Dockers Sales Slump May Put Off Bidders

Levi Strauss & Co. could find it tougher to sell its Dockers brand because of the casual clothing line’s poor performance in the last quarter, complicating the jeans maker’s plans to pay down its heavy debt load, analysts say.

Prospective Dockers suitors have watched the brand struggle as the company fights to reverse seven straight years of sliding sales of all its products.

But a steep 26% drop in Dockers sales last quarter in North America -- the company’s biggest market -- could provide some pause to bidders eyeing the brand that generates annual revenue of about $1.4 billion, analysts said.

Alexis Gold, an analyst with CIBC World Markets, said although prospective buyers would look at more than just one quarter, they probably would want more detailed answers from the company on the latest sales drop. Still, she and others were confident that a deal would eventually get done.

“It probably lengthens the due diligence time,” Gold said in a recent interview. “People are really going to scrub the numbers. Whoever is looking at this will have to dig into those numbers to get comfortable with the underlying assets.”

The San Francisco-based retailer said in May that it would explore selling Dockers to focus on boosting its traditional Levi’s brand as well as the Levi Strauss Signature clothing line sold by discount retailers.

Since then the company has provided few details on Dockers other than to say it would take a few months to sell a brand that helped create a new business casual category when launched in 1986.

The decision to explore selling the unit comes after the privately held company, which reports earnings because of its bonds outstanding, hired an outside turnaround specialist in December to help boost the jeans maker’s battered business.

Market sources have speculated prospective suitors could include: St. Louis-based Kellwood Co., Jones Apparel Group Inc., VF Corp. and Hong Kong supply chain Li & Fung Ltd. The companies could not be reached for comment.

Levi Strauss spokesman Jeff Beckman declined to comment on bidders but said the company would soon start discussions with lenders to secure consent agreements to sell the brand that helps back a portion of Levi’s $1.96 billion in debt.

He also said Dockers’ poor performance last quarter stemmed mainly from a tough year-ago comparison when the company filled retailers’ shelves with a new version of its popular khaki pant that featured an individual-fit waistband.

For the recent second quarter ended May 30 the Levi’s brand accounted for 69% of the company’s net sales, followed by Dockers at 22% and Signature at 9%, he added.

“The Dockers brand is a highly desirable brand,” Beckman said. “We believe prospective buyers understand the power and the value of the brand.”

Wall Street analysts have estimated the sale could fetch from $500 million to more than $1 billion because the brand offers strong cash flow and a number of attractive licensing deals.

Investors also have pushed up the company’s bonds in recent weeks on confidence a sale would go forward. The company’s bonds with a 12.25% coupon due 2012 have staged a huge rally in the last six months, rising from below 70 cents on the dollar to above par.

Jason Riehle, a bond analyst at 40/86 Advisors, said the company’s huge debt load leaves Levi Strauss with few other options than selling Dockers but cautioned that getting rid of the well-known brand could end up as a risky strategy.

“I do think the performance of Dockers could potentially make it tough but I think most companies looking at buying Dockers were looking at it mostly for the brand with the thought they could turn it around,” said Riehle, who owns Levi’s bonds.

He and other analysts warned the decision to sell Dockers posed risks by turning Levi Strauss into a denim-only company competing in a tough market.

Clark Orsky, an analyst at KDP Investment Advisors, added that Levi Strauss would have to sell the business for enough so it can emerge as a much less leveraged company.

“They have been suffering in the core products for years so the fact Dockers is down shouldn’t be a big surprise,” Orsky said. “The fact it was such a big decline means they will have to explain that in detail to whomever is looking at the business.”