June 23, 1999

Levi Strauss & Co.
1155 Battery St.
San Francisco, CA 94111
Phone: 415-501-6000

by Louis Corrigan (TMFSeymor)

Ownership: Bob Haas and Family
Competition: Gap, J.C. Penney's Arizona brand, Lee, Wrangler
A Future IPO? Company isn't interested
When Bavarian immigrant Levi Strauss set up a dry goods shop in San Francisco in 1853, he couldn't possibly have imagined he was founding what would become the world's largest branded apparel manufacturer with some $6 billion in sales last year. Heck, it would still be another 20 years before he and tailor Jacob Davis got a patent for the riveted jeans that made mining for gold seem like child's play.

Strauss melded rugged, innovative design with a quintessentially American spirit of individualism to create what would become a global brand better known than Marlboro, Nike, or Microsoft. Levi Strauss & Co. sold $3.9 billion worth of apparel in the Americas last year, and it did another $1.7 billion in sales to Europe, the Middle East, and Africa, and another $369 million to the Asia-Pacific region.

Levi Strauss has given us the classic five-pocket and 501 button-fly jeans, but it has also expanded well beyond dungarees. Though a top competitor like the Gap (NYSE: GPS) has recently made a name for itself with its swinging khakis, Levi's Dockers brand is actually the khaki king. Three-quarters of American men own a pair of those "nice pants." Meanwhile, The Slates, a brand launched in August 1996, has become the top-selling dress pants sold in U.S. department stores. Though the company doesn't make its profit figures public, Fortune recently reported that Levi enjoyed $1.1 billion in FY98 cash flows, more than Tommy Hilfiger, Polo Ralph Lauren, Nautica, and Liz Claiborne combined.

Chair/CEO Robert Haas is a Harvard MBA and the fifth-generation family member to run the company. As reflected in a famous Harvard Business Review interview called "Values Make the Company," Haas has long been considered an activist manager, combining his McKinsey & Co. training with do-gooder initiatives that reflect his background working for the Peace Corps. In 1991, Haas made Levi the first multinational company of any industry to adopt guidelines covering issues like working conditions, child labor, and environmental standards. The company has tried valiantly to bring employees into decision-making processes while keeping textile jobs in the U.S.

However, Levi has faced increased competition from the Gap's private-label jeans, J.C. Penney's (NYSE: JCP) Arizona brand, resurgent Lee and Wrangler brands from the finely tuned VF Corp. (NYSE: VFC), and hipper indie brands like JNCO. Overall sales rose from $3.1 billion in 1988 to a peak of $7.1 billion in 1996 before declining the last two years, including a 13% dip in 1998. Levi's share of the U.S. men's market for jeans fell from 48.2% in 1990 to 25% last year. According to Tactical Retail Monitor, Levi's dominated the U.S. jeans market in 1990 but has since been overtaken both by VF's brands and by private labels.


Percentage of retail dollars
                          1990      1998   
Levi's:                   31.0%     16.9%
Other:                    39.2%     25.7% 
VF (Lee, Wrangler):       17.9%     25.3%
Licensed/Designer:         6.0%      7.0%
Private label
(Arizona, Canyon River):   3.2%     20.2%
Gap Inc.:                  2.7%      4.9%
So Levi Strauss has been forced to restructure. In February, it said it would shutter 11 of its 22 North American factories, cutting 5,900 jobs, or 30% of its North American workforce. When these cuts are complete, Levi will have eliminated 16,000 jobs since 1997. The company will now source most of its products from cheaper overseas plants. Haas has nonetheless offered a severance deal that the U.S. needleworkers union has called "the most generous package ever given to North American apparel workers."

The good news is that Levi should now be able to focus on marketing its current brands and creating new ones that appeal to consumers. The company has become too closely associated with aging baby boomers and uncool department stores, losing credibility with youthful trendsetters looking for more stylish apparel. That's why the company launched its raw "What's True" campaign last fall featuring actual cool urban teenagers wearing Levi's threads and holding posters expressing their own viewpoints, like "Music is my female soul" and "I can't be prejudiced, I'm mulatto." Levi has also launched pricey new "underground" labels like Red Line and an awesome online store.

According to Hoover's, Levi Strauss came public in 1971. But led by Bob Haas, the founder's descendants bought back the public shares in 1985 in a $1.6 billion leveraged buyout. In 1996, Haas led still another LBO to buy up employee-held shares. Today, Haas, his uncle, and two cousins have full control of Levi. Judging by his comments to Fortune, Haas has no desire to answer to public shareowners, who might prove more interested in profits than values. Of course, Levi's global brand could make for a hot stock that would actually make it easier for the company to foster a conscientious capitalism. Being responsive to shareowners is not such a bad thing, especially when owners are customers, too.

Designs Inc. (Nasdaq: DESI), operator of 109 Levi's and Dockers outlet stores, offers an indirect way to invest in Levi's future success. Although this currently unprofitable retailer has been hurt by Levi's troubles, a major shareholder recently made a $3.65 per share bid (since withdrawn) to buy the company. That's twice the current price, which is about 0.13x last year's sales of $202 million. There might be some value there. Of course, it's not like being able to invest in Levi Strauss itself.

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