Levi to Cut Expenses, Jobs in Restructuring
Levi Strauss & Co. said Wednesday that it expected to lay off almost 7% of its U.S. workforce, part of a restructuring effort to cut costs and make the jeans maker more competitive.
Most of the 350 U.S. jobs to be shed will be from Levi’s headquarters in San Francisco, where about 1,500 people work. Levi also plans to eliminate 300 jobs in Europe.
Although it anticipates that sales and earnings will improve in the third quarter, the company continues to struggle with intense competition and downward pressure on prices, Chief Executive Phil Marineau said.
For example, he said, after it introduced the Levi Strauss Signature brand at Wal-Mart stores this summer for $22.80 a pair, Wrangler, which is owned by VF Corp., notched down the price of its jeans to $15 from $17.
“That’s the kind of competition that exists in the marketplace today,” Marineau said.
For its fiscal third quarter, which ended Aug. 24, Levi said it would record profit of $24 million to $28 million, up 75% to 104% over $13.7 million earned in the same period last year. Sales are expected to rise 6% to 7% to between $1.08 billion and $1.09 billion.
At the same time, Levi’s debt has swelled. The company said debt was an estimated $2.37 billion, compared with $1.85 billion on Nov. 24, the end of the last fiscal year.
Marineau blamed the increased debt on the cost of launching the Levi Strauss Signature brand and disappointing sales in the first half of the year.
“In the apparel industry today, demand is depressed,” while competition is intense, he said. “There are over 200 jeans brands in the U.S. and even more worldwide.”
Levi said Wednesday that it couldn’t ensure that it would be able to comply with all financial covenants in its existing credit line, and would seek a temporary waiver likely to remain in place until new financing is finalized. That prompted Standard & Poor’s to lower the company’s corporate credit rating to B from BB, moving it deeper into junk bond territory. Privately held Levi has about $2.3 billion of rated debt.
To obtain what it called the “financial flexibility” to move quickly with its reorganization program, the company said it has asked Bank of America and Banc of America Securities to arrange $1.15 billion in new financing.
Levi, which will release quarterly results Sept. 30, isn’t the only company feeling the strain of a rocky retail environment and consumer demand for low-ball prices.
“Whether it’s a television set, appliances, even furniture or computers, you can buy that cheaper now,” said Rosalind Wells, chief economist for the National Retail Federation. “You’re getting much more for your money. But it puts pressure on the retailer or manufacturer because they are squeezed. If they’re getting less for their product, they’ve got to look to cut costs somewhere to make profits.”
According to Marineau, Levi’s restructuring will help it compete more effectively, partly by streamlining operations and reducing the time it takes to get products from design to delivery.
Retail sales have picked up in recent months, raising hopes among some economists that the purse strings are loosening as the holiday shopping season approaches. Levi’s back-to-school sales were “excellent,” Marineau said.
Levi remains the second-best-selling jeans brand among youth, behind the Old Navy brand, said Michael Wood, vice president of Teenage Research Unlimited, and trend-setting teens have been responding favorably to some of the company’s new styles.
“They’ve got all the bases covered in terms of price [with some products] now being sold at discount, all the way up to high-end boutiques and everywhere in between with department stores,” Wood said.
Levi’s reorganization involves restructuring the U.S. business under three commercial business units, one each for the Levis, Dockers and Levi Strauss Signature brands. The change should allow the company to reduce the time it takes to get products into stores, a key component to staying competitive.
Levi also is planning to reduce the number of contractors it works with by about one-third, which would mean fewer workers required to manage those contractors, Marineau said.
As a result, the company said it would need fewer white-collar employees. Levi employs 12,400 people worldwide. It has slightly more than 5,000 workers in the United States.
The restructuring is expected to result in charges and expenses of $70 million to $80 million.
These organizational changes, combined with further cost-reduction efforts, should save the company $130 million to $150 million annually, Levi said. Much of the savings should be realized next year, spokeswoman Linda Butler said.
