Third-Quarter 2013 Highlights
Gross profit in the third quarter increased to $573 million compared with $521 million for the same period in 2012. Gross margin for the third quarter was 50 percent of revenues compared with 47 percent of revenues in the same quarter of 2012.
The gross margin improvement primarily reflected a currency benefit of $14 million and an unfavorable impact of approximately $25 million of customer support and inventory markdown taken in 2012 in conjunction with the decision to phase out the Denizen brand in Asia Pacific.
Selling, general and administrative expenses (SG&A) for the third quarter increased to $455 million from $434 million in the same period in 2012. The increase in SG&A was driven by higher incentive compensation expense, related to improved achievement against the company's internally-set objectives.
Advertising expenses also increased reflecting new campaigns that were launched during the quarter. The increase was partially offset by a decline in distribution expense reflecting a $19 million impairment charge the company recorded in the third quarter of 2012 on its owned distribution center in Japan due to a decision to outsource to a third-party in that market.
Operating income for the third quarter increased to $118 million compared with $87 million for the same period in 2012.
Net revenues increased 5 percent in the Americas primarily due to improved performance of the Levi's, Dockers and Signature brands at key customers in the wholesale channel, and of the Levi's brand in the company's retail stores. Lower operating income primarily reflected higher SG&A.
Net revenues in Europe increased 3 percent on a reported basis, but decreased one percent without the effect of currency, as improved performance and expansion from the company-operated retail network was offset by a decline in sales to franchisees, most notably in Southern Europe. Operating income declined slightly reflecting higher SG&A.
Net revenues in Asia Pacific were flat on a reported basis. Excluding the impact of currency, a six percent increase in revenues reflected the company's decision in the third quarter of 2012 to phase out the Denizen brand in Asia, which reduced revenues in that period. Sales of the Levi's brand declined at retail and wholesale due to challenging conditions in most markets in the region. Higher operating income primarily reflected the Denizen phase-out.
Net revenues increased four percent on a reported basis and three percent without the effect of currency, driven by strong performance from the Levi's and Dockers brands, particularly in the Americas with continued growth across both wholesale and retail channels.
Third quarter net income increased to $57 million as compared to $28 million in the third quarter of 2012, primarily reflecting non-recurring charges the company incurred in the third quarter of 2012 related to strategic business choices made in that period relating to operations in our Asia Pacific region; and a $14 million tax benefit related to the settlement of U.S. Federal tax audits. These improvements were partially offset by higher Selling, general and administrative expenses in 2013.
“Our positive first-half momentum continued in the third quarter, with top- and bottom-line growth,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “In a challenging consumer and economic environment, we are laser-focused on what's within our control to drive sustained profitable growth: innovative products, compelling marketing, engaging retail experiences, talent and cost management.”
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