LEVI STRAUSS & CO annual report, FY2020

Levi Strauss & Co. — Form 10-K Summary

Reporting period: Fiscal year ended November 29, 2020 (53 weeks, including a 14-week fourth quarter); filed January 27, 2021. Although the request metadata refers to 2019 Q4, this filing reports fiscal 2020 and includes comparative fiscal 2019 and fourth-quarter results.

Business context and performance

Levi Strauss designs and sells apparel, principally under the Levi’s brand, through wholesale and direct-to-consumer (DTC) channels across the Americas, Europe and Asia. COVID-19 closures and reduced consumer traffic materially affected fiscal 2020; most stores reopened by year-end, but renewed closures occurred in parts of Europe. The extra fiscal week and two Black Fridays in 2020 also affect comparisons with 2019, which had no Black Friday.

MetricFY2020FY2019
Net revenue$4.453 billion$5.763 billion
Gross profit / margin$2.353 billion / 52.8%$3.101 billion / 53.8%
Operating income (loss) / margin$(85.1) million / (1.9)%$566.7 million / 9.8%
Net income (loss)$(127.1) million$395.0 million
Diluted EPS$(0.32)$0.97
Operating cash flow$469.6 million$412.2 million
Capital expenditures$130.4 million$175.4 million

Revenue declined 22.7% reported and 22.0% in constant currency. Regional revenue fell 23.3% in the Americas, 18.8% in Europe and 28.4% in Asia. Gross margin declined 1.0 percentage point, mainly reflecting pandemic-related inventory reserves and fabric purchase commitments, partly offset by prior-year price increases. Adjusted EBIT, a non-GAAP measure, was $181.1 million (4.1% margin), versus $610.6 million (10.6%) in 2019; adjusted diluted EPS was $0.21 versus $1.12.

In Q4, revenue declined 11.6% reported (12.3% constant currency). Operating income was $92.0 million versus $131.6 million, net income was $56.7 million versus $95.3 million, and diluted EPS was $0.14 versus $0.23. Adjusted EBIT was $113.4 million versus $146.3 million.

Liquidity, debt and material changes

  • Year-end cash and equivalents were $1.497 billion, short-term investments $96.5 million, and unused revolver availability $713.5 million; management reported total liquidity of approximately $2.3 billion. Working capital was $1.577 billion.
  • Total debt was $1.564 billion, up from $1.014 billion. The company issued an additional $500 million of 5.00% senior notes due 2025 in April 2020. It had no borrowings under its revolving facility at year-end and was in compliance with debt covenants. Net debt, as defined by the company, was $(29.4) million after cash and short-term investments; its non-GAAP leverage ratio was 4.9x versus 1.4x.
  • Operating cash flow increased despite the net loss, reflecting lower inventory spending and reduced discretionary and employee-related outlays, partly offset by lower customer receipts. Financing cash flow included note proceeds, dividends, share repurchases and employee equity-award tax withholding.
  • Fiscal 2020 included approximately $250 million of net restructuring and COVID-related charges. The filing separately reports $90.4 million of restructuring charges, $68.5 million of COVID-related inventory costs, and $91.1 million of receivable, impairment and other charges. A non-GAAP reconciliation reports $69.3 million of COVID-related inventory costs; investors should check the detailed reconciliation and notes for classification and rounding.

Outlook, management commentary and risks

  • Management described the pandemic’s impact as expected to be temporary but said its duration and financial effects remained highly uncertain. At fiscal year-end, 87% of company-operated stores were open for in-store or curbside service; subsequent resurgent cases caused further closures.
  • Restructuring eliminates approximately 15% of global non-retail and non-manufacturing positions, is expected to be substantially completed in fiscal 2021, and is forecast to generate approximately $100 million in annual cost savings. Additional charges were expected.
  • Longer-term ambitions include DTC approaching 60% of annual revenue over the next decade, global digital sales exceeding one-third of revenue, and Adjusted EBIT margin above 12% once revenue recovers to pre-COVID levels. These are strategic targets, not near-term guidance.
  • Company-operated e-commerce revenue grew approximately 29% in fiscal 2020. Global digital business, including wholesale partners’ online sales, represented approximately 22% of revenue versus 13% in 2019. DTC rose to 39% of revenue from 36%.
  • Key risks include further pandemic disruption, consumer-demand and inventory uncertainty, wholesale customer distress and concentration, execution of DTC/digital initiatives and restructuring, sourcing and cotton costs, foreign exchange and trade restrictions, cybersecurity, and substantial debt and pension obligations. The top ten wholesale customers represented 29% of revenue; no single customer reached 10%. Sears/Kmart and J.C. Penney were in bankruptcy proceedings.
  • Dividends were suspended for the third and fourth quarters of 2020, and the share repurchase program was suspended after $56.2 million of repurchases. In January 2021, the board declared a $0.04-per-share quarterly dividend and indicated expected fiscal 2021 dividends of approximately $64 million, subject to board discretion and debt restrictions.
  • Ordinary-course legal proceedings were not expected by the company to have a material financial impact. The filing notes pending customs-duty audit assessments, whose resolution remains uncertain.

Important facts for investors to verify

  • Whether revenue, store traffic and margins recover, and how much results benefit from the extra week and Black Friday timing.
  • Cash generation and liquidity under renewed closures, including customer collections, inventory commitments and the timing of restructuring payments.
  • Progress toward the approximately $100 million savings target and the total remaining restructuring charges.
  • Debt maturity, refinancing and covenant flexibility, alongside the reported 4.9x non-GAAP leverage ratio.
  • The assumptions supporting deferred tax assets: the auditor identified realizability of $232.2 million of foreign tax credit carryforwards as a critical audit matter.
  • How management defines and reconciles non-GAAP measures, particularly COVID-related charges and the difference between reported inventory-charge figures.