New Jeans Fit Levi Well as Profit Doubles

For Levi Strauss & Co., the future is stacked on the shelves at Wal-Mart.

The struggling San Francisco-based apparel maker said Tuesday that its fiscal third-quarter profit nearly doubled, thanks to a new low-priced brand it began selling at Wal-Mart Stores Inc.’s 3,000 U.S. outlets two months ago.

Earnings in the quarter ended Aug. 24 jumped 95% to $26.7 million, compared with $13.7 million in the year-earlier period. The results, which also were helped by favorable currency rates, were in line with Levi’s projections.

Revenue rose 6% to $1.08 billion, boosted by robust sales of the new Levi Strauss Signature brand apparel. Without the new brand -- which includes pants, tops and jackets for men, women and children -- U.S. sales would have declined in the third quarter, the company acknowledged.

“It’s a core brand,” Chief Financial Officer Bill Chiasson said. “It’s a significant piece of our sales.” The privately held company, which reports earnings because some of its debt is publicly traded, doesn’t break out sales by brand.

Levi’s fortunes increasingly will be hitched to the Signature brand. The company intends to begin selling the line through additional U.S. retailers in 2004 and to push it into other countries this year and next.

Last week, Levi announced that it would shutter the last of its manufacturing plants in North America, laying off nearly 2,000 workers. Although Levi’s brand cachet has been closely linked to its American roots, all of its clothes soon will be made outside the U.S.

“This is a fundamental shift away from high-cost self-manufacturing to low-cost contract manufacturing,” Levi Chief Executive Phil Marineau told investors and analysts during a conference call Tuesday.

“It’s a painful process when you have to lay off people. We tried to hold on as long as we possibly could.”

The jeans industry increasingly is stretched in opposing directions, with customers demanding basic low-priced pants or coveting trendy high-end options, said Marshal Cohen, chief industry analyst with NPD Group, a market research firm in Port Washington, N.Y.

“The middle market is disappearing. Levi kind of fit in that middle,” he said. “I give them a lot of credit for recognizing this.”

But the company faces tremendous competition in the lower-priced arena as well. Wal-Mart offers a variety of jeans brands -- including Wrangler, Jordache and Faded Glory -- all of which are less expensive than Levi Strauss Signature jeans, which sell for about $23 a pair. By comparison, the company’s flagship 501 jeans -- developed by founder Levi Strauss during the California Gold Rush -- sell for about $30.

Further, Bentonville, Ark.-based Wal-Mart is pushing its George brand, which includes jeans that sell for $9. The line, launched in the retail giant’s British division Asda, began selling in the women’s departments of U.S. Wal-Mart stores two years ago.

Chiasson shrugged off that competition. “We are not going after the $9 consumer,” he said.

Indeed, Levi, which sells jeans at a wide variety of prices, is positioning itself as the premier option as it attempts to slug it out with other brands in the low-priced ring. The strategy makes sense, Cohen said. It gives Levi “a reason for being” and an opportunity to play off its strong reputation.

“The future of the basic denim sales is going to be at these value prices,” Cohen said.

Although U.S. sales of its Levi’s and Dockers brands were down in the quarter compared with last year, the brands’ sales at stores ticked up recently during the back-to-school selling season, the company said.

The introduction of the Levi Strauss Signature brand has made some retailers skittish about stocking up on Levi’s and Dockers brands, partly because they feared the new line would “cannibalize” the older brands, the company said.

Levi said it had conducted tests of retailers within about a 7.5-mile radius of Wal-Mart stores and determined that the less expensive line had not hurt sales of the other Levi brands.

The firm is struggling in Europe, partly because of a rough retail environment and weak economies, Marineau said. Its 501 jeans have been losing ground as consumers migrate to lower-priced offerings.

Hoping to bolster the brand, the company is in the process of updating the fit of 501s to nudge them more in line with European style trends.

Levi said it also was making significant gains in trimming lead times.

Four years ago, it took Levi 15 months to get a product from design to delivery, but the company has since shaved about five months off the process. Levi predicts that by this time next year, it will be able to get men’s products to stores in about seven months and women’s in three to five months.

Still, the company was cautious about its projections.

For the full year, Levi said it expected sales to be flat compared with 2002. Next year, Levi said, sales should increase in the low- to mid-single digits.

At the end of the quarter, the company had $2.29 billion in debt, compared with $1.75 billion at the end of the fiscal year Nov. 24. The company has said debt rose partly because of launching the new line.