Levi Strauss & Co. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended February 23, 2020 (13 weeks), compared with the three months ended February 24, 2019. The filing was signed April 7, 2020. The company designs, markets and sells apparel globally through the Americas, Europe and Asia segments and wholesale and direct-to-consumer channels.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net revenue | $1,506.1 million | $1,434.5 million | Up 5.0% reported; up 5.8% constant currency |
| Gross profit / margin | $839.3 million / 55.7% | $782.8 million / 54.6% | Margin expanded 1.1 percentage points |
| SG&A | $660.5 million | $581.9 million | Up 13.5%; 43.9% of revenue versus 40.6% |
| Operating income / margin | $178.8 million / 11.9% | $200.9 million / 14.0% | Income down 11.0%; margin down 2.1 points |
| Net income attributable to Levi Strauss & Co. | $152.7 million | $146.6 million | Up 4.2% |
| Diluted EPS | $0.37 | $0.37 | Flat; weighted-average diluted shares rose 4.3% |
| Operating cash flow | $197.9 million | $55.8 million | Improved, primarily on higher customer receipts and lower incentive-compensation payments |
The effective tax rate fell to 7.4% from 19.4%, mainly due to a $21.0 million discrete tax benefit tied to employee stock-award exercises. Management-reported adjusted EBIT was $189.3 million, down 8.2%, with a 12.6% adjusted EBIT margin versus 14.4%; adjusted diluted EPS was $0.40 versus $0.38. These are non-GAAP measures.
Segments and channels
- Americas: Revenue $745.6 million, up 3.9% reported; operating income $124.0 million, essentially flat. DTC growth and the Black Friday week benefit were partly offset by weaker wholesale sales.
- Europe: Revenue $512.9 million, up 10.4% reported and 12.9% constant currency; operating income $132.4 million, up 8.9%.
- Asia: Revenue $247.6 million, down 1.9% reported; operating income $32.7 million, down 24.0%. COVID-19-related closures and reduced traffic were significant factors.
- Wholesale was 58% of revenue, down from 61%; DTC was 42%, up from 39%. DTC revenue increased to $629.8 million from $565.1 million.
Financial position and liquidity
- At February 23, 2020, cash and equivalents were $873.6 million and short-term investments were $84.0 million. Unused revolving-credit availability was $819.5 million, producing reported total liquidity of approximately $1.8 billion.
- Total debt was $1,013.7 million, compared with $1,014.4 million at fiscal year-end; net debt, a non-GAAP measure, was $56.1 million. The company reported a 1.4x leverage ratio and compliance with debt covenants.
- In April 2020, the company drew $300 million on its revolving facility as a precaution, leaving approximately $520 million of unused availability.
- Cash used for investing was $119.3 million, including $52.2 million for the Chile, Peru and Bolivia distributor-asset acquisition and $44.4 million of capital expenditures. Cash used for financing was $138.0 million, including dividends, share repurchases, equity-award tax withholding and the Japanese minority-interest purchase.
- Adoption of lease accounting added approximately $1.0 billion of operating lease assets and liabilities. Reported operating lease liabilities were $1,062.9 million; quarterly lease expense was $87.1 million.
Material changes, outlook and risks
- Revenue growth and gross-margin expansion did not offset higher SG&A, which rose with retail-network expansion, increased advertising and administrative and technology spending. The filing cites the Black Friday week in the current-year quarter as a non-comparable benefit.
- COVID-19 had already reduced traffic and caused store closures in China and nearby markets during the quarter, with an estimated $20 million adverse revenue impact and approximately $10 million adverse impact on Asia operating income. By the filing date, closures, reduced hours or traffic affected stores globally.
- Management expected COVID-19 to materially adversely affect revenue, earnings and cash flows for at least the balance of 2020, but said the duration and overall impact could not be reasonably estimated. No quantified full-year financial guidance is provided.
- In response, the company reported reducing discretionary spending, reassessing investments, reducing payroll costs through furloughs and pay cuts, and suspending its share-buyback program. It also drew $300 million on the revolver. The board declared a further $0.08-per-share dividend in April, payable in May; future dividends remain discretionary.
- The company repurchased 1.9 million shares for $37.0 million during the quarter and a further 1.1 million shares for $19.2 million after quarter-end before suspending the program. A $100 million authorization had been approved in January.
- Other risks include wholesale-customer financial distress and store closures, supply-chain disruption, consumer spending weakness, competition and promotional pressure, foreign-exchange and trade/tariff exposure, and customs-duty assessments. Management said ordinary-course litigation was not expected to have a material effect; customs assessments remain subject to uncertainty.
- The company acquired the remaining 16.4% interest in Levi Strauss Japan K.K. for $13.6 million, making it wholly owned, and acquired distributor assets and operations in Chile, Peru and Bolivia for $52.2 million plus transaction costs.
Investor facts to verify
- How store closures, traffic, wholesale orders and supply-chain conditions developed after the filing, and the resulting full-year revenue, earnings and cash-flow effects.
- Whether operating cash generation and available credit remain adequate under prolonged disruption, including the impact of the $300 million revolver draw and any borrowing-base or covenant restrictions.
- Whether gross-margin gains persist and whether elevated SG&A, retail expansion and technology investments produce expected returns.
- The status and potential exposure from customs-duty assessments, and the realization or expiry of the quarter’s discrete tax benefit.
- Future dividend decisions and the timing or resumption of share repurchases; the filing does not provide a quantified earnings or revenue forecast.