Levi Narrows Loss but Cuts Sales Forecast for the Year

Levi Strauss & Co. said Thursday that its second-quarter loss narrowed but lowered its sales expectations for the year, despite the boost it anticipates when its jeans go on sale in Wal-Mart stores starting next month.

The San Francisco-based company said 2003 revenue probably would remain flat at about $4 billion -- rather than rising 2% to 5% as it had predicted previously -- because of a weak economy and pressure to lower prices.

“We don’t expect this retail environment to improve in the near term,” Chief Executive Phil Marineau told analysts.

The privately held company, whose debt is publicly traded, lost $13 million in its fiscal second quarter ended May 25, compared with a $76-million loss a year earlier. Excluding restructuring and other charges, the loss was $17 million, compared with a $21-million loss in 2002.

Sales for the period rose less than 1% to $930 million.

“Retail customers are aggressively cutting back their inventory levels across the board to deal with the reality of slower consumer spending,” Chief Financial Officer William Chiasson told analysts during a conference call.

Nonetheless, Levi is banking on its new Levi Strauss Signature line, which will be in all 2,900 Wal-Mart stores by mid-July, to meet its sales expectations for the second half of the year. Marineau said he expected the Levi Strauss Signature brand to generate hundreds of millions of dollars in annual sales.

The push into Wal-Mart comes at a crucial time, just before the back-to-school selling season. Analysts say the Wal-Mart deal is important if 150-year-old Levi hopes to regain share in the competitive denim marketplace.

About one-third of all jeans purchased in the U.S. are sold at mass-merchandise stores, such as those operated by Wal-Mart Stores Inc. and Target Corp.

“The largest issue for this company ... is whether or not they’re going to be successful in the mass market with their Wal-Mart endeavor,” said Andrew Leinoff, an analyst with APS Financial Corp. “They’re investing a huge amount of money in working capital and logistics to bring this off, and that’s a huge risk.”

The company would say only that it has accounted for about $10 million in costs related to the Wal-Mart jeans in the second quarter.

The jeans, which the company expects to sell for about $23, would cost more than the $15 to $20 that Wal-Mart shoppers are used to paying for its other denim brands, including Wrangler, Faded Glory and Bugle Boy. The new Levi line, which includes apparel for men, women and children, is selling in some Wal-Mart stores and will be in all outlets by July 22.

Levi is optimistic about how the line will do in the mass market. Some of its jeans already are selling in low-priced stores, such as Costco Wholesale Corp. sites and Sam’s Club, which is owned by Wal-Mart Stores.

At the Costco store in Fountain Valley, Levi’s sell for $19.99.

“Most of the jeans I get are from here,” said Scott Bilbruck, 33, a small-business owner who was shopping at Costco on Wednesday. The Fountain Valley resident, who likes the Levi brand, said he would have no reason to buy the jeans at Wal-Mart.

Levi has battled slipping sales since 1996, when sales topped $7.1 billion, as competition in the jeans market intensified and more consumers bought dungarees at discount stores.

The company, which is facing a lawsuit by two fired employees who have accused the apparel firm of tax fraud, has spent the last 3 1/2 years attempting to turn its business around. Sales rose in last year’s third and fourth quarters but slipped again in the first quarter of fiscal 2003.

“In the short term, business is not as strong as we hoped it would be because of a very weak apparel market that exists in Europe and the United States,” Marineau said in an interview. “It’s particularly bad in men’s, and at this point the vast majority of our sales are in the men’s market.”

However, he predicted that “profitable growth” would come for the company.

“We are prepared to grow in the back half of this year and in 2004 and 2005,” he said.

Thomas Atteberry, a portfolio manager and fixed-income analyst at First Pacific Advisors Inc. in Los Angeles, said he participated in Thursday’s conference call because he has been considering buying Levi bonds. But he said he was concerned about the company’s debt and sluggish sales.

“This is a company that’s highly leveraged,” he said. “The debt just isn’t coming down, and the sales just aren’t turning up.”

However, Atteberry said Wal-Mart could give Levi a lift .

To boost sales, the company, which also makes the Dockers brand, has been introducing new styles and promoting them with advertising campaigns.

A new U.S. ad will hit movie screens today and shift later to television. The company is also launching a print ad campaign in Europe to boost slacking sales of its 501 jeans there. It would be the first such ad campaign since 1998. The 501 brand is particularly important to Levi because of its higher profit margin.

In the most recent quarter, using the prior year’s currency exchange rates, overall Levi sales fell 4.7%. U.S. sales were down 5.5% and European sales fell 10.3%; sales in Asia rose 17.2%.

The company also said its debt level was rising as a result of higher inventories, tax payments and the cost of launching the new brand.

At the quarter’s end, debt was $2.31 billion, compared with $1.85 billion for its fiscal year ended Nov. 24. Debt minus cash was $2.17 billion at the end of the quarter, compared with $1.75 billion at the end of its fiscal year.

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Worn in the USA

Americans spend about $11 billion a year on bluejeans.

Jeans sales, April 2002-April 2003

*--* Dollar volume, Pairs sold, Market in billions in millions Specialty $2.63 $94.6 Chain $2.58 $130.1 Mass merchants $2.37 $176.7 Department stores $2.00 $80.4 Total $10.90 $546.7

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Source: NPD Group