Levi Strauss & Co. — Form 10-Q Summary
Period: The filing covers the quarter ended August 27, 2017, and the nine months ended that date. Although the request metadata says 2016 Q3, the supplied filing is for 2017 Q3. Financial statements are unaudited. Levi Strauss is privately held.
Results and key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenues | $1,268.4m | $1,185.1m | $3,438.2m | $3,253.2m |
| Gross profit | $656.6m | $592.8m | $1,779.6m | $1,669.6m |
| Gross margin | 51.8% | 50.0% | 51.8% | 51.3% |
| Operating income | $146.3m | $144.9m | $317.3m | $319.5m |
| Operating margin | 11.5% | 12.2% | 9.2% | 9.8% |
| Net income attributable to Levi Strauss & Co. | $88.0m | $98.3m | $165.7m | $194.9m |
- Q3 revenue rose 7% reported and 6% on a constant-currency basis. Nine-month revenue rose 5.7% reported and 6.1% constant currency.
- Q3 SG&A increased 13.8% to $510.3m; for nine months it increased 8.4% to $1,462.3m. SG&A was 40.2% of revenue in Q3 versus 37.8% a year earlier, pressuring operating margin despite higher gross margin.
- Nine-month operating income declined slightly. Net income attributable to the company fell 10.5% in Q3 and 15.0% for the nine-month period.
- Other expense was $14.7m in Q3 and $32.4m for nine months, mainly reflecting foreign-exchange derivative losses. Nine-month results also included a $22.8m loss on early debt extinguishment.
- The nine-month effective tax rate was 20.2%, versus 28.2% in 2016, mainly due to discrete tax benefits related to foreign deferred tax assets and equity compensation.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $294.5m, compared with $102.8m a year earlier; management attributed the increase mainly to higher customer receipts and less cash used for inventory purchases.
- Investing cash outflow was $75.6m, including $75.8m of capital expenditures. Financing cash outflow was $112.4m, including a $35m dividend and refinancing-related payments. Cash increased to $491.3m from $375.6m at fiscal 2016 year-end.
- Total debt was $1,069.3m at August 27, 2017, versus $1,045.2m at November 27, 2016. Debt was predominantly fixed-rate. Long-term debt was $1,035.8m; short-term debt was $33.4m.
- The company reported $680.5m of unused revolving-credit availability and total liquidity of approximately $1.2bn, including cash. It had no borrowings under the revolving facility and reported compliance with debt covenants. Management said liquidity should be adequate for the next 12 months.
- Inventory rose to $826.1m from $716.2m at fiscal year-end, primarily finished goods. Current liabilities were $863.2m and current assets were $1,886.9m.
Material changes, outlook and risks
- Europe was the strongest growth region: Q3 revenue increased 23.2% reported and 19.9% constant currency. Americas revenue rose 2.0% and Asia revenue 1.7% reported. Nine-month Europe revenue increased 17.4% reported.
- Management cited retail-network expansion and e-commerce, along with wholesale growth—particularly in Europe—as revenue drivers. Company-operated stores and e-commerce generated about 30% of nine-month revenue, compared with 27% in 2016; e-commerce represented about 14% versus 13%. The company had 62 more company-operated stores at Q3 end than a year earlier.
- Retail expansion increased selling costs. The filing also identifies challenging consumer spending, promotional retail conditions, competition, wholesale-channel pressures, sourcing-cost volatility, currency movements, and potential trade or tax changes as business risks. Foreign-exchange management losses were notably higher than in the prior-year periods.
- The company issued €475m of 3.375% senior notes due 2027 and used proceeds and cash on hand to tender for and redeem its 6.875% notes due 2022. It extended its revolving-credit facility through May 2022 and reduced certain borrowing and unused-availability rates.
- No specific earnings or revenue guidance was provided. Management noted that interim results may not indicate full-year results. The board’s second $35m dividend installment was expected in Q4 2017; the company has no established dividend policy.
- An out-of-period stock-compensation correction increased SG&A by approximately $9.5m in Q3 and $8.3m for nine months, reducing net income by $5.8m and $5.1m, respectively. Management concluded the adjustment was not material to the current or originating periods.
- Ordinary-course litigation was not expected by management to materially affect results or cash flows. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied filing is for Q3 2017, not Q3 2016.
- Assess whether revenue growth and improved gross margin can outpace rising SG&A, especially costs tied to store and e-commerce expansion.
- Track foreign-exchange effects and derivative losses, which materially affected other income and expense.
- Review inventory growth, operating cash conversion, debt maturities and the company’s substantial fixed-rate debt burden.
- Consider the effect of discrete tax benefits when evaluating whether the lower 2017 effective tax rate is sustainable.