Levi’s Personal Pair Jeans

Levi’s Personal Pair Jeans (A) Case

Memo

To: Head of Internal Audit

From: CPA

Date: November 2, 2018

Subject: Air Technologies

The purpose of this memo is to address the internal audit findings and discuss the financial reporting issues.

Issue 1: Management Accounting : ROIC/Performance Management

Issue : ROIC for Stauss in both Wholesale and Original Levi’s Store Channel. Calculation of ROIC would not help in proper decision making of the 2 channels.

Analysis: ROIC is the return on investment which states how a good a company is turning capital into profits. Based on Exhibit 2, ROIC for the Wholesale channel is 30.8% and for Original Levis store channel is 15.8% pretax. The Wholesale Channel is nearly double comapred that to the Original Levis store Channel. With a total of $13.00 investment the wholesale channel is generating a 30.8% return on investment. The ROIC calculated is based on how the company is performed in the past. Though this seems to be a good performance by the wholesale channel, a high ROIC can also be misleading, allowing management to think they are doing well. Management having this perception could hinder their long term future growth and performance of the channel. Further the whole channel will always be under scrutinity given the current market situation. The market is moving away from Levi’s jeans and this would be an added to pressure for management to maintain or increase the ROIC even with the declining market, which may lead to management manipulating the situation in order to provide results.

Recommendation:

Since Jeans has always and will always remain one of the main clothing item for men and women, Levis will always have the opportunity to sell. Hence, Levis should focus on management opportunity as they have already created a nieche for themselves in the market specially with introducing the Personal Pair Kiosk. Management should not just be satisfied with a high ROIC but rather differentiate themselves to continue to be competitive, current and to continue be leaders in the market. To do so Levis should continue with their ‘push -based’ strategy as this is a quick way to change customer awareness into purchase and will help in customers from getting distracted with competitors strategies.

According to Exhibit 1, the ROIC for the wholesale channel and Original Levi’s store channel are 30.8% and 15.8%, respectively. The ROCI of the distribution channel is almost double than the retail channel, since the total investment for the retail channel is much higher than the wholesale channel. The high ROIC indicates the company is efficiently using its money to generate enough returns. In this case, the wholesale channel appears more profitable than the retail channel. However, a high ROIC may lead to missing of growth opportunities, since company will believe they perform very well, and the management work efficiently, which will ultimately affect the long-term performance. A high ROIC is always under attack, since all companies intend to maintain or increase their ROIC. RecommendationAlthough Levi’s has decent ROIC in both wholesale and retail channels, it should focus on management and opportunities to pursue better competitive advantage.

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