Levi’s Earnings Up Despite Lower Sales

Levi Strauss & Co. said Tuesday that its quarterly profit rose 50%, helped by tax benefits and lower interest expenses, but sales fell because of weak European demand and competition from private-label brands.

The closely held apparel company’s outgoing chief executive, Phil Marineau, said sales were showing signs of improvement in Europe, which faces a challenging retail environment amid high unemployment.

“I don’t think anyone expected a sudden turnaround in Europe. It’s more a longer-term fix,� said analyst Clark Orsky of KDP Investment Advisors. “It sounds like they’re doing what they need to do. Now we just have to see if it works.�

San Francisco-based Levi Strauss has sought to upgrade its line in Europe, pulling jeans from discount retailers, broadening and improving its assortments and introducing new management.

The company posted profit of $40.2 million for the second quarter, including a $32-million income tax benefit and a $10-million benefit from the early extinguishment of debt and lower interest expenses.

But net revenue edged down 1% to $953 million and was flat on a constant-currency basis, hurt by a 17% drop in European sales and a 4% decrease in U.S. Levi Strauss Signature brand sales. U.S. sales of the Levi’s and Dockers brands improved 2% and 11%, respectively.

In a conference call with analysts, Marineau, who last week announced that he would retire at the end of this year, said the European business was improving, with comparable-store sales growth higher than a year ago and replenishment orders up.

“I am encouraged by these trends, but we still have a lot of work to do to stabilize sales,� he said.

At Wal-Mart, the Signature brand has lost floor space with the discounter’s introduction of its private-label women’s lines. But Marineau said the company was making up for that loss with gains in the men’s and children’s businesses.

Gasoline prices have also taken a toll, he said.

“We’ve seen a slowdown in demand for the value consumer� in the overall men’s and women’s jeans market since last July, Marineau said. “That continues to this day.�

Marineau said the company had strengthened its men’s and boy’s departments at Macy’s after the merger of Federated Department Stores Inc. and May Department Stores Co. But uncertainty persists as May stores convert to Macy’s, he said.

“Anytime you change a brand name ... it remains to be seen if there’s some short-term impact on consumer demand,� he said.

Levi Strauss said it was “cautiously optimistic� for the second half of the year and Marineau told analysts that the company had the right strategies in place to address challenges.

Earlier this year, Levi Strauss stemmed a sales slide that had dogged the company since 1997 as rival jeans makers stole market share from the iconic brand. In recent years, Levi Strauss has closed factories, laid off workers and revamped its jeans and other apparel to boost profit and win back customers.