Levi said the port disruption has not yet had a material impact on the business

Levi said the port disruption has not yet had a material impact on the business

Denim giant Levi Strauss & Co has said the “volatile” and “unpredictable” delays occurring at US West Coast ports could adversely affect its supply chain and product availability if they continue.

The Pacific Maritime Association (PMA) and International Longshore & Warehouse Union (ILWU) have been engaged in talks for nine months on a new coast-wide contract for 20,000 dockworkers - and no end to the dispute is currently in sight.

Vessel operations were temporarily suspended last week, and while operations resumed on Monday (9 February), the PMA said it would temporarily suspend vessel operations for four days. The disruption, analysts believe, could cost retailers as much as $7bn this year.

Supply chain caution
Levi Strauss CEO Chip Bergh spoke about the disruption during the group's fourth-quarter earnings call yesterday. To date, he said, it has not had a material impact on the business.

“The situation on the West Coast has been tenuous for about the last half-year with notable delays on delivery, and just like all other importers we've been experiencing delays and longer lead times. However, up until this point we've been able to mitigate the impact to the business.”

However, he remains cautious on any potential future impacts, should the shut-downs continue and talks remain unresolved.

“The situation has deteriorated, it's gotten worse over the last couple of weeks, and the delays are now more volatile and unpredictable, which makes it harder for us to manage and plan our business. Any prolonged disruption at these West Coast ports could adversely affect our supply chain and product availability.”

Bergh said Levi Strauss will continue to monitor the situation, adding that the company has contingency plans in place such as air freight, diverting shipments, and/or transiting product for early deliveries.

“All of these obviously come with a higher cost, and the risk for some service delays, but up to this point we really haven't had any material impact on the business. The next two months is pretty critical, and the situation has worsened over the last two weeks or so.”

New challenges
Aside from the risks associated with the West Coast ports dispute, Bergh said Levi Strauss expects 2015 to present its own set of unique challenges. Slow global economic recovery, mounting currency headwinds, and uneven consumer spending, will require the company to maintain its focus, he told analysts.

“We will work to mitigate the impact of these pressures by focusing on what's within our control, and so doing, we will not lose sight of our long-term objectives.”

In 2015, Levi Strauss will expand its direct-to-consumer business by opening new stores, continuing to improve productivity, and driving online traffic and conversion. Store openings will largely be outside the Americas region, mainly in Asia and Europe, and are planned towards the second half of the year.

Bergh also explained Levi Strauss's plan to re-set its global Levi's women's offering with a new product slate, which will launch later this year.

“We will delight consumers with fresh interpretations of our iconic products, such as the new tapered Levi's 501 CT. And a focus on innovation, including an expanded Levi's Commuter collection later this spring.

“We will engage consumers globally by building upon the marketing momentum generated by the Live in Levi's campaign. We will complete the transition of the women's Dockers business to a license model, which will allow us to focus on execution for the Dockers men's business, as we work to expand our successful alpha line, while striving to maintain share with the traditional consumer,” he added.

Global challenges
Bergh acknowledged the challenging global environment faced by the company and its competitors in 2014, and said the company had invested behind its brands with marketing initiatives to drive awareness and traffic in the key selling seasons. It also initiated a global programme to improve the structural economics of the business.

“We believe this initiative will provide the capital to fuel sustainable, profitable growth, and strengthen our financial position,” Burgh explained.

CFO Harmit Singh added that strengthening Levi Strauss's balance sheet remains a top priority for the group this year, with debt reduction an ongoing focus, but “at a more modest pace” than in 2014.

“We ended this year with an improvement of 140 basis points, which demonstrates we're beginning to see savings. We expect to see at the end of the programme, saving close to $175-$200m on a net basis.”

Despite the challenging conditions, the company made progress during 2014, growing full-year net revenues by 2% and adjusted EBIT by $62m to $134m.

“We focused on the controllable aspects of our business, counteracting soft retail traffic by driving conversion and productivity in our stores, ensuring product availability across all channels,” Bergh explained. He also pointed to the noticeable upswing in denim and the benefits Levi Strauss should reap from this.

“We need [the upswing]. The category was very very soft the last two years or so and we've managed to build share. Stronger brands tend to do better in soft categories. And so as the category comes back, we expect that our business should benefit as a result. We're also trying to bring a lot of innovation at the same time. That combined with the fact denim is getting a lot of play on the runway…we're pretty bullish about the category and our prospects for it.”