LEVI’S BACK IN BLACK, BUT SALES STILL FALLING

Byline: Scott Malone

NEW YORK — Is Levi’s turning itself around?
Based on the company’s first-quarter financial results, obtained from debt analysts after the San Francisco-based company released them Thursday, the bottom line is showing significant improvement, but sales continue to slide.
The company reported net income of $65.2 million for the quarter ended Feb. 27, compared with a $237.2 million loss in the prior-year quarter. The 1999 quarter included a $394.1 million restructuring charge for Levi’s plan to shut half of its remaining plants and cut its workforce by 30 percent.
But even without that charge, margins appear to be improving. According to Ethan Schwartz, an analyst at Credit Research & Trading LLC of Greenwich, Conn., earnings before interest, taxation, depreciation and amortization were 13.7 percent of sales in the 2000 quarter. A year ago, EBITDA was 6.1 percent of sales.
The downside is that sales slipped 15.4 percent to $1.08 billion, compared with $1.28 billion, and that has observers concerned.
“The biggest concern is the sales deterioration, plain and simple,” said Schwartz. “That’s the hemorrhage, and they’ve got to stop it at some time. I hear anecdotally from the retailers I talk to that they seem to be bottoming out, but they’ve been saying that for two or three quarters, now.”
Levi’s sales have been dropping for some time. As reported, in late February the company disclosed that its sales fell 13.8 percent in fiscal 1999, marking the third consecutive year of sales declines for the company. At the time, president and chief executive officer Philip Marineau warned that the company expected to experience another year of sales decline in 2000, with growth returning in 2001.
He also said that before the end of the first quarter, the company’s rolling 12-month sales comparisons — his preferred measure of corporate performance — were “beginning to flatten out now.”
It’s unclear how that statement relates to the reported sales figures, according to observers.
Despite the concerns about sales erosion, margins and earnings are improving. The cost of goods in the quarter was down to 58.4 percent of sales from 63.7 percent. Marketing, general and administrative expenses were 29.8 percent of sales, whittled down from 32.8 percent.
However, Schwartz noted that it is not entirely clear how “real” the margin improvements are. He pointed out that in the fourth quarter of 1999, the company reversed a number of expenses it had taken previously. It is not clear whether any of those expenses were taken in the first quarter of 1999.
He said it is hard to compare current results with previous trends because prior to reworking its bank debt late last year, the company didn’t provide as detailed results to the financial community.
He also noted that cash flow is positive, though it is not clear how related that change is to normal seasonality. He did note that the company is using its cash flow to pay down debt.
The Levi’s report shows that first-quarter interest expense was $56.8 million in 2000, compared with $43.2 million in 1999.
At quarter’s end, inventories were down 6.3 percent to $629.5 million, compared with $671.5 million.
The company’s elevated inventories last year were a major concern for both Levi’s, which needed to move old product before it could invest heavily in exciting new product, and its suppliers, who saw demand for denim fabric drop dramatically as Levi’s dealt with its pipeline issues.
A Levi’s spokeswoman confirmed that the company released its quarterly results to bondholders, which she said is a routine practice because of its publicly held debt. She declined further comment.
Levi’s has said that its turnaround will not be driven by dramatic steps, such as the company’s U.S. introduction of the ergonomic Engineered Jeans line. Instead, it’s focusing on improving basic operations — like deliveries to retailers — and emphasizing basic product, rather than image, in its marketing efforts.
Since joining the company in September, Marineau has made a number of executive changes. In November, he eased out three longtime Levi’s veterans. Last month, he named former Liz Claiborne executive Jim Lewis president of the Americas. That move brought in an apparel-industry veteran to complement Marineau, who came from Pepsi-Cola.

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