Levi’s pays the cotton toll and gains 50% less

Levi Strauss & Co.'s fourth-quarter net income fell by nearly 50% as the clothing company coped with lower margins and higher taxes, namely rising cotton prices. Its selling, general and administrative expenses rose by $4 million.

"Our fiscal 2011 results reflect the impact of higher cotton prices and the difficult economic environment," said Blake Jorgensen, chief financial officer of Levi Strauss & Co. "We are focused on operating our business with discipline and improving our cash flow to help us navigate the challenges ahead."

Levi's earned $138 million for the full year versus $157 million in fiscal 2010. Its full-year revenue rose 8 percent to $4.76 billion from $4.41 billion. Gross profit for the fiscal year increased to $2,292 million compared with $2,223 million in 2010, as the increase in net revenues and a favorable currency impact offset the decline in gross margin. Gross margin was 48 percent of revenues for the year compared with 50 percent of revenues in 2010.

"In the face of stiff cost and economic headwinds, Levi Strauss & Co. grew the top-line for the second year in a row," said Chip Bergh, president and chief executive officer of Levi Strauss & Co. "As we move forward, we need to build on this momentum and on our global scale, strong brands and innovation pipeline, while improving profitability and cash flow to deliver sustainable long-term growth," company said in a statement released Tuesday.

The privately held company said Tuesday that its revenue improved but it earned $44 million for the period that ended Nov. 27, compared to the $86 million it gained a year earlier. Its selling, general and administrative expenses rose by $4 million, while Levi's had also to face a $32 million increase in income taxes, compared with the prior year's fourth quarter, when it recorded a one-time tax benefit of $34 million.

Revenue rose from $1.29 billion to $1.34 billion for the period as Levi's brand grew in popularity around the globe.

The company's net revenues grew in each geographic region in fiscal year 2011, primarily due to the strength of the Levi's(R) brand and its global store network. Fourth-quarter net revenues were up 4 percent on a reported basis compared to the same period in the prior year and full-year net revenues were up 8 percent on a reported basis from the prior year. Fourth quarter net income decreased from the prior year due to the company's lower gross margin in the fourth quarter of 2011 and a $32 million increase in income taxes, primarily reflecting a $34 million tax benefit recorded in the fourth quarter of 2010.

Higher net revenues in the Americas primarily resulted from price increases and continued growth in the Levi's(R) retail business, which offset a decline in the U.S. Dockers(R) brand. In a similar path, net revenues grew in Europe from expansion of the company-operated retail network.

Meanwhile, net revenues in Asia Pacific increased for the Levi's(R) and Denizen(R) brands, including the expansion of the company's brand-dedicated retail network. The growth in the region was partially offset by lower net revenues in Japan.

The company ended the fourth quarter with cash and cash equivalents of $205 million and unused availability under its credit facility of $495 million. Cash provided by operating activities declined to $2 million for 2011, compared with $146 million for 2010, primarily due to the higher cost of cotton. As a result, the company borrowed against its credit facility to fund working capital, and ended the fiscal year with net debt of $1.8 billion as compared to $1.6 billion at the end of 2010.