updated 2/22/2004 7:06:04 PM ET 2004-02-23T00:06:04

Bondholders of struggling San Francisco jeansmaker Levi Strauss & Co. are bracing themselves for a seventh straight drop in annual revenue when the company reports results for 2003.

That's expected to happen in the next two weeks. Levi -- which is privately held but discloses annual results each February -- late last year warned of gloomy news ahead.

Still, bondholders are waiting to see if major changes instigated by the turnaround firm hired last December are showing signs of helping the troubled company. It remains to be seen whether the firm, New York-based Alvarez & Marsal, has had time to catalyze significant new directions for the company.

Aside from new strategies, company observers will also be watching for potential savings from North American plant closures and for an update on sales of the company's Signature line of jeans, which were recently picked up by Target Corp. stores and which have been sold at Wal-Mart stores since last summer.

Retail consultant Kurt Barnard, who heads Barnard's Retail Consulting Group, said another set of disappointing results will increase the pressure on CEO Philip Marineau, who has guided the company through various turnaround efforts since he took over as CEO in 1999.

Still, Chairman Robert Haas, a key member of the voting trust that controls the company, took pains to praise Marineau when Alvarez & Marsal was brought on board in December, and attributed the idea to hire the firm to Marineau.

Levi Strauss in November cut its projections for full-year 2003 sales, saying they would decline 6 percent to 7 percent, rather than stabilizing to flat or nearly flat. Thus, last year is set to mark the seventh straight year revenue has fallen at the company. Following that announcement, Moody's Investor Services downgraded Levi's bonds to Caa2 from Caa1. Both ratings are considered "junk" status.

"The outlook is negative," Moody's wrote at the time. "The current ratings still incorporate perceived negative price and volume pressure in Levi Strauss & Co.'s core products, which comprise the largest portion of the company's business and its increasing dependence on strong execution in the mass channel for revenue growth and margin stability."

Indeed, sales of the Signature line were not significant enough to offset lower-than-expected October and November orders, the company said. And even if the retail climate improved during December holiday sales, it remains to be seen whether the company benefited. It is possible that sales of the Signature brand could harm the rest of the franchise.

Tim Guthrie, a Levi Strauss bondholder and money manager in Southern Ohio, said he will be watching the company's numbers and is looking "for the Signature brand to either, A, help Levi Strauss out or, B, cannibalize higher-end product sales."

He said he will also be looking to see if Levi has addressed long-standing distribution issues.

"They were notorious, for ... offering 100 jeans and delivering 80, three days late," he said. "Has working with Wal-Mart improved their distribution management?"

Levi Strauss bonds have recently traded as low as 69 cents on the dollar, which Guthrie believes understates the company's prospects.

"Look at airline bonds with similar ratings as Levis. After the World Trade Center attack, they traded down to where Levi's bonds were at two days ago. That's awfully pessimistic."

© 2007 San Francisco Business Times


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