Levi Strauss & Co. — Form 10-Q Summary
Reporting period: The filing is for the quarter ended August 25, 2013, and compares the three and nine months ended August 25, 2013, with the corresponding 2012 periods. This differs from the “2012 Q3” period in the request metadata. Levi Strauss is privately held; its common stock is not publicly traded.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,141.3 million | $1,100.9 million | $3,386.9 million | $3,313.0 million |
| Gross profit / margin | $572.8 million / 50.2% | $520.7 million / 47.3% | $1,713.4 million / 50.6% | $1,550.2 million / 46.8% |
| Operating income / margin | $118.1 million / 10.3% | $86.8 million / 7.9% | $399.2 million / 11.8% | $242.6 million / 7.3% |
| Net income attributable to Levi Strauss & Co. | $57.1 million | $28.4 million | $212.2 million | $90.8 million |
- Quarterly revenue rose 3.7% reported (3.3% constant currency); nine-month revenue rose 2.2% reported (2.3% constant currency). Higher Americas sales led growth; Asia Pacific remained pressured.
- Gross margin improved, reflecting lower cotton costs in the first half and prior-year Denizen exit-related customer support and inventory markdowns in Asia Pacific. Management also cited favorable currency effects.
- Quarterly operating income increased 36.1%; nine-month operating income increased 64.5%. Comparisons benefited from approximately $44 million of Asia Pacific strategic charges in Q3 2012, including the Denizen phase-out, and an $18.8 million Japan distribution-center impairment in 2012.
- SG&A was $454.8 million in Q3, up 4.8%, and $1,314.2 million for nine months, up 0.5%. Increased advertising and incentive compensation partly offset lower prior-year impairment-related costs.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $273.8 million, down from $415.8 million. Management attributed the decline to higher vendor payments, inventory investment and lower customer cash receipts associated with a lower beginning receivables balance. Investing cash use was $63.4 million; financing cash use was $227.7 million.
- Cash and equivalents were $382.3 million at August 25, 2013, versus $406.1 million at November 25, 2012. Inventory rose to $624.6 million from $518.9 million.
- Total short- and long-term debt was $1,540.1 million, down from $1,729.2 million. The company repaid its 2014 term loan using proceeds from an additional $140 million issue of 6.875% senior notes due 2022 and cash on hand. The weighted-average borrowing rate was 7.75% for Q3 and 7.44% for nine months.
- Unused revolving-facility availability was $521.6 million; cash plus unused availability totaled $903.9 million. Management said liquidity should be adequate for the next 12 months. The company reported compliance with debt covenants.
- Capital expenditures were $63.0 million for nine months; the 2013 estimate was revised to approximately $90 million. A $25.1 million cash dividend was paid in Q1; the company has no established annual dividend policy.
Material changes, outlook and risks
- Regional revenue was stronger in the Americas and Europe, while Asia Pacific revenue declined 5.8% for nine months as reported (2.4% constant currency). Excluding the Denizen comparison, management said Asia Pacific Levi’s sales declined amid challenging market conditions.
- Management expected full-year 2013 gross margin to exceed 50% and advertising and promotion expense as a percentage of revenue to be in line with full-year 2012. No full-year revenue or earnings guidance was provided in the filing text.
- The effective tax rate for nine months was 28.8%, compared with 36.2% a year earlier. Finalization of the U.S. federal tax audit for 2003–2008 produced a $23.4 million recognized tax benefit, including a $14.2 million reduction in tax expense.
- Other expense included $18.7 million of foreign-currency transaction losses for nine months, primarily from weakening currencies against the U.S. dollar. Currency exposure is managed in part with forward contracts.
- Management highlighted economic and consumer-spending uncertainty, competition, volatile cotton and labor costs, foreign-exchange movements, retail and channel changes, and pension/postretirement obligations as business risks. It reported no material changes to previously disclosed risk factors or market-risk exposures.
- The company said pending ordinary-course legal matters were not expected to materially affect financial condition, results or cash flows; there were no material litigation developments reported.
Key facts for investors to verify
- Confirm the filing period: the document covers Q3 2013, notwithstanding the request metadata’s Q3 2012 label.
- Assess how much of operating-income growth reflects prior-year strategic and impairment charges versus underlying operating performance.
- Monitor inventory growth and the decline in operating cash flow, as well as the company’s ability to convert earnings into cash.
- Review the sustainability of margin improvement, including cotton-cost effects, currency movements, and performance in Asia Pacific.
- Verify refinancing terms, debt maturities, interest costs and continued covenant compliance; consider the company’s privately held status and lack of public common-stock trading.