More Rough-and-Tumble for Lee and Wrangler

Levi's push into Wal-Mart is a kick in the pants for VF brands

Seven years stuck in neutral might not seem like much to brag about, but VF (VFC ) Corp. CEO Mackey J. McDonald insists that he has nothing to be ashamed of. His core products -- regular old blue jeans sold under venerable brand names such as Lee and Wrangler -- have held their own even as big-name designers, no-name upstarts, and private labels have fragmented the market. While archrival Levi Strauss & Co. in San Francisco has suffered a 43% sales skid since 1996, to $4.1 billion last year, VF's jeans sales have held steady at about $2.9 billion a year.

But things are about to get a lot rougher in America's jeans wars. Desperate to reverse its declines, Levi Strauss has just cut a deal with VF's biggest customer, über retailer Wal-Mart Stores (WMT ) Inc. After years of disdaining to put its brand into the nation's leading discounter, Levi's will ship a new, lower-price line of jeans called Levi Strauss Signature to the chain's 2,800-plus U.S. outlets this July. Signature is expected to pose a direct challenge to VF's Wrangler, Riders, and Rustler lines, which have long sold at Wal-Mart and other discount outlets.

The upcoming competition is a serious threat for VF, based in Greensboro, N.C. Despite an acquisition spree that has brought North Face parkas, Lily of France bras, and other brands into the VF fold, jeans still account for more than half of the company's $5.1 billion in revenues. So VF is fighting back with a new-product and marketing assault while prowling for more acquisitions. "Our guns are loaded," promises McDonald, who will spend close to $150 million on jeans advertising this year.

Officially, VF executives pooh-pooh the Levi's threat, arguing that a new line of jeans will have only limited effect in a $24 billion U.S. market that encompasses 577 million pairs of pants sold per year under more than 100 different labels. Talk to loyal VF customers like Dave Lamport, though, and it's clear that Signature could be a problem. Lamport, a retired police officer, has sworn by his Wranglers for 30 years. But he and his wife, Mercia, are even more passionate about value. The Lamports say that when Signature reaches their local Wal-Mart store in Ocala, Fla., they'll give the jeans a try. "Levi's is going to have an impact," predicts Mercia.

Luckily for VF, its innovation machine has been humming in recent years. The Lee brand, a favorite among boomer women, has grabbed a bigger share of the men's market, thanks in part to a popular ad campaign built around a revived 1920s icon, Buddy Lee. Its Wrangler Five Star Premium Denim, which rolled out last year, helped Wrangler grab four percentage points of share among men 25 or older.

New sub-brands currently in the works will be marketed to specific demographic groups, such as teenage boys and twentysomething women. "They're rejuvenating a category that hasn't had a lot of excitement," says Terri Mann, senior vice-president for merchandising at Kohl's (KSS ) Corp. department stores. And with $650 million in free cash flow, VF is looking to pick up some additional brands, McDonald acknowledges. Analysts say fashion labels such as Mudd, Miss Sixty, and Paris Blues are on his wish list.

Those efforts, along with moving to lower-cost production overseas, helped VF rack up $92.1 million in net income for the first quarter of 2003, a marked increase from $77 million the previous year. But the company concedes that the Signature launch will contribute to an expected 3% sag in VF's jeans sales this year. That's bad news for VF. For denim shoppers, however, it means lots of choices when it comes to jeans -- and probably some hot prices to boot.

By Brian Grow in Orlando with Robert Berner in Chicago

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