John Anderson kicked off his tenure as president and chief executive officer of Levi Strauss & Co. with strong fourth-quarter earnings results, seeking to build momentum.
For the three months ended Nov. 26, the San Francisco denim giant on Tuesday reported a 119 percent increase in earnings, to $96 million, compared with $43.6 million reported during the same period last year. Revenues for the quarter increased 4 percent, to $1.24 billion, driven by solid performances from the U.S. Levi’s and Dockers divisions.
“We began the year facing a substantial headwind,” Anderson said in a conference call with analysts, citing a sluggish European retail environment, a downturn in the firm’s Levi Strauss Signature business because of a pullback from Wal-Mart and significant retail consolidation. Despite this, the company reported significant improvement in the second half of the year and finished the fourth quarter with revenue growth in North America, Europe and the Asia-Pacific region. It “was a good year for us,” Anderson said.
The company’s North American business posted a 4 percent revenue gain, to $771 million. “The impact of U.S. retail consolidation was less than we originally anticipated, although the issue remains a concern going forward,” Anderson said.
After posting double-digit declines for the first two quarters of the year, the company’s European business rebounded. Fourth-quarter revenues rose 3 percent, to $245 million. Two-thirds of the 65 new Levi’s stores that were launched in Europe in 2006 were opened during the second half of the year, ultimately driving sales, Anderson said. The European business also benefited from lower advertising and promotion expenditures, which helped operating income for the region rise 20 percent, to $42 million.
Despite continued difficulties in Japan, the Asia-Pacific business segment posted a 6 percent revenue gain to $220 million. Japan accounts for 30 percent of the region’s revenues, and has been making the transition to new management since Anderson’s ascension in November.
Earnings for the full year increased 53.3 percent, to $239 million from $155.9 million. Revenues dipped 0.8 percent, to $4.19 billion from $4.22 billion.
The privately owned firm releases its financial results because of its publicly traded bonds. Levi’s reported total debt, excluding capital leases, of $2.22 billion, a 4.7 percent improvement over last year’s debt level.
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North American revenues for the year rose 1.1 percent, to $2.53 billion, fueled by gains in the U.S. Levi’s and Dockers businesses. The Dockers brand’s revenues improved 5.9 percent, to $716 million, while Levi’s revenues jumped 2.3 percent, to $1.29 billion from $1.26 billion.
“The U.S. Levi’s brand, our largest business unit, built on its stability in 2005 with revenue growth in 2006,” Anderson said. “I believe this is an important indicator of the growing strength of the company.”
The Levi Strauss Signature business, however, continued to be a weak point because of Wal-Mart’s decision to devote more shelf space to its private label brands. Signature revenues finished the year down 13.1 percent, to $316.8 million from $364.6 million.
“The Levi Strauss Signature brand is a key element of our multichannel strategy, and our key management is focused on reenergizing that business,” said Robert Hanson, president of the firm’s North American region.
In the face of management’s contention that the European business got back on a growth track during the second half of the year, European revenues continued to fall for the year. The region reported a 9.3 percent drop, to $898 million from $990.2 million. Revenues for the Asia-Pacific region grew 4.4 percent, to $761.4 million from $729.2 million.
“I’m encouraged about our prospects for 2007,” Anderson said. “We have plenty of work to do, including improving business in Japan and our Levi Strauss Signature business.”
The opening of additional dedicated stores has been a catalyst for revenues and the company is stepping up its expansion efforts. Based on a year-end filing with the Securities and Exchange Commission, Levi’s opened 72 company-operated stores in 2006 for a total of 138. In addition, Levi’s has more than 1,100 franchised or licensed stores.
“In fiscal 2007, we expect approximately 200 new stores to open in our Asia-Pacific region, 50 new stores in our Europe region and 40 new stores in our North America region, with the substantial majority of the new stores outside the United States to be franchised,” the company said in the filing.
Levi’s also has largely been unable to grow its women’s business and pants are making up an increasing share of its product mix. According to the SEC filing, pants represented 87 percent of total units sold in 2006 and 2005, an increase from 85 percent in 2004.
“Men’s products generated approximately 72 percent of our total net sales in fiscal 2006 and 73 percent in fiscal years 2005 and 2004,” said the filing.