Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The supplied filing is for the three months ended February 26, 2017 (fiscal 2017 first quarter), compared with the three months ended February 28, 2016. This differs from the request metadata identifying 2016 Q1.
Business context
Levi Strauss designs, markets and sells apparel under the Levi’s, Dockers, Signature and Denizen brands. It reports three geographic segments: Americas, Europe and Asia. The company is privately held, with no public trading in its common stock. Company-operated retail stores and e-commerce generated approximately 32% of quarterly revenue, up from 31% a year earlier.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $1,102.0 million | $1,056.5 million | +4.3% reported; +5.4% constant currency |
| Gross profit / margin | $564.6 million / 51.2% | $559.6 million / 53.0% | Profit +0.9%; margin down 1.8 percentage points |
| Operating income / margin | $108.3 million / 9.8% | $116.6 million / 11.0% | Down 7.1% |
| Net income attributable to Levi Strauss & Co. | $60.1 million | $65.8 million | Down 8.6% |
| Cash provided by operating activities | $49.0 million | $46.1 million | Up $3.0 million |
| Capital expenditures | $25.1 million | $30.7 million | Down $5.7 million |
Cash and cash equivalents were $368.6 million at quarter-end, versus $375.6 million at fiscal year-end. Total debt was $1.041 billion, including $1.007 billion of long-term debt and $34.2 million of short-term debt. The company reported $746.1 million of unused revolving-credit availability and total liquidity of approximately $1.1 billion. It was in compliance with debt covenants.
Material changes and drivers
- Revenue growth was led by Europe (+12.2% reported; +14.6% constant currency), while Americas revenue rose 1.2% and Asia revenue rose 2.4%.
- Gross margin contracted mainly because of higher sales allowances, particularly in U.S. wholesale, and unfavorable transactional currency impacts, particularly in Europe.
- SG&A increased 3.4% to $456.2 million, including higher selling costs associated with retail expansion. The company had 51 more company-operated stores than a year earlier.
- Regional operating income grew in the Americas and Europe but declined 12.1% in Asia. Corporate expenses rose 30.3%, primarily due to purchasing variances related to global sourcing.
- Interest expense rose 33.8% to $19.9 million. The effective tax rate declined to 32.3% from 33.4%, primarily due to lower tax rates on foreign earnings.
Cash, debt and outlook
Operating cash flow increased year over year, while investing activities used $16.0 million and financing activities used $42.5 million, principally reflecting a $35.0 million dividend payment. The board declared a total $70 million dividend, with the remaining $35 million expected to be paid in the fourth quarter of 2017. The company has no established dividend policy and future dividends are discretionary.
Management stated that it expects adequate liquidity to operate and meet cash requirements over the next 12 months. No specific revenue or earnings guidance was provided. Subsequent to quarter-end, the company issued €475 million of 3.375% senior notes due 2027 and initiated retirement of its 6.875% notes due 2022. It expected to record an approximately $23 million loss on early extinguishment, including about $21 million of premiums.
Risks, contingencies and notable items
- Management cited a challenging, promotional retail environment, changing consumer spending, increased competition and pressure on traditional wholesale channels.
- Foreign-exchange volatility may affect reported revenue, margins and earnings; the quarter’s derivative and currency effects were significant components of other income and expense.
- Potential changes to trade rules, taxes or import tariffs, sourcing and raw-material cost volatility, and wholesale-customer restructurings are identified risks.
- The company reported no material developments in previously disclosed litigation and did not expect ordinary-course pending cases to materially affect its financial condition, results or cash flows.
- The 2016 global productivity initiative was completed; management did not anticipate significant additional costs from it.
- Certain global expenses were newly allocated across the regional segments in 2017; comparative segment figures were revised to reflect the presentation change.
Facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal Q1 2017, not Q1 2016.
- Track whether revenue growth can be sustained without further gross-margin erosion and whether retail expansion generates adequate returns.
- Verify completion and final costs of the 2027-note issuance and 2022-note redemption, including the expected extinguishment loss.
- Monitor liquidity, debt levels, covenant compliance, and the planned second dividend installment.
- Assess currency exposure and the effects of promotional wholesale conditions, retail-channel shifts and potential trade or tariff changes.