Levis said it failed to “fire on all cylinders" in 2013

Levis said it failed to “fire on all cylinders" in 2013

Levi Strauss & Co says it is focusing on a number of key strategies to drive its profitable core in its next fiscal year, with a focus primarily on Europe, China, women's wear and cost management.

The jeans giant this morning (12 February) revealed that lower gross margin and higher seasonal advertising spend had hit earnings in its fourth quarter.

The company posted a net profit of US$17m, down from $53m a year earlier, and sales of $1.29bn, down 0.2% on the back of weaker revenues in Europe. Gross margin narrowed to 49.2% from 50%.

The group pointed to a calendar shift, "sluggish" traffic trends, and challenges in certain key international markets and its US women's business for the declines.

Despite describing 2013 as "a good year" in terms of sales, profitability and cash flow, CEO Chip Bergh told analysts on the firm's earnings call that the company failed to "fire on all cylinders in 2013".

"In 2014 we'll build on what worked in 2013, while at the same time addressing our challenges," he said.

The group's focus, Bergh said, will be to execute against four key strategies this year: namely growing its profitable core, building a more balanced portfolio, becoming a leading omni-channel retailer, and leveraging its global scale.

With those in mind, the chief executive said the company had identified a number of opportunities for improvement.

"We will focus on several primary areas this year: our women's business, Europe, China, and cost management. Some of these efforts will take time but longer term we believe these will improve our structural economics."

International challenges
In Europe, where fourth-quarter sales were down 5% to $279m, Bergh said the company was working on "reversing the slide" it had experienced in the north.

"With the right leadership now in place, we're getting back on track and addressing the executional issues we had at wholesale."

Bergh told analysts Levi Strauss had experienced some "service and delivery issues" in the north, as well as leadership vacancies, which he says have now been remedied.

"We've isolated what the issues were and we've addressed those issues. The north has historically been a pretty good performing part of the business for us. We expect to get that business back on track pretty quickly."

In Asia, where sales edged up 2% to $188m, the company said it was happy with its performance, although Bergh admitted there was "still work to do", particularly in China.

"We're very focused on growing in China. It's a big market and it's only going to get bigger.

"Asia represents only 15% of [group] sales and China only a portion of that. Our long-term outlook for the region remains strong.

"Our Asia Pacific leaders are focused on delivering the right product assortments and deploying more effective marketing campaigns. We are also rationalising the franchisee base and working with them to improve store experiences as well as build our e-commerce presence in the market."

Wholesale issues
In Levi's Junior's and Misses' businesses at wholesale in the Americas, where the company experienced a decline in sales, Bergh said it was addressing product issues "as quickly as possible".

The CEO said competitors had moved to 'super stretchy, super soft' products, while Levi's was still offering a more rigid fabric. "We missed from a product standpoint. We're not scrambling, we've got new product, we've shown it to customers and they're excited about it, but it takes a while to get it through the pipeline."

The final area of focus will be improving cost structure, which Bergh said will be "particularly visible" in 2014.

"We've looked at our cost structure and, including external benchmarks, we recognise we are uncompetitive. As we speak, we are identifying opportunities to streamline processes, eliminate redundant work, take advantage of lower cost service delivery options and overhaul our procurement practices. We are concentrating on what's within our control as we drive our business forward."

Bergh declined to give specific details on what the improvements to cost structure will involve, but reiterated they were about "improving agility".

"It is our intent to begin executing this as we move through 2014 and beyond."

E-commerce growth
Separately, the company said it had identified "significant" opportunities to grow its $120m e-commerce business globally, particularly in Asia.

Bergh added that an improved platform that launched in Europe last year will also be rolled out to the US later in fiscal 2014.

"It has more functionality and capabilities built into it, which will enhance the consumer experience. The plan is to then roll that out into the critical markets that matter most internationally in the next couple of years. We're looking for a head of e-commerce too at the moment. We believe the upside of that business is huge."

When questioned on further growth avenues such as M&A, CFO Harmit Singh said the company would consider opportunities but remained focused on growing organically.

"It begins with the our base business. We're really optimistic about growing our base business and we feel there's enough growth left in our organic business for a while. Depending on opportunities available, we'll take a look at them, but at this point we feel good about growing our business organically in the long term."