Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The filing is for the fiscal quarter ended August 29, 2021, and the nine months then ended—not 2020 Q3 as stated in the request metadata. The comparative quarter ended August 23, 2020. Financial statements are unaudited.
Business context and reporting period
Levi Strauss designs, markets and sells apparel and accessories under the Levi’s, Dockers, Signature and Denizen brands through wholesale and direct-to-consumer (DTC) channels. It reports three geographic segments: Americas, Europe and Asia. The company also acquired Beyond Yoga after quarter-end.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenues | $1,497.6m | $1,063.1m | $4,079.2m | $3,066.8m |
| Gross profit / margin | $862.2m / 57.6% | $577.4m / 54.3% | $2,372.4m / 58.2% | $1,586.4m / 51.7% |
| Operating income (loss) | $216.3m | $92.3m | $499.9m | $(177.1)m |
| Net income (loss) | $193.3m | $27.0m | $400.6m | $(183.8)m |
| Diluted EPS | $0.47 | $0.07 | $0.97 | $(0.46) |
Q3 reported revenue grew 40.9% year over year, or 38.0% at constant currency; nine-month revenue grew 33.0%, or 29.6% at constant currency. Comparisons reflect significant COVID-related store closures and demand disruption in 2020. Management also reported Q3 revenue in the Americas and Europe above the comparable pre-pandemic quarter in 2019.
- Margins and costs: Q3 gross margin rose 3.3 percentage points; nine-month margin rose 6.5 points. The company attributed improvement primarily to greater DTC mix, with nine-month gains also reflecting product mix and price increases. Q3 SG&A was $649.5m, up 34.2%, while SG&A as a share of revenue improved to 43.4% from 45.5%.
- Cash flow: Nine-month operating cash flow was $498.9m, versus $240.9m. Investing used $127.7m, including $108.4m of capital expenditures; financing used $489.6m. Cash and cash equivalents ended at $1,376.6m.
- Liquidity: Cash and short-term investments totaled about $1.47bn. Unused revolving-credit availability was $716.4m; reported total liquidity was about $2.2bn. Management said it expected adequate liquidity for the next 12 months.
- Debt: Total debt was $1,250.8m, versus $1,564.3m at November 29, 2020. Debt was fixed-rate at quarter-end; net debt, as defined by the company, was negative $221.3m. In February, the company issued $500m of 3.50% notes due 2031 and used proceeds and cash to redeem $800m of 5.00% notes due 2025. Nine-month results included a $30.3m loss on early debt extinguishment.
- Segments: Q3 revenue was $838.0m in the Americas, $494.5m in Europe and $165.1m in Asia. Regional operating income was $202.9m, $140.0m and $(16.4)m, respectively. Asia continued to face COVID-related closures and restrictions.
Material changes, outlook, risks and unusual items
- The year-over-year rebound reflects reopening and recovery from 2020 pandemic disruptions; prior-year nine-month results included substantial COVID-related charges. The company recorded $11.1m of restructuring charges in the first nine months of 2021, compared with $68.4m in 2020; Q3 included a $3.6m net reversal. The restructuring initiative had incurred $101.5m of charges to date and was expected to be substantially implemented by fiscal year-end 2021, with approximately $100m in annual cost savings anticipated.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management cited continuing uncertainty from COVID-19, including renewed outbreaks, store closures, weaker traffic and consumer confidence, and possible supply-chain disruption. It also identified shipping delays, labor constraints, raw-material and freight cost pressure, foreign exchange, competition, wholesale-customer exposure and inventory/markdown risk.
- Subsequent events: On September 21, 2021, the company completed its $403m cash acquisition of Beyond Yoga. On September 30, it redeemed the remaining $200m of 5.00% notes due 2025, expecting an additional approximately $6.2m extinguishment loss in Q4. In October, the board authorized up to $200m of share repurchases and declared a $0.08-per-share dividend.
- The Q3 effective tax rate was 4.8%; the nine-month rate was 3.1%, favorably affected by tax benefits including the foreign-derived intangible income deduction and stock-award exercises. These rates may not represent future periods. The company reported compliance with debt covenants and effective disclosure controls; it did not believe pending ordinary-course litigation would materially affect its financial condition, results or cash flows.
Important facts for investors to verify
- Whether revenue and margin momentum persists when compared with pre-pandemic periods rather than the disrupted 2020 base.
- How continued COVID-19 effects, supply-chain and freight constraints, labor availability, and input-cost inflation affect inventory, sales and gross margin.
- Whether the restructuring delivers the anticipated annual savings and whether further charges are incurred.
- Post-quarter liquidity and debt after funding the Beyond Yoga acquisition and redeeming the remaining 2025 notes; also assess the assumptions behind the company’s liquidity outlook.
- Beyond Yoga’s integration, performance and contribution to growth, and the cash and dilution effects of the repurchase and dividend plans.
- Non-GAAP measures are company-defined and exclude selected items; assess them alongside GAAP results and cash flows.