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Levi’s is one of the largest (privately held) apparel companies that at the same time evades many radar screens of those who solely trade equities.  Nevertheless, the company often provides interesting  and honest insights into its business trends. Last night was no exception, with Levi’s reporting it’s 4Q results.  We believe the company’s candid commentary on the cost environment provides valuable insight into the challenges facing an iconic, cotton-dependent brand such as Levi’s.

  • Despite possessing one of the world’s most recognizable trademarks, the company has launched a new global brand called dENIZEN to address emerging middle market consumers in growing markets.  The brand launched in China in 4Q with 50 doors. India and Singapore also have transitioned doors to the new
  • The company continues to view the economic environment as difficult, especially in Europe.  Southern Europe remains particularly challenged.
  • The market for cotton was described as “unpredictable”.  Increased cotton prices will work their way in the company’s COGS and as a result they’ve taken selective price increases to protect margin and mitigate inflation’s impact.  It was noted that a further increase in cotton prices could negatively impact margins and working capital in the latter part of 2011. 
  • Cotton prices in the back half will have more impact on 2012 than 2011. 
  • Management explained its relationship between Levi's, third-party manufacturers, and denim/textile manufacturers:

"We actually don’t hedge cotton where we buy finished product from our third-party manufacturers. Those manufacturers are buying denim from denim manufacturers, who are essentially buying raw cotton. So, we’re three steps or two steps removed from the actual purchasing cotton or the ability to hedge that. And so our real controls are essentially through pricing, as well as cost controls that run through our supply chain that we manage, which is primarily the third-party manufacturers."

  • When asked about the demand elasticity of their customer base, management noted that it’s too early to judge.  In three months there should be more data for which conclusions can be drawn.
  • The company has not seen customers attempt to increase purchases near-term ahead of further potential price increases. 
  • Spring deliveries which are just now arriving on retail floor are the first products carrying increased costs.
  • Japan continues to be a struggle.   Over the past three years the denim market in Japan has decreased by 40%!

Eric Levine

Director