Levi Strauss & Co. — Form 10-Q summary
Period note: The supplied filing is for the quarter ended August 28, 2011, with nine-month results through that date. This differs from the request metadata, which says 2010 Q3. Financial figures below are in U.S. dollars; amounts are in millions unless noted.
Business context and reporting period
Levi Strauss designs and markets apparel and related products under the Levi’s, Dockers, Signature and Denizen brands. It reports through the Americas, Europe and Asia Pacific regions and is privately held. Fiscal 2011 Q3 and the comparable 2010 quarter each comprised 13 weeks.
Financial performance
| Metric | Three months ended Aug. 28, 2011 | Three months ended Aug. 29, 2010 | Nine months ended Aug. 28, 2011 | Nine months ended Aug. 29, 2010 |
|---|---|---|---|---|
| Net revenues | $1,204.0 | $1,109.0 | $3,417.6 | $3,120.7 |
| Gross profit | $569.4 | $543.6 | $1,668.1 | $1,576.0 |
| Gross margin | 47.3% | 49.0% | 48.8% | 50.5% |
| Operating income | $80.9 | $86.3 | $244.7 | $262.8 |
| Operating margin | 6.7% | 7.8% | 7.2% | 8.4% |
| Net income attributable to Levi Strauss & Co. | $32.2 | $28.2 | $93.8 | $70.2 |
- Revenue: Q3 net revenues rose 8.6% reported and 4.2% on a constant-currency basis. Nine-month revenue rose 9.5% reported and 6.8% constant currency.
- Regional trends: Q3 reported revenue increased 6.6% in the Americas, 6.2% in Europe and 19.7% in Asia Pacific. Europe declined 4.1% on a constant-currency basis in Q3.
- Cash flow: Nine-month operating cash flow was $17.3, versus $95.8 in 2010. Investing cash outflow was $114.6, principally including $106.0 of property and equipment purchases. Financing cash inflow was $52.3. Cash and cash equivalents ended at $230.8, down from $269.7 at Nov. 28, 2010.
- Liquidity: At quarter-end, the previous revolving facility had $336.7 of unused availability; cash plus unused availability was $567.5. Current assets were $1,792.0 and current liabilities $861.6.
- Debt: Total short- and long-term debt was $1,985.2, up from $1,863.1 at Nov. 28, 2010. The company reported $70.0 drawn on its revolving facility and $59.0 in short-term borrowings. It said it was in compliance with debt covenants.
Material changes versus the comparable period
- Revenue growth did not translate into higher operating income: operating income fell 6.3% in Q3 and 6.9% for the nine months. Gross margin contracted as cost of goods sold rose faster than revenue.
- Management attributed margin pressure mainly to higher cotton costs, not fully offset by price increases, and increased discounts to support sales and manage inventory. Growth in company-operated retail, which generally carries higher gross margins than wholesale, partly offset the pressure.
- Net income attributable to the company increased 14.2% in Q3 and 33.8% year to date, despite lower operating income. The nine-month effective tax rate was 31.8%, versus 59.3% in 2010, when discrete tax charges totaled $28.2.
- Inventory was $730.6 at Aug. 28, 2011, compared with $579.9 at Nov. 28, 2010; management cited higher inventory costs, particularly cotton, as a major contributor to weaker operating cash flow.
- Corporate expenses increased, including global IT investment and costs reclassified to corporate in 2011. The Q3 results also included $11.5 of separation-related charges for former CEO John Anderson.
Outlook, commentary, risks and unusual items
- Management said it expected continued cotton and other input-cost pressure for the rest of 2011 and at least the first half of 2012. It warned that industry conditions and the challenging consumer environment could affect margins, working capital and sales volumes.
- The company stated it expected adequate liquidity for the next 12 months. It expected 2011 required pension contributions of approximately $70.0, revised based on pension valuations and funding considerations.
- On Sept. 30, 2011, after quarter-end, the company entered a new asset-based secured revolving facility with maximum availability of $850.0. It borrowed $215.0 to refinance the prior facility. Availability depends on eligible collateral; the facility includes customary covenants and a springing fixed-charge coverage test. Its stated maturity is 2016, potentially accelerated to December 2013 subject to conditions related to the 2014 term loan.
- Charles V. Bergh succeeded John Anderson as CEO on Sept. 1, 2011. Costs under Bergh’s employment agreement were expected to begin in Q4.
- Europe wholesale orders were temporarily affected by issues fulfilling orders during implementation and stabilization of the regional ERP system. Management also identified consumer demand, cotton and sourcing costs, foreign exchange, pension funding, competition, retail expansion and ERP execution among relevant risks.
- The company said pending ordinary-course litigation was not expected to have a material effect. No material changes to reported risk factors or market-risk exposures were disclosed.
Important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q covers 2011 Q3, not 2010 Q3.
- Track whether price increases, discounting and cotton costs improve or further pressure gross margin.
- Assess inventory growth, operating cash generation, capital spending and the expected pension contribution.
- Review the new revolving facility’s borrowing-base availability, collateral terms, covenant triggers and maturity provisions.
- Separate underlying performance from foreign-currency effects, the lower comparative tax rate and the $11.5 CEO-separation charge.
- Monitor the ERP-related order disruption in Europe and the costs and execution of the CEO transition.