Business Context and Reporting Period
Company: Levi Strauss & Co. (Privately Held)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009 (Second Quarter of Fiscal Year 2009)
Overview: The Company designs and markets jeans, casual, and dress pants under the Levi's, Dockers, and Signature brands. Operations are divided into three geographic segments: Americas, Europe, and Asia Pacific. The Company is privately held, with nearly all common equity owned by descendants of the founder.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2009 | Six Months Ended May 31, 2009 |
|---|---|---|
| Net Revenues | $904.5 million | $1,856.0 million |
| Gross Profit | $415.4 million | $860.5 million |
| Gross Margin | 45.9% | 46.4% |
| Operating Income | $56.1 million | $162.1 million |
| Operating Margin | 6.2% | 8.7% |
| Net Income (Loss) | $(4.1) million | $43.9 million |
| Cash from Operating Activities | N/A | $158.9 million |
| Cash and Cash Equivalents (Ending) | $269.6 million | $269.6 million |
| Total Debt (Short & Long Term) | $1,856.4 million | $1,856.4 million |
| Net Liquidity Position | $502.7 million | $502.7 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net revenues decreased 3.4% in the quarter and 8.1% for the six-month period compared to the prior year. Reported declines were driven by unfavorable foreign currency exchange rates. On a constant-currency basis, revenues increased 5.4% in the quarter but decreased 1.0% for the six-month period.
- Profitability: Operating income increased 8.4% in the quarter ($56.1M vs $51.8M) but decreased 32.0% for the six-month period ($162.1M vs $238.3M). The quarterly increase was driven by lower SG&A expenses in the Americas, offsetting declines in Europe and Asia Pacific.
- Net Loss in Quarter: The Company reported a net loss of $4.1 million for the quarter, compared to net income of $0.7 million in the prior year quarter. This was primarily due to a $20.5 million increase in "Other expense, net," driven by foreign exchange management losses.
- Cash Flow Improvement: Cash provided by operating activities increased to $158.9 million for the six months ended May 31, 2009, from $121.3 million in the prior year, aided by inventory management and lower payments for incentive compensation and taxes.
- Segment Performance:
- Americas: Operating income increased significantly (509.8% in the quarter) due to cost reductions and the absence of 2008 ERP stabilization costs.
- Europe: Operating income declined 48.5% in the quarter due to currency impacts and retail expansion investments.
- Asia Pacific: Operating income declined 34.3% in the quarter due to currency impacts and increased advertising in Japan.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued difficult economic conditions globally. Key challenges include weak consumer spending, transitioning sales volume from bankrupt customers, and revitalizing the U.S. Dockers brand.
- Liquidity: The Company maintains a net liquidity position of $502.7 million (cash plus unused credit facility availability). Management believes this is adequate for the next 12 months.
- Dividends: A cash dividend of $20 million was paid in the second quarter of 2009, down from $50 million in the same period of 2008.
- Restructuring: The Company recognized $3.7 million in restructuring charges for the six months ended May 31, 2009, related to facility closures (including a manufacturing facility in Hungary) and organizational changes. Additional charges of approximately $1.6 million are expected over the next 12 months.
- Subsequent Event: On July 13, 2009, the Company completed the purchase of operating rights to 73 Levi's and Dockers outlet stores from Anchor Blue Retail Group for approximately $72 million.
- Risks: Significant risks include foreign currency fluctuations, dependence on wholesale customers facing bankruptcy, and the ability to adapt to changing retail environments and fashion trends.
Investor Verification Checklist
- Verify the impact of foreign currency fluctuations on reported revenue and operating income versus constant-currency performance.
- Monitor the progress of the U.S. Dockers brand revitalization strategy and its effect on Americas segment revenue.
- Review the status of the Anchor Blue Retail Group acquisition (73 outlet stores) and its integration into the company-operated store network.
- Assess the Company's ability to manage debt levels ($1.86 billion total) and interest expenses amidst a challenging economic environment.
- Track the resolution of the California refund claim, which could impact unrecognized tax benefits by up to $100.2 million.
- Confirm the execution of cost-containment initiatives and the timeline for the Hungary facility closure.