Levi Strauss Selling Dockers Brand

(San Francisco, CA) According to this report, Levi Strauss and Co. is suffering financially. The company is $2.2 billion in debt and has experienced seven consecutive years of decreasing sales and cost cuts resulting in thousands of layoffs. To inject some health into their sick balance sheet, the San Francisco-based company has decided to sell its Dockers brand of casual clothing.

The reasonableness of this decision is questionable since it appears it is only being done to provide a one-time infusion of revenue at the cost of losing a generally successful and productive division of the company. A substantial 25% of Levi's revenue will disappear by the sale of Dockers for no other reason than cash. Understandably, cash is nice, but it offers no apparent promise of future revenue generation. There is also no reason to believe that the problems which are at the root of Levi's financial troubles would be corrected or mitigated by the sale of Dockers.

Through many good and some bad years, the company appears to have become compartmentalized to the extent that individual departments don't communicate well with each other resulting in an ongoing inefficient and noncompetitive management style. All aspects of the business have been affected. Poor market forecasting, poor inventory control, manufacturing difficulties, supply chain problems, ineffective demand replenishment systems, and other weaknesses have all been blamed on the lack of information being available to Levi's executives. The net result has been an increase in the cost of doing business to a level whereby Levi's competitors have an advantage. Personally, I know people who quit buying Levi's years ago. There are many comparable products available for significantly cheaper prices.

The inefficiencies in management communications have caused a product price structure that is much greater than necessary or desired, however, there are other areas that contribute to the high cost of doing business. One is a glaring weakness in financial accounting and reporting. In fact, the recently announced financial results for last year specifically acknowledges the weakness.

"It was a tough year for the company, with both weak operating results and financial reporting missteps," said chief financial officer Jim Fogarty. "However, we have sufficient liquidity in the business, we are taking steps to improve our financial reporting, and our work with Alvarez & Marsal is well under way to strengthen the company."

Without accurate and timely financial data, company management is hindered from doing the best possible job. As a result, Levi Strauss executives have committed to strengthen the discipline.

The company is taking several actions to address this issue [material weakness in internal controls], including recruiting individuals with greater expertise in tax-related financial reporting and improving our internal communications.

Given that the success or failure of any business is determined by the counting of beans, Levi's promise to get better bean-counters is encouraging.

One other area that has a significant, albeit not easily quantifiable, impact on cost is Levi's business plan which de-emphasizes the selling of profitable products by putting strong emphasis on social programs and reforms. They do this within the company, within the community, and internationally. It's understandable and generally expected that any large multinational corporation will conduct business like a good neighbor, ethically and morally. In that regard, Levi's does a superb job. However, Levi's goes much further than being just a good neighbor. According to their Global Sourcing and Operating Guidelines, Levi Strauss mandates specific and strict requirements on about 600 contractors in more than 60 countries. Conditions are imposed on hiring, working conditions, the environment, working hours, health and safety, discipline, union associations, education and apprenticeship programs, and more. Whether Levi Strauss should or should not be functioning as an international social reform organization is a question for the stockholders to answer. Agreed, some level of sub-tier vendor control needs to be established, but I doubt there would be general concurrence on the necessity to implement social reformation in foreign countries. Nonetheless, right or wrong, Levi's international social reform plan is expensive. Quite expensive. As a result, Levi's has put itself at a competitive disadvantage to companies that don't inflate their product prices to pay for social reform programs.

In summary, Levi Strauss and Co. has been performing poorly for a number of years due to management and financial/accounting deficiencies and expensive social initiatives. To improve performance, Levi's will sell one of its most successful product lines, the Dockers brand. Good idea? Hold all tickets until the results are tabulated.