Levi Strauss & Co. is bracing for tepid consumer spending this holiday season after back-to-school shoppers in the U.S. balked at higher prices on its namesake jeans and Dockers pants.
“It is hard to imagine a very robust holiday season compared to last year,” Chief Financial Officer Blake Jorgensen said in a telephone interview yesterday from San Francisco, where closely held Levi is based. “We remain cautious around where the future is going over the next couple of quarters.”
Some shoppers at J.C. Penney Co., Sears Holdings Corp. (SHLD) and Kohl’s Corp. (KSS) stores bought fewer pairs of Levi jeans in the quarter that ended Aug. 28, which included the start of the back-to-school season, Jorgensen said. To clear out excess merchandise, Levi cut prices it had raised in the past year to cover soaring cotton costs, hurting profitability.
Levi’s gross margin, the fraction of sales remaining after subtracting the cost of goods sold, narrowed to 47 percent in the quarter from 49 percent a year earlier, the company said yesterday. Revenue advanced 8.6 percent to $1.2 billion.
“Price increases in the value channel were much harder on the consumer,” said Jorgensen, 51. Regular prices of those jeans were $30 to $50 in the quarter, after jumping by $5 to $15 to make up for higher costs, he said.
“Your average family with two or three kids may have bought two pairs of jeans before,” he said. “You are buying one now.”
Wal-Mart Stores Inc. (WMT), the world’s largest retailer, said said today during an investors meeting that U.S. apparel sales are improving while comparable-store clothing sales still are declining from last year. The Bentonville, Arkansas-based company said it plans to double its volume of holiday television advertising.
U.S. retail sales growth will slow to 2.8 percent during the holiday season, restrained by decelerating job growth, a weak housing market and a volatile stock market, the National Retail Federation said last week.
The increase to an estimated $465.6 billion in retail sales in November and December compares with a 5.2 percent jump last year and the 10-year average of 2.6 percent, according to the Washington-based NRF.
Jorgensen said other apparel makers may have misjudged how much they could raise prices.
“Most of the industry is making production bets six to 12 months in advance,” he said. “Normally, that is not a problem. But in a year in which prices dramatically moved due to input costs, you’ve got some guessing around how the consumer is going to react.”
Penney, Sears and Kohl’s cater to “the core population of America” that’s worried about jobs and “took pause” in August amid political rancor in Washington and signs the economy may be slipping back into recession, Jorgensen said.
“Until you see real job growth, you’re not going to see real economic momentum,” Jorgensen said. “The U.S. has a long- term issue with unemployment that for the average consumer is going to remain challenging.”
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