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Moody’s Downgrades Levi’s Debt

August 15, 2002

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SAN FRANCISCO (AP) _ Casting doubt on Levi Strauss & Co.’s turnaround effort, a major credit rating agency downgraded the jeans maker’s debt after concluding the company probably will have to lower prices to remain competitive.

Moody’s Investor Service delivered its bleak forecast as part of a downgrade late Wednesday. The action lowered the ratings on $2.1 billion in debt by two notches, pushing Levi’s even deeper into junk bond territory.

The decision largely reflected market forces pressuring Levi’s to reduce prices, Moody’s analyst Catherine Guinee said in an interview Thursday. The anticipated price cuts will make it more difficult to reverse five consecutive years of declining sales.

``Levi’s is competing against a lot of basic jeans that are cheaper than they are,″ Guinee said. ``The question then becomes can they afford to lower their prices without losing the quality they are known for?″

Levi’s believes Moody’s downgrade is unwarranted, said company treasurer Joe Maurer. While reducing its debt by $340 million over the past year, Levi’s also has overhauled its operations so it can lower prices without significantly affecting its profit margins, he said.

The reorganization included the closure of six high-overhead U.S. manufacturing plants and the laying off of 3,600 workers. The cost-cutting is expected to save Levi’s $100 million annually, money the company plans to pour into advertising and product development.

``Our turnaround strategy is on track,″ Maurer said. ``We expect to stabilize the business in the second half of this year and begin growing again in 2003.″

Through the first half of this year, Levi’s sales fell to $1.86 billion, 9 percent behind last year’s pace. Management expects improvement during the fall and holiday season as more consumers flock to new low-cut Levi’s jeans and other more hip fashions. Even so, Levi’s expects sales this year will be about $4 billion, down from $7.1 billion before the company’s slump began.

Levi’s said price-cutting has already cost some revenue this year.

With the department stores that sell its jeans losing more business to discount chains, Levi’s acknowledged it lowered its wholesale prices in the quarter ending in May.

Ironically, the price cuts have coincided with Levi’s debut in upscale stores such Saks Fifth Avenue and Neiman Marcus, where price isn’t a major consideration.

The upscale Levi’s products have been getting a warm reception, suggesting the company’s revived fashion sense might be able to win over more mass-market customers without heavy discounting, said San Francisco fashion industry consultant Harry Bernard.

``Price isn’t the primary motivation for most fashion purchases,″ Bernard said. ``It’s more about whether the clothes make a person look and feel good. Until recently, Levi’s weren’t worth buying at any price. Now it looks like they have a very good shot at turning things around.″

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http://www.moodys.com

http://www.levistrauss.com

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