LEVI STRAUSS & CO quarterly report, Q2 FY2024

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Levi Strauss & Co. — Form 10-Q Summary

Reporting period: Fiscal second quarter and first six months ended May 26, 2024, compared with the periods ended May 28, 2023. The filing is for 2024, notwithstanding the “2023 Q2” period label in the request. Amounts are in U.S. dollars.

Business context and results

The company designs, markets and sells apparel under Levi’s, Dockers, Signature by Levi Strauss & Co., Denizen and Beyond Yoga. It reports Americas, Europe and Asia as Levi’s Brands segments, with Dockers and Beyond Yoga included in Other Brands. In the first half, DTC generated 48% of revenue, versus 44% a year earlier.

  • Second quarter: Revenue rose 7.8% to $1.441 billion (9.0% constant currency). Management said about 7.5% of the increase reflected approximately $100 million of wholesale shipments shifted out of the prior-year quarter, mainly due to the U.S. ERP implementation. DTC revenue increased 8.2%; wholesale increased 7.4%.
  • First half: Revenue declined 0.9% to $2.999 billion (0.4% lower constant currency). DTC grew 7.6%, while wholesale fell 7.5%; management attributed the overall near-flat result to DTC growth offset by wholesale weakness.
  • Regional and brand mix: Second-quarter Americas revenue increased 17.0%; Europe declined 2.1% and Asia declined 0.7% reported, though Asia grew 5.7% constant currency. In the first half, Beyond Yoga revenue rose 11.7%, while Dockers declined 5.0%.

Financial performance and liquidity

  • Gross profit and margin: Second-quarter gross profit was $871.7 million, up 11.2%, and gross margin was 60.5%, compared with 58.7%. First-half gross profit was $1.778 billion, up 3.0%, and gross margin was 59.3%, compared with 57.1%. Management cited lower product costs and favorable product mix, partly offset by currency impacts.
  • Operating expenses and profit: Second-quarter SG&A was $794.7 million (55.1% of revenue); operating income was $21.9 million and operating margin 1.5%, versus $9.9 million and 0.7%. First-half SG&A was $1.585 billion; operating income was $21.5 million and margin 0.7%, down from $167.3 million and 5.5%, largely due to restructuring charges.
  • Net income and EPS: Second-quarter net income was $18.0 million, or diluted EPS of $0.04, versus a $1.6 million loss. First-half net income was $7.3 million, or diluted EPS of $0.02, versus $113.1 million and $0.28. A $7.5 million state-audit tax benefit affected the current-period tax results.
  • Adjusted results (non-GAAP): Second-quarter Adjusted EBIT was $87.0 million (6.0% margin), and Adjusted net income was $66.2 million (Adjusted diluted EPS $0.16). First-half Adjusted EBIT was $227.7 million (7.6% margin), and Adjusted net income was $168.7 million (Adjusted diluted EPS $0.42). These measures exclude specified charges; they supplement, not replace, GAAP results.
  • Cash flow: First-half operating cash flow was $548.8 million, versus $125.4 million; capital expenditures were $111.8 million, versus $181.4 million. Adjusted free cash flow, a non-GAAP measure, was $437.0 million, versus negative $56.0 million. The current-period operating cash flow included a $77.9 million advance payment from a distribution-center logistics provider and benefited from changes in operating assets and liabilities.
  • Balance sheet and liquidity: Cash was $641.4 million at May 26, 2024, up from $398.8 million at November 26, 2023. Total debt was $1.008 billion, primarily fixed-rate senior notes; no revolving-credit-facility borrowings were outstanding. Unused facility availability was $791.2 million, giving reported cash plus available credit of approximately $1.4 billion. The company reported compliance with debt covenants.
  • Other balance-sheet items: Inventory was $1.220 billion, down from $1.290 billion at fiscal year-end. Accounts payable included $124.0 million of supplier-finance obligations. Stockholders’ equity was $1.954 billion.

Material changes and notable items

  • Project Fuel: The two-year global productivity initiative, expected to continue through 2025, generated $171.3 million of first-half restructuring charges, mainly severance and post-employment benefits; $55.1 million was recorded in the second quarter. Restructuring liabilities were $154.0 million at quarter-end. The company warned that further charges could be significant.
  • Separately, the company recorded $15.3 million of first-half restructuring-related charges in SG&A, primarily consulting fees, and a $5.5 million goodwill impairment related to discontinuing its footwear category.
  • Distribution-center transition: The company received $77.9 million upfront under an agreement for a third party to manage its Dorsten, Germany distribution center. The payment is recorded as a liability and is expected to reduce distribution expenses over the arrangement’s term, expected to begin in the second half of 2024.
  • Acquisition: The company completed its acquisition of former Colombian distributor Expofaro’s Levi’s-related operating assets, including 40 stores and an e-commerce site. The purchase agreement specified $31.9 million in cash; the cash-flow statement reported $34.4 million for a business acquisition.
  • Capital returns: First-half dividends paid were $95.6 million and share repurchases totaled $41.9 million. A subsequent quarterly dividend of $0.13 per share, approximately $52 million in total, was declared for payment in August 2024.

Outlook, risks and contingencies

Management said it expects adequate liquidity over the next 12 months and longer term. It described capital-allocation priorities, including investment of 3.5%–4% of revenue, a dividend payout-ratio target of 25%–35% of net income, and an aim to return 55%–65% of Adjusted free cash flow through dividends and repurchases. These are stated targets and priorities, not a specific earnings or revenue forecast. The filing provides no clear numerical full-year 2024 guidance.

Risks discussed include inflation and weaker discretionary spending, consumer-demand and inventory forecasting, shipping disruption and cost increases related to Red Sea routing, foreign-exchange volatility, geopolitical conflicts and trade uncertainty, wholesale-channel pressures, climate-related supply and demand effects, and execution of the productivity initiative and DTC strategy. Management said ordinary-course litigation and customs matters were not expected to have a material impact; customs reserves were described as not material. No material changes to previously disclosed risk factors or market-risk exposures were reported.

Important facts for investors to verify

  • How much second-quarter revenue growth was a shipment-timing comparison benefit, and whether wholesale demand improves after that effect fades.
  • Whether DTC growth and gross-margin gains persist, considering currency effects and DTC’s higher selling expenses.
  • Project Fuel’s remaining costs, cash payments, timing and realized savings; and the impact of the footwear exit.
  • How much first-half operating cash flow and Adjusted free cash flow depended on working-capital movements and the $77.9 million advance payment.
  • Inventory trends and the effect of the supplier-ownership timing change, which management said contributed approximately $156 million, or 12%, to the year-over-year dollar comparison.
  • Progress on the Dorsten transition, Colombia acquisition integration, debt management and capital returns; also review non-GAAP reconciliations alongside GAAP results.