Levi Strauss & Co. — FY2023 Form 10-K Summary
Period: Fiscal year ended November 26, 2023, a 52-week year; the filing was signed January 25, 2024. The request metadata says “2022 Q4,” but this filing reports FY2023 and also gives FY2023 fourth-quarter results. Dollar amounts are in U.S. dollars.
Business context
Levi Strauss designs, markets and sells apparel under Levi’s, Dockers, Signature by Levi Strauss & Co., Denizen and Beyond Yoga. It operates through Americas, Europe and Asia reporting segments; Dockers and Beyond Yoga are included in Other Brands. Products are sold through wholesale partners and direct-to-consumer (DTC) stores, shop-in-shops and e-commerce. FY2023 revenue was 57% wholesale and 43% DTC, compared with 62% and 38%, respectively, in FY2022.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net revenue | $6,179.0 million | $6,168.6 million | +0.2% |
| Gross profit / margin | $3,515.7 million / 56.9% | $3,548.8 million / 57.5% | Margin down 0.6 percentage points |
| Operating income / margin | $353.3 million / 5.7% | $646.5 million / 10.5% | Income down 45.4% |
| Net income / margin | $249.6 million / 4.0% | $569.1 million / 9.2% | Income down 56.1% |
| Diluted EPS | $0.62 | $1.41 | Down 56.0% |
| Adjusted EBIT / margin (non-GAAP) | $554.8 million / 9.0% | $713.0 million / 11.6% | EBIT down 22.2%; margin down 2.6 points |
| Adjusted net income / adjusted diluted EPS (non-GAAP) | $440.7 million / $1.10 | $603.9 million / $1.50 | Down 27.0% / 26.7% |
| Operating cash flow | $435.5 million | $228.1 million | Up $207.4 million |
| Capital expenditures | $315.5 million | $268.3 million | Up $47.2 million |
| Adjusted free cash flow (non-GAAP) | $120.0 million | $(40.2) million | Improved |
Net revenue was nearly flat as DTC and Asia growth offset wholesale weakness, particularly in the U.S. Gross margin declined amid higher product costs and fewer full-price sales, partly offset by favorable channel mix. SG&A rose 6.3% to $3,072.2 million, including higher selling and store costs. The effective tax rate fell to 5.9% from 12.4%, primarily due to tax benefits related to foreign-derived intangible income and the absence of FY2022 intellectual-property transactions.
Fourth-quarter FY2023 results
Compared with Q4 FY2022, revenue increased 3.4% reported and 1.8% at constant currency. Operating income rose 10.4% to $151.2 million; net income fell to $126.8 million from $150.6 million. Adjusted EBIT increased to $200.1 million from $142.3 million, and adjusted diluted EPS rose to $0.44 from $0.34. Diluted EPS declined to $0.32 from $0.38. Management attributed the net-income decrease mainly to higher SG&A and income tax expense.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $398.8 million at year-end, down from $429.6 million; FY2022 short-term investments of $70.6 million had been liquidated.
- Total debt was $1,021.9 million, compared with $996.2 million; net debt was $623.1 million, up from $496.0 million. The leverage ratio was 1.4x versus 1.1x, based on Adjusted EBITDA.
- Unused revolving-credit availability was $942.8 million. Cash plus unused availability totaled approximately $1.3 billion. No revolver borrowings were outstanding at year-end; the company reported compliance with debt covenants.
- Current assets were $2,637.6 million and current liabilities $1,787.5 million. Inventory was $1,290.1 million, down from $1,416.8 million.
- Operating cash flow improved largely because of lower inventory spending and employee incentives. Financing cash outflow was $214.1 million, including $190.5 million of dividends.
Material changes, outlook and unusual items
- Asia revenue increased 11.3% reported (18.3% constant currency); Americas revenue declined 3.2% (4.2% constant currency) and Europe declined 1.1% (2.1% constant currency). Other Brands revenue grew 4.9% reported.
- FY2023 included $90.2 million of noncash Beyond Yoga goodwill and trademark impairment charges. Management cited changed expected cash flows, investment and expansion decisions, macroeconomic conditions and higher discount rates. Further impairment is possible if performance or valuation assumptions weaken.
- Other notable FY2023 items included $49.3 million of internal-use software impairment, $19.0 million noncash pension-settlement loss and $20.3 million of restructuring charges. FY2022 included $60.4 million of Russia-Ukraine-related charges and a subsequent $15.8 million lease-termination gain; substantially all commercial activity in Russia had ceased by the end of Q1 FY2023.
- Project Fuel, endorsed in Q1 FY2024, is a two-year productivity initiative. The company expects approximately $100 million of net savings in FY2024; its first phase is expected to reduce global corporate positions by 10%–15% and incur $110–$120 million of pretax restructuring charges in Q1 FY2024. Additional charges may follow.
- Management expects FY2024 capital expenditures of approximately $290 million and said it expects the quarterly dividend to remain $0.12 per share. The filing does not provide a clear FY2024 revenue or earnings forecast. Long-term targets are annual revenue growth of approximately 6%–8%, revenue of $9–$10 billion and Adjusted EBIT margin of approximately 15%, subject to macroeconomic, currency and supply-chain conditions.
- CEO transition: Michelle Gass succeeded Chip Bergh on January 29, 2024; Bergh was expected to remain an executive director through the 2024 annual meeting and then serve as a strategic adviser through fiscal year-end.
- Key risks include weak discretionary demand, inflation and promotional pressure, foreign-exchange volatility, wholesale customer and supplier concentration, distribution-center capacity and technology constraints, cyber and privacy threats, sourcing and trade disruptions, and execution of DTC expansion and restructuring. The company said pending ordinary-course legal matters and customs assessments were not expected to materially affect its financial condition, results or cash flows.
Most important facts for investors to verify
- Whether revenue and full-price demand stabilize, and whether DTC growth offsets ongoing wholesale softness without further margin erosion.
- Whether Project Fuel delivers the projected savings and whether restructuring costs, service disruption or employee reductions exceed expectations.
- Beyond Yoga’s sales, profitability and valuation assumptions after the $90.2 million impairment, including the risk of additional impairment.
- Cash conversion and inventory trends, including the effect of supplier-title transfer terms on year-over-year inventory comparisons; management said those terms accounted for about $110 million of the reported inventory decrease.
- Debt, interest and capital-return capacity, including the $1.03 billion of scheduled debt principal payments, largely due in 2027 and thereafter, and restrictions in debt agreements.
- FY2024 operating guidance as it becomes available; the filing provides capital-spending and restructuring expectations, but no clear full-year revenue or earnings forecast.
The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of November 26, 2023. Adjusted measures cited above are non-GAAP and should be considered alongside GAAP results.