NEW YORK — Levi Strauss & Co.’s on-again, off-again climb back to growth was both on and off track in the second quarter.
The San Francisco-based company reported that net sales were up 0.7 percent for the quarter ended May 25, after sliding in the first quarter. But executives pointed out that, factoring out the boost in sales overseas caused by the sliding dollar, sales would have been off 4.7 percent.
A soft retail environment prompted company officials to warn that the company’s long-awaited sales turnaround would likely not come until next year.
“Returning the company back to a growth pattern is absolutely critical to our success,” said Phil Marineau, president and chief executive officer. “But with total sales down in the first half as they were, on a constant-currency basis, we can only expect to be flat in total [for the year]. We might do slightly better than that, but we are planning on being flat on a total-year basis.”
When Levi’s reported its first-quarter results, executives said although they thought the first half would be slow, they expected the company to post sales growth of 2 to 5 percent for the year, factoring out the effect of currency fluctuations, as reported. The 6.4 percent drop in first-quarter sales had followed two quarters of revenue growth in the second half of 2002.
Currency fluctuations helped the company in the most recent quarter by making its prices more competitive in Europe and Asia. Levi’s reported net sales of $930 million, up from $923.5 million a year earlier. While the company remained in the red, the bottom-line picture improved, with a $13.4 million net loss compared with a $75.7 million net loss a year ago.
But company officials acknowledged that, factoring out a slew of one-time costs that weighed down last year’s results, operating income was off 43 percent to $50.9 million.
The company’s weakest link remained its Americas business, where sales slid 6 percent to $560.6 million. European sales rose 8.2 percent to $261.2 million and Asian sales climbed 26.7 percent to $108.2 million, despite the SARS outbreak in many key markets.
Factoring out fluctuations in exchange rates, Americas sales would have slid 5.5 percent, European business would be off 10.3 percent and Asian sales would have risen 17.2 percent. Privately owned Levi’s releases its financial results because of public bonds.
On a conference call with debt analysts, chief financial officer Bill Chiasson noted that the company’s advertising expenses were up 24.2 percent in the quarter to $87 million. He said that’s because the company pulled $15 million of its European ad budget from the second half of the year into the quarter to pay for a campaign introducing Type One jeans, a dark denim style with exaggerated details that Levi’s has made a major focus of its marketing this year. Levi’s allocated its entire spring ad budget to the new style.
That move didn’t pay off as well as the company had hoped, executives acknowledged.
“The style that we put out there was fairly edgy in terms of fabric and color, and has not done well,” said Marineau, adding that the product “was never planned to be a huge percentage of our business.”
In spring 2002, when the firm was preparing for the rollout of Type One products, Levi’s officials said the style would be the first in a line of design innovations. Each major innovation was intended to potentially represent 10 percent of the brand’s revenues within 18 months.
Marineau said in a phone interview he still believes Type One jeans have the potential to represent “a high-single-digit” percentage of the brand’s sales in Asia and Europe, but admitted it wouldn’t be that much in the U.S.
Coming a couple of years after Engineered Jeans, Type One marks the second in a series of major design innovations Levi’s introduced that have performed fairly well abroad, but have not caught on in the U.S. That prompted the question of whether American shoppers are looking to Levi’s for product innovations of this magnitude.
“Those would be generalizations that we are not necessarily willing to make,” said Marineau, who still believes Levi’s could use major design innovations to attract consumer attention.
“We’ve used Engineered Jeans and then Type One as a symbol of it’s not just your basic 501’s or 550’s anymore,” he said. “Done in a way that reinforces the notion of quality, value and style within the communications, that strategy will work.”
Marineau made headlines earlier this year when he said the Super Bowl ad the company used to introduce Type One jeans, which involved a stampede of bison in a postmodern setting, had been unsatisfactory.
Also on Thursday, Levi’s unveiled its fall TV ads for Type One jeans, to which Marineau gave a thumbs-up. The campaign, by Levi’s agency, Bartle Bogle Hegarty, includes two spots, a men’s ad featuring a fellow trying to tame an escaped car, and a women’s spot with a horse being tamed by a trainer. The car ad is due to premiere in movie theaters today and then appear on TV, with the horse ad following up on July 14.
The ads will feature a revised version of the Type One jeans, the same silhouette, but with a more traditional stonewashed denim fabric, rather than tinted and treated fabrics used in the launch. The ceo said the company had heavily tested the ads to “make sure we weren’t kidding ourselves” by producing spots consumers wouldn’t like.
The company forecast sales growth in the second half, but not enough to significantly offset the 8 percent constant-currency decline in the first half.
Marineau acknowledged the upcoming launch of Levi Strauss Signature product at Wal-Mart Stores Inc. would be the primary engine of growth for the rest of the year.
“It’s not 100 percent Wal-Mart, there are some parts of the company that will grow in addition to that,” he said. “But the vast majority of that would be Levi Strauss Signature.”
For the half, Levi’s reported a $37.9 million net loss, deeper than the $33.2 million loss a year ago. Sales were off 2.9 percent to $1.81 billion.