Levi Strauss & Co. — Form 10-Q Summary
Reporting period: Fiscal first quarter 2013, the 13 weeks ended February 24, 2013; comparable period ended February 26, 2012. The filing describes a privately held global apparel company whose principal brands include Levi’s, Dockers, Signature and Denizen.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenues | $1,146.7 million | $1,165.0 million | Down 1.6% reported; down 1.9% constant currency |
| Gross profit / margin | $591.9 million / 51.6% | $548.8 million / 47.1% | Gross profit up 7.9%; margin up 4.5 percentage points |
| SG&A | $410.4 million | $438.6 million | Down 6.4% |
| Operating income / margin | $181.5 million / 15.8% | $110.2 million / 9.5% | Operating income up 64.6% |
| Net income attributable to Levi Strauss & Co. | $107.0 million | $49.2 million | Up 117.4% |
| Operating cash flow | $143.1 million | $104.8 million | Up $38.3 million |
Lower cotton costs were the primary driver of gross-margin improvement. Currency contributed approximately $11 million favorably to gross profit and operating income. SG&A savings reflected lower advertising and promotion expense—primarily timing—as well as lower administration and other costs. Interest expense declined to $32.2 million from $38.6 million. The effective tax rate was 31.2%, versus 32.3%.
Segments and material changes
- Americas: Revenue was essentially flat at $647.1 million. Retail growth, particularly outlets and online, was offset by lower wholesale sales, including the licensing of Levi’s boys products.
- Europe: Revenue increased 2.5% reported to $296.6 million, but was up 0.8% on a constant-currency basis. Retail expansion and improved performance were offset by weakness in traditional wholesale, especially southern Europe.
- Asia Pacific: Revenue declined 11.1% reported to $203.0 million (down 9.8% constant currency), reflecting difficult market conditions and lower Levi’s wholesale and retail sales.
- Regional operating income rose in all three regions. The company said Americas benefited mainly from higher gross margin; Europe from lower SG&A, improved gross margin and currency; and Asia Pacific from phasing out Denizen and lower SG&A.
- Company-operated and online stores represented approximately 24% of revenue, compared with 21% a year earlier. Levi’s products accounted for approximately 86% of quarterly net sales.
Cash, debt and liquidity
- Cash and cash equivalents were $449.6 million at quarter-end, versus $406.1 million at fiscal year-end. Operating cash flow was $143.1 million; investing cash outflow was $23.5 million, including $20.9 million of capital expenditures; financing cash outflow was $76.0 million.
- Operating cash flow benefited from a California tax refund and lower pension-plan funding. Financing outflows included a $50.0 million term-loan prepayment and a $25.1 million dividend.
- Total short- and long-term debt was $1.680 billion, down from $1.729 billion at November 25, 2012. Approximately 84% was fixed-rate and 16% variable-rate. The weighted-average borrowing rate was 6.91%.
- Unused revolving-facility availability was $573.7 million; together with cash, reported liquidity exceeded $1.0 billion. The company said it expected adequate liquidity for the next 12 months and was in compliance with debt covenants.
- The company prepaid $50.0 million of its 2014 term loan during the quarter and a further $25.0 million after quarter-end. On March 14, 2013, it issued $140.0 million of additional 6.875% notes due 2022 and used the proceeds plus cash to repay the remaining 2014 term loan. The post-quarter issuance and repayment are not reflected in quarter-end debt balances.
- Stockholders’ deficit was $24.3 million, and accumulated other comprehensive loss was $417.8 million at quarter-end.
Outlook, risks and other notable items
- Management expected lower cotton input costs to continue at least through the first half of 2013, full-year gross margin to be closer to 50%, and full-year advertising and promotion expense to increase versus 2012.
- Management cited ongoing economic challenges in key markets, including Asia Pacific and southern Europe, while noting continued strength in the company-operated retail network, particularly outlets. The company cautioned that first-quarter results may not indicate full-year results.
- Key disclosed risks include apparel demand and economic conditions, wholesale-customer performance, sourcing and raw-material costs, fashion and competitive pressures, retail execution, foreign-exchange movements, pension and postretirement obligations, and reliance on key channels, customers and suppliers.
- The company reported no material developments in previously disclosed litigation and did not expect ordinary-course pending cases to materially affect its financial condition, results or cash flows. It reported no material changes to risk factors, off-balance-sheet arrangements or market-risk exposures.
- A $3.1 million donation to the Levi Strauss Foundation was reported for the quarter, compared with $0.3 million in the prior-year quarter. The company has no established annual dividend policy; future dividends are discretionary and subject to debt agreements and other considerations.
Important facts for investors to verify
- Whether the sharp margin and earnings improvement is sustainable, given the contributions from lower cotton costs, favorable currency and advertising-campaign timing.
- Whether Asia Pacific revenue weakness and southern European wholesale softness persist, and how much growth comes from company-operated retail.
- How the March 2013 note issuance and term-loan repayment affect interest costs, maturities and leverage after quarter-end.
- Whether operating cash flow remains strong when adjusted for the California tax refund and pension-funding timing.
- Future cotton costs, advertising and promotion spending, pension funding requirements, and compliance with debt covenants.