Levi Strauss Asian business declines in Q2 FY'12

The company’s second quarter results reflected a challenging global economy, the continued impact of higher-priced cotton and the negative effects of currency. Net revenues decreased 4 percent on a reported basis and 1 percent on a constant-currency basis, primarily reflecting a decline in sales in the Asia Pacific and Europe regions.

Second quarter net income attributable to the company was $13 million compared with $21 million in the second quarter of 2011, as a gross margin decline reflecting the higher cost of cotton was only partially offset by lower SG&A expenses.  

Net income also reflected a debt extinguishment charge of $8 million ($6 million net of the related tax effects), as the company completed a successful refinancing of $0.4 billion of its debt, taking advantage of lower interest rates and extending its bond maturity profile.

“It is clear that the economic headwinds are getting stronger.  While our business grew in the Americas, primarily driven by our own retail stores, Europe continues to be a challenge, and for the first time in two years our business in Asia declined,” said Chip Bergh, president and chief executive officer.  “In the face of these tougher economic conditions, we are rationalizing our business, reducing operating costs and focusing our resources on the opportunities that will have the most impact in growing shareholder value.”

Second-Quarter 2012 Highlights

-         Gross profit in the second quarter decreased to $481 million compared with $541 million for the same period in 2011, reflecting a decline in gross margin and the negative effects of currency. 

-         Gross margin for the second quarter was 46 percent of revenues compared with 49 percent of revenues in the same quarter of 2011.  The decline in gross margin was primarily due to higher-priced cotton, which price increases did not fully cover; however, margin benefitted from increased revenues from the company’s retail network and a decline in sales to lower-margin channels, reflecting the company’s tighter inventory position. 

-         Selling, general and administrative expenses (SG&A) for the second quarter decreased to $435 million from $476 million in the same period of 2011.  The decline in SG&A was primarily driven by a reduction in advertising activities in some markets, the favorable effects of currencyand lower distribution costs.

-         Operating income of $46 million declined from $65 million the prior year due to the negative effects of currencyand as the decline in SG&A did not sufficiently offset the lower gross margin.