Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The filing provided is for the quarter ended May 29, 2016, not 2015 Q2. Comparisons are to the quarter ended May 31, 2015; six-month comparisons are also provided. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Levi Strauss designs, markets and sells apparel under the Levi’s, Dockers, Signature and Denizen brands. It operates in the Americas, Europe and Asia and sells through wholesale, company-operated stores, ecommerce and licensees. The company is privately held. Its first-half 2016 results cover 26 weeks.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $1,011.6 | $1,012.2 | $2,068.1 | $2,067.3 |
| Gross profit / margin | $517.2 / 51.1% | $500.2 / 49.4% | $1,076.8 / 52.1% | $1,037.3 / 50.2% |
| Operating income / margin | $58.0 / 5.7% | $47.6 / 4.7% | $174.6 / 8.4% | $155.1 / 7.5% |
| Net income attributable to Levi Strauss | $30.7 | $11.7 | $96.6 | $50.1 |
| Operating cash flow | Not separately stated | Not separately stated | $103.3 | $102.6 |
First-half diluted or basic earnings per share are not presented in the supplied filing text. First-half capital expenditures were $47.2 million. Cash and cash equivalents were $359.5 million at May 29, 2016, versus $318.6 million at November 29, 2015.
Material changes versus the prior comparable period
- Q2 reported revenue was essentially flat; constant-currency revenue increased 1.3%. First-half reported revenue was flat and constant-currency revenue increased 3.0%.
- Americas revenue fell 5.2% in Q2 and 3.0% in the first half, primarily due to weaker U.S. wholesale sales. Europe and Asia grew, supported by retail performance and store-network expansion.
- Gross margin improved 1.7 percentage points in Q2 and 1.9 points in the first half. Management attributed the improvement to international retail growth, lower negotiated product costs, supply-chain efficiencies and price increases, partly offset by currency effects.
- Q2 operating income rose 21.9%; first-half operating income rose 12.6%. SG&A increased 2.2% in Q2 and 2.9% in the first half, including higher store, ecommerce, advertising, distribution and technology investment.
- First-half net income attributable to the company increased to $96.6 million from $50.1 million. The prior-year period included a $14.0 million debt-extinguishment loss; interest expense also declined in 2016.
- First-half operating cash flow was nearly unchanged. Increased inventory investment was offset by higher receivable collections and lower vendor payments.
Debt, liquidity and cash uses
Total debt was $1,166.3 million at May 29, 2016, compared with $1,152.5 million at November 29, 2015. Long-term debt was $1,005.6 million; short-term debt and current maturities totaled $160.7 million. About 90% of debt was fixed-rate. The company had $610.8 million of unused revolving-credit availability and reported total liquidity of approximately $1.0 billion, including cash. It was in compliance with debt covenants and expected the $105 million revolving-facility borrowing to be repaid over the next twelve months. The company stated it believed liquidity would be adequate for that period.
Financing cash outflow was $49.1 million in the first half, including a $60 million dividend paid in Q2; the company has no established annual dividend policy. Investing cash outflow was $13.0 million. Cash increased by $41.0 million during the six months.
Outlook, commentary, risks and unusual items
- No numerical revenue, earnings or margin guidance was provided. Management’s stated long-term priorities include profitable growth, strong cash flow and debt reduction, supported by brand growth, retail and ecommerce, product-portfolio development and cost efficiencies.
- Management described a challenging retail environment marked by mixed discretionary spending, declining traffic and promotional activity. U.S.-dollar strength and currency volatility may affect reported revenue, margins and store traffic; Brexit was identified as an additional source of market and currency uncertainty.
- The global productivity initiative was expected to continue through the end of 2016. The company said it could not yet reasonably estimate costs for additional actions; cash payments for charges recognized to date were expected to continue through 2017.
- Q2 included a $6.1 million gain from the sale-leaseback of a U.K. distribution center. The comparable 2015 period included a $7.5 million gain on the sale of a Turkish facility.
- Material risk areas include consumer and wholesale-customer weakness, competition and changing shopping behavior, currency and interest-rate movements, sourcing and product-cost variability, execution of restructuring and store expansion, pension funding, data security, and litigation. The company reported no material changes to previously disclosed risk factors and no material litigation developments.
- Disclosure controls were deemed effective at the reasonable-assurance level. The company reported continued outsourcing of certain global business-service activities, changing related processes and controls.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q2 2016, despite the request metadata stating 2015 Q2.
- Assess whether Americas wholesale weakness persists and whether Europe and Asia retail growth can offset it.
- Track gross-margin improvement against currency headwinds and rising SG&A investment.
- Monitor inventory growth, operating cash conversion, debt maturities and revolving-credit usage.
- Evaluate the sustainability of earnings after separating operating trends from foreign-exchange effects and the U.K. sale-leaseback gain.
- Review execution costs and benefits of the productivity initiative, as additional cost estimates were not available.