Tuesday, July 11, 2006

Levi Strauss & Co. Q2 Results

The company just announced their second quarter financial results. There will be an investor conference call live broadcast today at 7 a.m. Eastern Time via their website.

Hot release: Levi Strauss & Co. (LS&CO.) today announced financial results for the second quarter ended May 28, 2006 and filed its second-quarter 2006 Form 10-Q with the Securities and Exchange Commission.

Net revenues for the second quarter were $953 million compared to $962 million for the same quarter in 2005, approximately a 1 percent decrease on a reported basis and flat on a constant-currency basis. Net revenue reflects lower European and U.S. Levi Strauss Signature brand sales, largely offset by increased U.S. Dockers and U.S. Levi's sales and continuing growth in the Asia Pacific business.

Net income for the second quarter increased 50 percent to $40 million compared to net income of $27 million in the same quarter of 2005. The improvement was primarily due to a $32 million discrete income tax benefit recognized during the second quarter of 2006, a $10 million decrease in loss on early extinguishment of debt during the 2006 period and lower interest expense, partially offset by lower operating income.

"We made good progress during the quarter," said Phil Marineau, chief executive officer. "Revenues stabilized and our net income improved. Looking at the business regionally, I'm particularly pleased with the growth in our U.S. business. We continue to transform our European business, and I'm optimistic that the region's revenue trends will improve during the balance of the year. And the Asia Pacific business continued its strong revenue and profit performance."

Second-Quarter 2006 Results

Gross profit decreased 4 percent to $438 million compared to $455 million in the second quarter of 2005. Gross margin was 46.0 percent of revenues for the second quarter of 2006 compared to 47.4 percent of revenues in the same period last year. The reduced gross margin in the 2006 period was primarily due to Europe and the U.S. Levi's and Dockers brands as a result of changes in sales mix, increased investment in products and higher sales allowances to support customers' marketing efforts, partially offset by an improvement in the margin for the U.S. Levi Strauss Signature brand.

Selling, general and administrative expenses increased 3 percent or $9 million to $317 million in the second quarter of 2006 from $308 million in same period of 2005. Higher SG&A expenses in the 2006 period were primarily attributable to higher selling expense associated with new company-operated Levi's Stores in Europe and the United States, the impact of reversing a litigation reserve in the second quarter of 2005, and additional long-term incentive compensation expense during the 2006 period. These increases were partially offset by lower advertising and promotion expenses and lower distribution costs.

Operating income for the quarter decreased $30 million to $115 million compared to $145 million in the second quarter of 2005. The decrease was primarily driven by lower operating income in Europe due to lower net sales and higher SG&A, partially offset by increased operating income in the U.S. Levi Strauss Signature, Asia Pacific and Mexico/Canada businesses.

Interest expense for the second quarter of 2006 decreased 7 percent to $62 million compared to $66 million in the prior year period. The decrease was primarily attributable to lower interest rates and lower average debt balances during the 2006 quarter.

Income tax for the quarter was a $17 million benefit compared to a $9 million expense in the 2005 period. The income tax benefit in the 2006 period is primarily attributable to the recognition of a $32 million discrete tax benefit arising from a change in subsidiary structure. The company expects the estimated annual effective income tax rate for Fiscal Year 2006 to be 42% compared to an actual annual rate of 45% in 2005.

"I'm encouraged by our growth in North America and Asia and our progress in Europe," said Hans Ploos van Amstel, chief financial officer. "We continue to deliver strong margins while investing in our business. This, together with our working capital improvement, continues to yield strong free cash flow, which remains our key focus."

Levi Strauss & Co.

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