marineau pointed out, however, that prior-year sales include significant amounts of clearance merchandise, a result of some of Levi’s fashion missteps in seasons past.
“We had a huge quarter in the first quarter of 2000 as a result of closing out the Dry Goods line,” he said. “If you look at our first-quality sales for the company through the first quarter, we are basically right where we want to be, which is flat with a year ago.”
He said much of the company’s margin improvements in the quarter — gross margins came in at 44.2 percent of sales, compared with 41.6 percent — is attributed to the company’s higher rate of first-quality sales.
Chiasson noted that about one point of that increase “was driven by more favorable sourcing costs,” as a result of the trade benefits recently extended to the Caribbean Basin Initiative countries, where Levi’s produces most of its Dockers merchandise.
However, Marineau emphasized that he doesn’t expect the CBI margin boost to be a long-lived one: “It’ll get spent back one way or the other, either in price or in promotion.”
Marineau said the company is not moving more production into the CBI region as a result of the extension of trade parity.
One result of the economic slowdown in the quarter was a buildup in inventory. Chiasson said the company ended February with inventories of $744 million, 14.1 percent higher than they’d been at the close of the fourth quarter. That came about as retailers revised their sales plans, he said, because “the weak U.S. environment led to order cancellations.”
“We are, however, comfortable with the quality of the inventory,” he said, explaining that it is mostly basic replenishment products, not fashion items. A heavy buildup in inventory in 1999 is part of what led Levi’s into its downturn.
“Our brands are currently not overstocked in most of our retail accounts,” Chiasson continued. “Inventory management remains a priority and we expect to work through this excess by yearend.”
Marineau said the order cancellations mostly coincided with the end of retailer’s fiscal years, which tend to wrap up in January. Since then, he said, ordering activity has normalized, though retailers are becoming more conservative.
“Retailers are trying to manage their inventories very closely, given the uncertain economic environment,” he said.
Levi’s sales were down in all of its geographic regions. In the Americas, sales were off 4.1 percent, to $662.2 million. In Europe, sales dropped 15.1 percent, to $257.3 million; and in Asia they fell 13.5 percent, to $76.9 million. On a constant-currency basis, European sales would have been down 7.1 percent and Asian sales would have declined 5.8 percent.
“Our Dockers women’s business is very strong these days,” Marineau said. “The reception that we’ve had to the basic women’s stretch product and our twill khakis has been very strong in women’s. We’re really excited about the Superlow low-rise stretch product, which is starting to take off now.”
However, given Levi’s need to build sales in an adverse economic environment, he said the firm is negotiating with some top retail customers to allow them to drop below Levi’s $29.99 minimum advertised price rule on basic red-tab product.