Distressed Levi finding pockets of success

SAN FRANCISCO

Not that long ago, Levi Strauss & Co. had the jeans world sewn up.

Its riveted, five-pocket denim bottoms were a must-have for the teenage set, as well as a wardrobe icon for middle-aged baby boomers who grew up with the brand.

Then Levi unraveled. It missed the wide-legged urban jeans trend in the 1990s and pushed "hard" uncomfortable jeans to casually dressed folks who weren't about to give up their soft, stone-washed uniform.

Meanwhile, everyone from such middle-brow retailers as Sears, Roebuck and Co. to tony design houses such as Gucci starting making their own blue jeans, stealing market share from the longtime industry leader. Levi executives watched helplessly as sales plummeted to $4.26 billion last year from $7.1 billion in 1996.

Now Levi believes that the long, painful fade is over, courtesy of former food industry star Philip Marineau.

Since arriving nearly three years ago, the 55-year-old Marineau has averted one debt crisis, shuttered eight plants and done much to recapture Levi's reputation for being hip, which was lost when the company stuck with its straight-legged 501 jeans too long.

"We were inwardly focused. We were a victim of our own success," Marineau said.

To Marineau's credit, Levi is enjoying some newfound success, this time in an area that was never its strength.

Levi's over-the-top success with low-rise jeans for women last year has translated into strong fall orders. And upscale retailers such as Neiman Marcus and Barneys New York have jumped on Levi's bandwagon, carrying a more expensive Levi's line that starts around $85.

"They have a fashion presence now they didn't have before, particularly for women," said Kathy Suto, vice president and general manager of Neiman Marcus' Northbrook, Ill., store. "It's incredible how well their product is selling."

Levi's back-to-school offerings are in stores, and if they turn out to be a hit with fickle teenagers and twenty-somethings, a turnaround finally will be in the making for the San Francisco company that got its start sewing durable work pants for miners in the 1870s.

"Now, we're at least competitive," said Marineau, Levi's CEO and a veteran of Dean Foods and Quaker Oats. "By 2003, we'll be growing again. We're right where we expected to be."

If Marineau's turnaround loses steam, all bets are off.

In the second quarter ending June 20, Levi reported a loss of $80.9 million on sales of $924 million, a 12 percent decline from a year earlier, as shoppers bought more jeans at discount stores and trendy brands such as Seven captured an ever-greater share of fashion-conscious jeans buyers.

Obligations coming due

Despite the order upturn, Marineau is resigned to the company posting a sixth consecutive year of lower sales.

Balance sheet issues are looming as well. Levi, which has trimmed $3.6 billion in debt to less than $2 billion, still has almost $1 billion in obligations coming due in 2003, an overhang that recently prompted Moody's Investors Service to downgrade Levi's already junk ratings on senior debt by a hefty two notches.

On the bright side, Levi has been able to stay profitable on an annual basis as sales have sharply contracted.

Even with the latest styles, winning over teenagers isn't going to be easy for the iconic brand.

"When I think of Levi's, I think of a little kid or a 40-year-old person," said Tom Castronov, a 16-year-old junior at St. Patrick's High School on Chicago's Northwest Side. "I could see my dad wearing them. Fashion doesn't rule his life. Comfort and price do."

For Castronov, style is the most important factor when selecting jeans, and Levi's aren't hip enough. His retailer of choice these days is Armani Exchange, which offers comfortable bottoms in a variety of colors with prices ranging from $50 to $80 a pair.

What would it take to get Castronov to try on a pair of Levi's?

"They'd have to add stylish colors like sand-blasted and torn, faded," he said. "I'm betting Levi's doesn't have boot cut."

Castronov would lose that bet.

Levi does offer boot-cut jeans as one of several leg options. Faded and torn? Levi's has that, too. In fact, its LVC (Levi's Vintage Clothing) is modeled on actual worn-out pairs of jeans garnered from auctions and denim collectors.

For fall, there's a women's jean called the Mechanic, which features the outline of a greasy hand on the rear end and a $45 price tag. Levi's is making a big push to win over women consumers, who are buying more jeans today than their male counterparts.

Levi's newfound edginess is making some inroads with hard-to-please adolescents. Among the top 10 selling styles for juniors in department stores, three of them are Levi's, according to NPD Group, a market research company that tracks apparel sales.

"That means they're being successful in penetrating a designer brand market," said Marshal Cohen, co-president of NPD FashionWorld. "That's really what's driving Levi's recent resurgence."

Experts unconvinced

But outside Levi's leafy headquarters near the Embarcadero, few experts are convinced that Levi has gotten its groove back.

"Designer jeans are where it's at," said David Wolfe, creative director of the Doneger Group, a fashion consulting firm in New York. "Even if they produce fashionable jeans, that's not what people are looking to Levi's for. Levi's means basic, forever, unchangeable denim pants you can count on."

Critical decision to make

Since joining Levi nearly three years ago, he has shuttered domestic plants, moving Levi production to cheaper off-shore factories owned by others. He has paid down debt and laid out a recovery plan with three phases: control, stabilize and grow. Levi is now at the end of the second phase, Marineau says.

Now he faces a critical decision -- whether to create a lower-priced jeans line to sell to Wal-Mart Stores Inc. and Target Corp.

Selling to discounters would add pizazz to Levi's top line but it could jeopardize its longstanding relationship with department stores and torpedo its recent progress with high-end retailers and specialty chains.