LEVI’S FACES A LONG HAUL TO RESTORE MARKET CLOUT
Byline: Thomas J. Ryan
NEW YORK — The magnitude of the challenges facing Levi Strauss & Co. was made quite clear recently when the San Francisco-based company revealed that income plummeted 94.7 percent in 1999. The company disclosed the details to debt analysts in a conference call late last month.
This news follows the privately held company’s announcement that its 1999 sales were off 13.7 percent. As reported at that time, Levi’s new president and chief executive officer, Philip Marineau, said the company has been stabilized and that now recovery must begin.
After three years of sales declines, Levi’s has been shaken up both outside and inside. Its market share has declined and multiple changes of course in marketing and advertising strategy have left retailers and consumers scratching their heads as to what Levi’s wants to be and to whom it wants to appeal. The company has also undergone wholesale changes in its executive ranks over the past year or so.
Marineau, a former Pepsi-Cola executive who took the helm in September, said that rather than looking for a dramatic stroke to radically change the jeanswear giant’s direction, he will emphasize gradual recovery. His focus is on making basic operational improvements — improving Levi’s delivery rates — and keeping designers’ eyes on what he called “great basic product” to appeal to Levi’s broad customer base.
However, the gradual turnaround is not expected to result in a rebound in sales this year. Marineau said he doesn’t expect a sales upturn until 2001.
In a conference call with fixed income debt analysts last month, the company revealed that it squeaked out a $5.4 million profit in 1999, compared with $102.5 million the prior year. Those figures came on 1999 sales of $5.14 billion, compared with $5.96 billion.
While 1999 results were hammered by big interest payments and heavy restructuring charges related to the company’s announcement last year that it would close half its then-22 plants. But even excluding those special items, operating income was down 52.5 percent for the year ended Nov. 28, to $328.8 million from $691.5 million.
A Levi’s spokeswoman said the firm released its 10-K report to debt holders “to provide a little more detail about our company and our business in response to feedback.” The Wall Street conference call is believed to be the firm’s first since going private in 1996.
The announcement is thought to have been prompted by worries over Levi’s financial condition that caused the company’s bonds to sink to distressed levels. In late January, the company’s bank lenders reworked Levi’s loan to take a lien on the company’s assets.
The documents released show that gross margins last year were 38.1 percent of sales, off from 42.4 percent — a result of the company needing to clear out its inventory pipeline. Marketing, general and administrative expenses rose to 31.7 percent of sales from 30.8 percent.
The company’s restructuring efforts took a heavy toll on the bottom line in 1999. Results included $497.7 million in charges primarily related to the plant closings.
Those charges were partly offset by a $343.9 million reversal credit related to the company’s backing away from its “global success sharing” plan, a bonus program for its employees.
That program was put in place at the time Levi’s went private. Because it would be harder to award stock to employees, the company set up an ambitious bonus program that called for a one-time cash payment to eligible employees in 2002. That payment was to be between 3 and 10 percent of cash flow, assuming that minimum cash-flow requirements were reached.
Levi’s employees could have split a bonus of as large as $760 million under the terms of the plan as it was originally conceived.
However, Levi’s last year lowered its financial forecast for 2000 and 2001 and as a result lowered the reserve set aside for bonuses.
The company said a 2002 bonus payment now appears unlikely. The latest year also includes a combined $70.3 million credit for reversals related to other employee-incentive plans.
Fiscal 1998 results included $341.2 million in one-time items, including both restructuring charges and gains due to reversals of reserves.
The company’s efforts over the last three years to change its model from a manufacturing operation with large assets concentrated in the U.S. to a company that outsources sewing to wherever costs are lowest has resulted in about $3 billion in costs. Over that time the company has closed 24 plants, five finishing facilities and eliminated 15,690 jobs.
As of Nov. 28, Levi’s had a payroll of 18,000; 1,890 of those workers were headed for layoffs under the terms of previously announced restructurings.
Levi’s earnings before interest, taxes, depreciation and amortization — an important measurement of cash flow for debt-heavy firms — fell 53.8 percent, to $378.6 million from $820.3 million.
The firm noted that 1999 results included $50 million in costs related to plant downtime and $115 million in losses to clear excess inventories. Excluding those items — which Levi’s said should not recur — EBITDA was down 33.7 percent, to $543.6 million.
Nonetheless, the company’s bonds remain depressed. Levi’s 6.8 percent notes maturing in November 2003 are trading at 65 and its 7 percent coupon notes maturing in November 2006 are quoted at 59.
Brian Jarmain, associate director at M.J. Whitman, said trading has picked up as some investors bet on a turnaround, and he expects prices will eventually rise as well.
“There’s a lot of bonds trading at these levels, and that indicates that a lot of investors feel there is great value in the Levi’s name and the company will turn around and improve its sales,” said Jarmain.
Levi’s told analysts that the credit facility it adopted in January provides a $450 million senior secured bridge loan with a first-priority lien on most assets, excluding land, 35 percent of foreign subsidiaries and all United Kingdom and British subsidiaries. The new financing also granted second liens to the existing bank facilities, raised pricing on the existing facilities to LIBOR (London Interbank Offering Rate) plus 3.25 percent from 3 percent; and converted a maturing $580.2 million facility to a term loan.
Levi’s now has $1.879 billion in bank financing, and as of Feb. 15 had $450 million in total liquidity, the 10-K showed. Prior to the refinancing, Levi’s had $1.5 billion in unsecured bank debt. Last year, interest expense was $183 million versus $178 million in 1998.
For 2000, Levi’s told analysts that it expects to achieve an additional $200 million in savings from restructuring efforts, $60 million in tax refunds and $80 million from the sale of two office buildings in downtown San Francisco.
During the conference call, Levi’s noted that unit volume in the Levi’s brand was down 13 percent in the quarter and 16 percent in Europe, but that overall sales were starting to stabilize.
The 10-K also noted:
Advertising costs grew to $490.2 million, up from $466.7 million in 1998 and $473 million in 1997.
Total inventories fell 17.9 percent to $671.5 million from $818 million, with finished inventory down 20.5 percent, to $433.5 million from $546.1 million.
Cash and cash equivalents more than doubled, to $192.8 million from $84.6 million;
Trade receivables were $759.3 million, against $856.6 million;
In 1997, earnings reached $138.2 million; operating earnings before $500 million in charges were $852.8 million; and sales hit $6.9 billion.