Business Context and Reporting Period
Company: Levi Strauss & Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 29, 2011 (Second Quarter of Fiscal Year 2011)
Business Overview: A privately held global apparel company marketing jeans, casual wear, and accessories under the Levi's, Dockers, Signature, and Denizen brands. Operations are managed across three geographic segments: Americas, Europe, and Asia Pacific.
Key Financial Metrics
| Metric | Three Months Ended May 29, 2011 | Six Months Ended May 29, 2011 |
|---|---|---|
| Net Revenues | $1,092.9 million | $2,213.6 million |
| Gross Profit | $540.7 million | $1,098.7 million |
| Gross Margin | 49.5% | 49.6% |
| Operating Income | $65.0 million | $163.9 million |
| Operating Margin | 5.9% | 7.4% |
| Net Income (Attributable to LSC) | $21.0 million | $61.6 million |
| Cash and Cash Equivalents | $258.5 million (as of May 29, 2011) | N/A |
| Total Debt | $1.90 billion (Long-term + Short-term) | N/A |
| Operating Cash Flow | N/A | $85.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 11.9% (quarterly) and 10.0% (year-to-date) compared to the same periods in 2010. Growth was driven by all three regions, with significant contributions from the Levi's brand and expansion of the company-operated retail network.
- Margin Compression: Gross margin declined to 49.5% (from 51.1% prior year) due to higher sales discounts and increased cotton costs. Operating margin decreased to 5.9% (from 7.1%) as revenue gains were offset by lower gross margins and continued investment in retail expansion.
- Profitability: Net income attributable to Levi Strauss & Co. turned positive at $21.0 million for the quarter, compared to a net loss of $14.4 million in the prior year quarter. This improvement was aided by a significantly lower effective tax rate (32.6% vs. 66.1% in the prior year six-month period), which had been impacted by discrete tax charges in 2010.
- Cash Flow: Operating cash flow for the six-month period decreased to $85.4 million from $146.4 million in the prior year, primarily due to inventory build-up and pension plan contributions.
Guidance, Outlook, and Risks
- Management Commentary: Management remains focused on long-term strategies including product innovation, wholesale customer relationships, and expanding the dedicated store network. They anticipate ongoing pricing pressure due to rising raw material costs (cotton) and tightened supply.
- Liquidity: The company maintains a total liquidity position of $553.0 million, comprising $258.5 million in cash and $294.5 million in unused availability under its revolving credit facility.
- Leadership Transition: A subsequent event disclosed that CEO R. John Anderson will be succeeded by Charles V. Bergh effective September 1, 2011. Separation charges will be recorded in the third quarter.
- Risks: Key risks include the impact of global economic conditions on consumer spending, volatility in raw material costs, foreign currency exchange rate fluctuations, and the ability to successfully integrate new leadership and enterprise resource planning systems.
Investor Verification Checklist
- Inventory Levels: Verify the impact of the $42.5 million increase in inventory on future working capital requirements and potential markdown risks.
- Pension Obligations: Review the $70 million projected pension contribution for 2011 and the funded status of defined benefit plans, which significantly impacts cash flow.
- Debt Structure: Confirm the weighted-average interest rate of 6.84% and the composition of fixed vs. variable rate debt ($1.5B fixed, $0.4B variable).
- Executive Transition: Assess the potential financial impact of the CEO separation agreement and transition costs to be recognized in Q3 2011.
- Foreign Exchange: Monitor the impact of currency fluctuations, which favorably affected revenues but resulted in net foreign exchange losses in "Other income (expense)" for the period.