Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The request identifies 2021 Q1, but the supplied filing is for the 13 weeks ended February 27, 2022, compared with the 13 weeks ended February 28, 2021. The financial statements are unaudited.
Business context and reporting period
Levi Strauss designs, markets and sells apparel and related products through wholesale and direct-to-consumer (DTC) channels. Its brands include Levi’s, Dockers, Signature, Denizen and, following its 2021 acquisition, Beyond Yoga. The company reported Americas, Europe and Asia segments for Levi’s Brands; Dockers and Beyond Yoga are included in Other Brands.
Products were sold in approximately 50,000 retail locations across more than 110 countries. In Q1 fiscal 2022, wholesale generated 61% of revenue and DTC 39%; DTC’s share rose from 36% a year earlier.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $1.592 billion | $1.306 billion | +21.9% reported; +25.6% constant currency |
| Gross profit / margin | $943.6 million / 59.3% | $760.0 million / 58.2% | Margin +1.1 percentage points |
| Operating income / margin | $234.2 million / 14.7% | $177.1 million / 13.6% | +32.2% |
| Net income | $195.8 million | $142.5 million | +37.4% |
| Diluted EPS | $0.48 | $0.35 | +37.1% |
| Operating cash flow | $86.1 million | $69.5 million | Increased |
Adjusted EBIT was $237.9 million versus $174.0 million; adjusted diluted EPS was $0.46 versus $0.34. These are non-GAAP measures and should be considered alongside GAAP results. Cost of goods sold was 40.7% of revenue, down from 41.8%; SG&A was 44.6% of revenue in both periods.
Q1 cash used in investing was $78.2 million, including $73.6 million of capital expenditures. Cash used in financing was $139.4 million, including $74.2 million of share repurchases and $39.9 million of dividends. Ending cash and cash equivalents were $678.3 million, with $98.8 million in short-term investments. Total debt was $1.025 billion, largely fixed-rate senior notes; net debt, the company’s non-GAAP measure, was $247.6 million. The company reported $837.2 million of unused revolving-credit availability and total liquidity of approximately $1.6 billion. It was in compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue grew across all reported segments. Americas revenue increased 26.4%, Europe 12.6% and Asia 10.9% on a reported basis; Other Brands revenue nearly doubled, with Beyond Yoga included in the current period.
- Growth reflected stronger traffic and demand, more stores open than in the prior-year period, price increases and a greater contribution from DTC. The company noted that prior-year results were affected by pandemic-related closures and restrictions.
- Gross margin improved on higher DTC mix, fewer promotions, more full-price sales and price increases, partly offset by higher product costs. The prior-year comparison included a $7.2 million reduction in COVID-related inventory costs.
- Interest expense fell to $4.2 million from $23.3 million, reflecting lower debt-related interest following prior-year debt redemption and lower deferred-compensation-plan interest expense.
- Other income included a $12.5 million German government subsidy for COVID-19 losses incurred in prior years. The effective tax rate rose to 20.4% from 7.9%, primarily due to lower tax benefits.
- Inventory rose to $1.006 billion from $898.0 million at fiscal year-end, primarily in finished goods. Cash declined from $810.3 million at fiscal year-end.
Outlook, commentary, risks and unusual items
Management said it expected adequate liquidity over the next 12 months and longer term, but the filing provides no specific revenue, earnings or margin guidance. It described capital priorities as investing in growth, returning capital through dividends and repurchases, and pursuing strategic acquisitions. A $0.10-per-share dividend was declared after quarter-end, and the company completed its $200 million repurchase program after quarter-end with an additional $40 million of repurchases.
Supply-chain disruption, including transportation shortages, labor constraints and port congestion, prevented fulfillment of some customer orders; management estimated a roughly $60 million revenue impact in Q1 and said disruptions could affect future sales. Higher freight, labor and distribution costs were also reported. COVID-19-related store restrictions, lower traffic, consumer spending uncertainty and supply-chain interruption remained risks. The company cited inflation, currency volatility, competition, changing consumer preferences, trade measures and sanctions among other challenges.
In March 2022, the company temporarily suspended most commercial operations in Russia. Russia represented approximately 2% of Q1 revenue and 1% of net assets at February 27. Management planned a Q2 impairment review of Russia-specific assets, including $9 million of goodwill, $4 million of property and equipment, and $30 million of lease right-of-use assets.
Other items to note: the company repurchased 3.0 million shares for approximately $71.5 million during the quarter; it donated $11.4 million to the Levi Strauss Foundation, compared with $2.4 million a year earlier; and it disclosed ordinary-course litigation and customs assessments that it did not expect to materially affect results. A proposed German distribution-facility lease is expected to add $100–$110 million of lease assets and liabilities when its term begins, currently expected in fiscal Q4 2023, plus approximately $60 million of equipment capitalization.
Most important facts for investors to verify
- Confirm the intended period: the supplied 10-Q reports Q1 fiscal 2022, not Q1 2021.
- Track whether supply-chain constraints, the estimated $60 million Q1 order-fulfillment impact, and higher freight and labor costs persist.
- Assess the Russia suspension and planned impairment review, including any subsequent asset charges or operating effects.
- Separate GAAP earnings from adjusted results and note that Q1 net income included the $12.5 million German subsidy gain.
- Monitor inventory growth, cash generation after capital expenditures and shareholder returns, and the company’s debt and liquidity position.
- Review subsequent filings for actual performance against management’s liquidity outlook; this filing gives no quantitative full-year guidance.