Levi Strauss’ Q3 revenues decline in Asia Pacific

October 10, 2012 - United States Of America

Levi Strauss & Co. announced financial results for the third quarter ended August 26, 2012.

Third quarter 2012 net revenues declined 9 percent on a reported basis and 4 percent on a constant currency basis.  These results reflect the ongoing global economic challenges and actions the company took to drive improvements in its future performance, including the decisions to license the Levi’s brand boys business in the Americas and phase out the Denizen brand in Asia.  Despite the notable revenue decline, net income dropped only $4 million, reflecting an improved operating margin.

“While the third quarter was impacted by the continuing difficult global macro-economic environment, we are very focused on what we can control: our product innovation and marketing programs, the key strategic choices we make and addressing our underlying cost structure,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co.  

“Our goal is to prioritize efforts behind our core business to drive sustainable, profitable growth and drive shareholder value.   During the third quarter, we began to execute several initiatives against our goals, including exiting the Denizen brand from Asia and licensing the U.S. Levi’s boys business.”

Third Quarter 2012 Financial Highlights

- Gross profit in the third quarter declined to $521 million compared with $569 million for the same period in 2011, reflecting unfavorable impacts of $45 million of currency effects and $25 million associated with the company’s decision to phase out its Denizen brand in Asia. Third quarter gross margin of 47.3 percent was flat to prior year.  Excluding the currency and Denizen impacts, gross margin improved, reflecting increased sales from the company’s retail stores, a decline in sales to lower-margin channels and lower cotton costs. 

- Selling, general and administrative (SG&A) expenses for the third quarter declined to $434 million from $489 million in the same period of 2011, inclusive of favorable currency effects of $22 million. 

The decline in SG&A was primarily driven by a reduction in advertising activities in some markets and a difference in timing of campaigns; organization and distribution expenses also declined during the quarter.  Partially offsetting these declines, the company recorded a $19 million impairment charge 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 was $87 million compared with $81 million for the same period of 2011, reflecting the lower SG&A. 

Regional Overview

- Net revenues in the Americas included higher sales from company’s Levi’s brand retail stores, but declined overall primarily reflecting the company’s decision to license the Levi’s brand boys business.

- In Europe, economic challenges continue in most markets.  The year-over-year constant-currency trend reflects the order fulfillment issues tied to the July 2011 implementation of an enterprise resource planning system in the region.   Net revenues from company-operated retail grew, reflecting price increases and an expanded network of stores.

- Revenues declined in Asia Pacific on both a reported and constant currency basis, reflecting a decline in wholesale revenues, including franchisee revenues, due to the economic slowdown in the region, particularly in India. Additionally, the company’s decision to phase out the Denizen brand in Asia further reduced revenues.

Cash Flow and Balance Sheet

As of August 26, 2012, cash and cash equivalents were approximately $315 million, and $478 million was available under the company’s revolving credit facility.   Cash provided by operating activities during the nine-month period in 2012 was $416 million, compared with $17 million for the same period in 2011, reflecting the company’s lower purchases and lower cost of inventory, as well as lower operating expenses. Net debt was $1.4 billion as compared to $1.8 billion at the end of 2011.

Levi Strauss & Co. is one of the world’s largest brand-name apparel companies and a global leader in jeanswear.  The company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi’s, Dockers, Signature by Levi Strauss & Co, and Denizen brands.