Ailing Levi Strauss Working to Fashion a Fitting Turnaround

As it jockeys for shelf space during the coming holiday season, Levi Strauss & Co. will be in an enviable but costly position. Customers are snapping up its 501 jeans--but the troubled apparel company isn’t meeting the demand.

That’s because earlier this year Levi opted against kicking 501 jeans production into high gear and risking a costly inventory glut if retailers couldn’t move the goods.

“It’s a problem of our own making,” Levi Strauss President and Chief Executive Philip Marineau said Tuesday. “We ended up shipping and depleting inventories of 501 product in the August and September time frame and now we’re working feverishly to correct that problem.”

To help meet demand, Levi is now shipping 501 jeans to the U.S. from European plants.

Although the 501 shortage is painful, industry analysts say it’s a welcome sign for a company that’s had trouble clicking with consumers.

“Basic denim is coming back pretty strong, and that has the potential to be good news for Levi,” said Dutch Leonard, president of denim mill operator Burlington Casual Wear.

Marineau blamed the 501 shortage, a weak back-to-school season and an even weaker euro for net profit that fell by 31% to $37.8 million on sales that fell by 8% to $1.13 billion during its third quarter ended Aug. 27.

In the United States, Levi reported a 6.3% decline in sales during the quarter. European sales, which were hurt by the slumping euro, fell by 18%, while sales in Asia rose by 15%. Privately held Levi Strauss began reporting quarterly figures earlier this year, after registering bonds with the Securities and Exchange Commission.

Marineau, brought in a year ago to steer Levi through a painful restructuring, maintained that the profit and sales dips are in line with the company’s business plan.

“We knew the sales decline of the past two years won’t be totally stopped in 2000,” Marineau said. “Double-digit sales declines are giving way to single-digit declines . . . so we’re very comfortable with where we are.”

Levi also is credited with “fortifying relationships with key retailers,” said Isaac Lagnado, president of Tactical Retails Solutions, a New York-based market research firm. “In the past, Levi’s was a very arrogant company that didn’t understand or chose not to be sympathetic with what department store operators wanted and needed.”

Levi, which sells through such retailers as Sears, Roebuck & Co., J.C. Penney Co. and Macy’s, irked merchants last year when it introduced the ill-fated Dry Goods line. “We delivered it 60 days late and it didn’t sell well,” Marineau said. “We went back through an independent consulting firm so people would be bluntly honest. What they told us was: Get the product right, then get delivery right.”

Marineau, who previously was North American beverage chief for PepsiCo Inc., also has been struggling to refocus Levi’s advertising. “This turnaround is going to be driven by relevant styles and a fit for every consumer we’re serving,” Marineau said. “Our [past] advertising has focused more on image than selling specific product news. My advertising philosophy is to continuously highlight what’s relevant in the marketplace.”

Irma Zandl, a New York-based market researcher, said the Levi turnaround “will be determined by product. It’s much bigger than advertising. They can have wonderful ads, but if they’re not giving young consumers the kinds of products and styles they want, then it’s not going to happen.”

Levi’s fall from fashion grace in recent years “has been absolutely shocking,” said Zandl, who regularly surveys high school and college students. “They’ve let a lot of smaller brands come in and steal their share.”

Levi hopes to lure younger consumers with its loose-fitting 569 jeans and the new, edgier-looking Engineered line that is generating 10% of sales in Europe. Marineau said the Engineered line will be available in only 1% of retail locations this holiday season.

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Tops Among Bottoms

Five years ago, Levi Strauss was cited as the favorite brand for denim apparel by 27% of high school students and 37% of young adults. Today the market is much more spread out. The top five preferred brands:

High school (ages 13-17)

Levi: 9%

Tommy Hilfiger: 9%

Polo: 5%

Old Navy: 4%

LEI: 4%

College (ages 18-24)

Levi: 12%

Gap: 7%

Tommy Hilfiger: 6%

Old Navy: 3%

LEI: 3%

Source: August survey by Zandl Group