HOW LEVI STRAUSS DID AN LBO RIGHT The jeansmaker went private to focus on the long term. But unlike others who took the same route, it's not struggling under a load of debt. It's booming.
By Brenton R. Schlender

(FORTUNE Magazine) – EVER FANTASIZE about running a private company? Do you imagine escaping Wall Street's relentless demands for quarterly profit gains, breaking free to invest in visionary projects that hurt earnings now but pay off spectacularly down the road? Sounds nice -- and executives at Levi Strauss will tell you that it needn't be just a fantasy. Nearly five years after taking their company private in a leveraged buyout, they have achieved knockout improvements in sales and profits. At a time when many LBOs are coming unraveled, Levi Strauss is showing how to do one right. Plenty of security analysts will argue that your fantasy makes no sense. * Wall Street is not a villain, they contend; it evaluates long-term investments rationally, and if it doesn't like yours, then they probably aren't worth liking. ''Bosh to that,'' reply the managers of Levi Strauss, led by CEO Robert D. Haas, the founder's great-great-grandnephew. They have increased sales 31% (to $3.6 billion) and profits fivefold (to $272 million) since the LBO in 1985 even though the U.S. jeans market was shrinking. They say with passion that they could not have done it while catering to Wall Street's demands. Immediately after the LBO, Levi poured tens of millions into new-product development, marketing, and computer technology. A corporate reorganization in 1988 focused the company on basic product lines, weeded out redundant management, and trimmed the number of products by two-thirds. Since 1985 the company has closed 26 plants and pared the 38,000-person work force by 16%, a distinctly unpleasant move for an employer long considered unusually benevolent. A new computer system helped streamline manufacturing and distribution by wiring Levi directly to its retailers and fabric suppliers. All these things cost money at first, but Levi didn't have to worry about what stock analysts would think of the hit to earnings. The company's shareholders now consist mainly of the extended family of descendants of Levi Strauss, the 19th-century San Franciscan who stitched some surplus tent canvas into work pants for prospectors to wear in the gold fields. What a difference a deal makes. While Levi's brass no longer feel pressure to manage for the short term, executives believe they can move faster than ever when they really have to. The chief case in point: The company's creation from whole cloth of Dockers, a new line of casual clothing aimed at the progressively less slim over-25 crowd. In just four years, Dockers has become a nearly half-billion-dollar-a-year success. Explains Robert Siegel, president of Levi's U.S. men's wear division: ''We are very research driven at Levi, and at about the time of the LBO we saw a new consumer emerging from the changing demographics. This consumer wanted something in between Dad's pressed slacks and his own old jeans.'' Dockers don't exactly represent a fashion revolution -- the flagship of the line is an updated version of loose-fitting cotton chino pants men have been wearing for decades. Even the name was recycled: Levi previously had sold baggier cotton pants called Dockers in Japan and Argentina, but neither was a hit. The difference is that Levi makes the new Dockers in a variety of colors and fabrics, sells coordinated shirts to go with them, along with women's versions, and promotes the line relentlessly. Says John Tugman, an apparel industry analyst for MRCA Information Services: ''Dockers is a major category that didn't even exist before. The beauty is that it's a natural extension of the jeans business, and Levi had either the wisdom or the luck to be the first to develop a brand position.'' TO ESTABLISH that brand name, Levi spared little expense in advertising and in helping its biggest customers -- retailers like J.C. Penney and Sears Roebuck -- set up flashy Dockers departments in their stores that offer only products with the brand's nautical logo. ''The big difference we have noticed with Levi since the LBO is how much more attention they give to merchandising and to targeting new customer groups,'' says W. Barger Tygart, Penney's director of merchandising. ''They went from being recognized as simply a maker of jeans to the symbol of a lifestyle.'' Thomas Tusher, Levi's president and chief operating officer, contends that Levi couldn't have made Dockers such an overwhelming overnight success if it had remained a public company. ''There's no way we could have spent $10 million on advertising like we did to get the name established,'' says Tusher, who totes unfinished work home at night in a hokey-looking denim-covered briefcase. Nor could Levi have been so ambitious revamping its corporate computer system. Only half-completed, Levi's new information network is already the envy of the apparel industry. The company has a computer hookup with retailers -- called LeviLink -- that enables customers to order and pay electronically for new inventory. Other direct connections with fabric suppliers let Levi constantly fine-tune the amounts and kinds of fabrics it orders to meet consumer demand. In essence, Levi is trying to bring just-in-time manufacturing and distribution to an industry that because of its wild, fashion-driven swings has resisted automation. Already the new systems have practically eliminated the need for big fabric warehouses adjoining Levi's apparel plants, and the quick order turnaround has allowed some of Levi's retailers to dispense with their own warehouses and still keep hot-selling styles and sizes in stock. ''Instead of taking three days to handwrite orders for 125 stores, we can punch in our orders in minutes,'' says Dennis Pederson, buyer and merchandise manager of pants for KG Men's Stores of Denver. ''It has cut my shipping cycle from every three weeks to every six days and sometimes less. We've saved more money than anybody knows.'' The company's goal ''is to order electronically the manufacture of a pair of jeans when the customer buys one in the store,'' to replace the stock, says Paul Benchener, known in the apparel company as the director of quick response. So far about 35% of Levi's domestic sales are ordered electronically through LeviLink. Does all this fancy technology really help to move product? ''There has to be some correlation,'' says Benchener, ''because in those accounts that use LeviLink we've had 20% to 30% sales increases.'' LEVI'S international operations represent another post-LBO success story. In the 1970s, Levi followed the jeans craze around the world and began setting up joint ventures or licensing other manufacturers to make and sell good old