Levi Strauss & Co. — Form 10-Q summary
Period: The filing covers the quarter ended August 30, 2015, and the nine months ended August 30, 2015, compared with the periods ended August 24, 2014. This differs from the requested “2014 Q3” metadata. Levi Strauss is a privately held global apparel company operating through the Americas, Europe and Asia.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $1,142.0 million | $1,154.1 million | $3,209.3 million | $3,366.0 million |
| Gross profit / margin | $573.4 million / 50.2% | $562.2 million / 48.7% | $1,610.7 million / 50.2% | $1,668.9 million / 49.6% |
| Operating income / margin | $114.8 million / 10.1% | $105.1 million / 9.1% | $269.8 million / 8.4% | $263.9 million / 7.8% |
| Net income attributable to Levi Strauss | $58.2 million | $50.6 million | $108.3 million | $112.0 million |
- Third-quarter reported revenue fell 1%, but increased 7% at constant currency. Nine-month reported revenue fell 4.7%, while constant-currency revenue increased 2.2%.
- Q3 operating income rose 9.2%; nine-month operating income rose 2.2%. Higher gross margins and lower interest expense supported results, while currency headwinds weighed on revenue and operating income.
- Nine-month net income declined 2.0% despite higher operating income, reflecting higher other expense and income tax expense. The effective tax rate was 35.1%, versus 28.7% in the prior-year period.
- Nine-month operating cash flow was $110.3 million, compared with $81.3 million. Investing used $53.6 million, financing used $62.9 million, and cash decreased by $25.7 million to $272.6 million.
Balance sheet, debt and liquidity
- At August 30, 2015, total debt was $1.197 billion: $144.9 million short-term and $1.052 billion long-term. Total debt was $1.224 billion at November 30, 2014.
- Cash was $272.6 million. Revolving-credit availability was $549.3 million; together, cash and unused availability provided stated total liquidity of $821.9 million.
- Current assets were $1.643 billion and current liabilities were $883.0 million. Inventory increased to $674.9 million from $600.9 million at fiscal year-end.
- The company issued $500 million of 5.00% senior notes due 2025 and used proceeds, alongside revolver borrowings, principally to tender for and redeem its 7.625% senior notes due 2020. It recorded a $14.0 million early-extinguishment loss in the nine-month period.
- Management reported compliance with debt covenants. Approximately 90% of debt was fixed-rate and 10% variable-rate.
Changes, outlook and risks
- Regional Q3 revenue was mixed: Americas increased 2.2% reported, Europe declined 9.6%, and Asia declined 0.2%; each region grew on a constant-currency basis. Europe’s reported revenue was particularly affected by currency translation.
- Management cited lower negotiated product costs, supply-chain streamlining and price increases as contributors to improved gross margin, partially offset by unfavorable currency effects.
- The global productivity initiative is expected to deliver net annualized benefits of $175–$200 million when completed. Actions taken to date are expected to generate $125–$150 million in annualized savings. Most actions are expected by the end of 2016; additional costs remain uncertain and cash payments for charges already recognized are expected through 2016.
- Management said liquidity should be adequate for the next 12 months. Estimated 2015 capital expenditures were revised to $100–$110 million.
- Risks highlighted include weak or promotional apparel demand, retail traffic and channel competition, currency movements, execution of the productivity initiative, changing consumer preferences, sourcing and raw-material costs, and pension funding. The company reported no material change in risk factors or market-risk exposures from its prior 10-K.
- Management did not establish an annual dividend policy. It paid a $50 million dividend in Q2 2015. Pending ordinary-course litigation was not expected to materially affect results or cash flows.
Important facts for investors to verify
- Confirm the reporting period: the supplied filing is for Q3 2015, not Q3 2014.
- Assess how much constant-currency growth and margin improvement can persist as foreign-exchange effects continue to affect reported results.
- Track execution, remaining costs and realized savings from the productivity initiative, including actions subject to local consultation.
- Review debt maturities, refinancing terms, covenant restrictions and the sustainability of liquidity and cash generation.
- Evaluate the impact of higher inventory, tax-rate changes and foreign-currency transaction losses on future earnings and cash flow.