Levi Strauss & Co. — Form 10-Q Summary
Period: The filing covers the quarter and nine months ended August 26, 2018, compared with the periods ended August 27, 2017. The request metadata says “2017 Q3,” but the filing itself is for fiscal 2018 Q3.
Business context and results
Levi Strauss designs and sells apparel and accessories globally under the Levi’s, Dockers, Signature and Denizen brands. It reports three regions: Americas, Europe and Asia. The company is privately held.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $1.394B | $1.268B | $3.984B | $3.438B |
| Gross profit / margin | $741.6M / 53.2% | $656.6M / 51.8% | $2.151B / 54.0% | $1.780B / 51.8% |
| Operating income / margin | $158.6M / 11.4% | $146.3M / 11.5% | $409.2M / 10.3% | $317.3M / 9.2% |
| Net income attributable to Levi Strauss & Co. | $130.1M | $88.0M | $186.0M | $165.7M |
Q3 revenue grew 9.9% reported and 11.2% constant currency; nine-month revenue grew 15.9% reported and 13.4% constant currency. Growth was broad across regions, channels and product categories. Europe led Q3 reported growth at 16.6%; Americas grew 7.4% and Asia 7.6%. The nine-month effective tax rate was 48.4%, versus 20.2% a year earlier, materially affecting reported earnings.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $204.8M, down from $294.5M. Management cited higher pension contributions, inventory and SG&A payments, and income taxes, partly offset by increased customer receipts.
- Investing cash outflow was $119.7M, including $99.3M of capital expenditures; financing cash outflow was $95.8M. Cash declined by $21.1M from fiscal year-end to $612.5M.
- Inventory was $938.3M, up from $759.4M at November 26, 2017, primarily reflecting working-capital investment. Current assets were $2.196B and current liabilities $1.042B.
- Total debt was $1.062B, down from $1.077B at fiscal year-end. Long-term debt was $1.026B and short-term debt $35.8M. The company reported $612.5M cash and $669.1M unused revolving-credit availability, or approximately $1.3B total liquidity. It had no borrowings under the revolving facility and was in material compliance with debt covenants.
- Capital expenditures were $99.3M versus $75.8M in the prior-year period. The company reported fixed-rate debt at 98.8% of total debt.
Material changes, outlook and risks
- Gross margin improved 1.4 percentage points in Q3, primarily from a greater contribution from higher-margin company-operated retail and international revenue. SG&A rose 14.2% in the quarter, including increased store and e-commerce investment and advertising; consequently operating margin edged down from 11.5% to 11.4%.
- Nine-month operating income rose 29.0%; the comparison also reflects the prior-year $22.8M debt-extinguishment loss. Interest expense declined year over year for the nine-month period, partly due to lower average borrowing rates after the 2017 refinancing.
- The Tax Act produced a provisional $129.6M nine-month tax charge: $91.5M for deferred-tax remeasurement and $38.1M transition tax. A $7.1M benefit was recorded in Q3 as estimates were updated. The amounts remain provisional; the company had not estimated the effect of GILTI provisions for fiscal 2019.
- Management said liquidity should be adequate for the next 12 months. Estimated 2018 pension contributions increased to $124M from $94.7M; a further $45M dividend installment was expected in Q4. The company has no established dividend policy.
- Risks highlighted include volatile discretionary spending, promotional pressure, competition and wholesale-channel disruption, currency fluctuations, sourcing and input-cost pressures, possible tariffs or trade restrictions, and brand and reputation risks. Customs-duty assessments and appeals are ongoing; management disputes the claims but notes uncertainty over resolution. Management does not expect pending litigation to materially affect results.
- No specific revenue or earnings guidance was provided. Management cautioned that interim results may not indicate full-year results. The filing also describes planned adoption of ASC 606 in fiscal Q1 2019 and expects lease accounting adoption to materially affect the balance sheet.
Important facts for investors to verify
- Track inventory growth and operating cash conversion, particularly against sales growth and the seasonal working-capital cycle.
- Assess whether store expansion and higher advertising and selling costs generate durable revenue and margin returns.
- Follow final Tax Act accounting, including potential adjustments to the provisional charge and the future GILTI impact.
- Monitor tariff, trade-policy and customs-duty developments, alongside currency exposure and hedging outcomes.
- Review debt maturities, covenant compliance, pension funding needs and the discretion around future dividends.