American blue jeans in 70 countries. But when demand for jeans tapered off in the U.S. in the early 1980s, the international operations got double-whammied: Demand fell even faster overseas, as the dollar hovered at all-time highs, which clobbered profit margins. By 1985, Levi was contemplating pulling out of most of its international markets. Instead, Lee C. Smith, head of Levi's international operations, proposed a restructuring that mirrored what Haas was already thinking about for U.S. operations. ''We shut down factories, cut off a lot of fixed assets, eliminated some sales territories and lots of products, and converted some of our joint ventures to licensing arrangements,'' says Smith. ''Since that time, the market for jeans overseas has actually grown somewhat, and the value of foreign currencies has turned around.'' Result: ''Right now in terms of profit margin we've surpassed domestic, something I once predicted we would never do.'' Last year international operations accounted for 34% of Levi's total sales and 45% of pretax operating profit. Levi's hottest overseas market is Japan, where dress habits are profoundly changing. ''There's a jeans revolution going on over there,'' says Smith. ''Now even women are wearing jeans in Japan. I never would have predicted that, either.'' In addition to selling more overseas, Levi is manufacturing more there as well, including goods it sells back in the U.S. Most Dockers products, for example, are made in the Caribbean basin. The reason: ''Dockers have twice the labor content of 501 jeans ((Levi's biggest-selling product)),'' says Peter Thigpen, senior vice president in charge of operations. ''The higher the labor content, the less viable it is to manufacture in the U.S., and the part of the product line that is growing fastest is the high-labor part.'' That trend alarms unions representing many of Levi's factory workers. Says Jack Sheinkman, president of the Amalgamated Clothing and Textile Workers: ''Since the LBO the character of Levi's business has changed, and today the company is operating pretty much like any other global multinational.'' Sheinkman concedes that Levi's severance benefits and labor relations are among the best in the apparel industry. The plant closings, he says, ''just prove that even in a good LBO the employees are still victims.'' Levi has always been proud of how it treats employees, so the closing of plants has prompted lots of soul-searching at headquarters. Perhaps as a consequence, the company has lately been promoting what it calls corporate aspirations, aimed at making work more meaningful for employees. Laminated plaques outlining these goals are prominently posted all over Levi's headquarters and plants, urging managers and employees to speak openly to one another and promising that the company will value diversity in its work force, reward good work, and give all employees more power and responsibility. Thigpen, who makes the final decisions on which plants will be closed, allows that ''among the manufacturing work force, job security is the primary concern, and the aspirations and all that really don't mean much. But that's not the way we want our people to feel, and we're struggling with it.'' To raise productivity as well as help get the good feeling back among remaining employees, Levi is trying a gain-sharing program. At a jeans factory in Blue Ridge, Georgia, Levi set productivity improvement goals and agreed to split the savings with employees. Last year each worker earned an extra $450. ''Before gain sharing, this was our second-best plant in cost of goods produced,'' says Thigpen, ''and now it's best by 7%. We had no idea how much these people could help us turn around the business.'' It's hard to believe that Levi factory workers could pick up their already frenetic pace. A jeans plant that employs 700 in El Paso, Texas, is a constant blur of activity. Rock music blares over the din of sewing machines and the & hiss of pneumatic tools. An example of what gets done in an 8 3/4-hour workday: Each of four workers sews the buttons on 4,037 pairs of button-fly jeans. Only a few steps of the jeans-making process, such as sewing the scalloped stitching on the rear pockets, are fully automated. The rest is exacting manual labor with a sewing machine. Nonetheless, workers whose plants survived the cutbacks treasure their jobs. At the El Paso plant, turnover is about 1.5% a year, a fraction of the attrition at most apparel plants. Sammy Quinones, a 19-year veteran who worked his way up to a supervisor job there, says that ''the company is different now after the buyout, but the people are the same. It's a big family.'' And what do members of the founder's family think of the buyout now? ''Everyone is extremely pleased, but then every story is wonderful that ends so well,'' says Douglas Goldman, a cousin of Robert Haas who had doubts the move would succeed. Other family members still cringe at the massive layoffs and at the huge fees Levi paid its investment bankers, F. Warren Hellman, a distant cousin of Haas, and his partner, Tully Friedman. Their San Francisco boutique firm, Hellman & Friedman, received a $7 million fee and was allowed to purchase 2.2% of the company for $42,500. Current value: nearly $42 million. Haas says, ''Overall I think the family has grown closer ((since the LBO)), although part of it, of course, is the glow of a risky venture.'' A DISADVANTAGE OF LBOs for the owners is that they can't easily sell their shares. To address that problem, Levi recently created an employee stock purchase plan that can buy shares if anyone wants to sell. Twice a year Morgan Stanley will appraise the company as if it were a public concern and assign a value to the shares. The company is also building up a corporate fund to buy back shares for those who want to cash in. Life as an LBO has been good to Levi. Not only are its executives certain that being liberated from Wall Street has enabled them to achieve outstanding results, but it also appears that those results will keep the company free of the Street for the time being. Levi is generating so much cash that it has paid back more than two-thirds of the $1.5 billion it borrowed to go private, putting it seven years ahead of its repayment schedule -- so it won't need to raise money through an equity offering anytime soon. Indeed, in light of all that has happened, will Levi ever go public again? Haas, whose 11-year-old daughter calls him the Corniest COB ((chairman of the board)) in the World, is quite blunt: ''I don't see any glimmer of a reason why we would want to.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: A BUYOUT'S BLESSINGS Profits have rocketed since the LBO (above). CEO Haas (left, among bronzed jeans) says that's because Levi escaped Wall Street's demands.