Levi Strauss & Co. — Form 10-Q Summary
Reporting period: Quarter ended May 31, 2015; comparative periods ended May 25, 2014. The request metadata says “2014 Q2,” but the supplied filing is for 2015 Q2. Financial amounts below are in millions of dollars unless noted. Levi Strauss is a privately held global apparel company operating the Americas, Europe and Asia regions.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $1,012.2 | $1,081.8 | $2,067.3 | $2,211.8 |
| Gross profit / margin | $500.2 / 49.4% | $530.3 / 49.0% | $1,037.3 / 50.2% | $1,106.7 / 50.0% |
| Operating income / margin | $47.6 / 4.7% | $65.1 / 6.0% | $155.1 / 7.5% | $158.8 / 7.2% |
| Net income attributable to Levi Strauss & Co. | $11.7 | $11.5 | $50.1 | $61.4 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $102.6 | $72.4 |
- Revenue and regional trends: Q2 reported revenue fell 6.4%, but rose 0.8% on a constant-currency basis. First-half reported revenue fell 6.5% and was nearly flat on a constant-currency basis (-0.2%). Europe and Asia grew on a constant-currency basis, while Americas revenue declined.
- Margins and earnings: Q2 operating income declined 26.9%, reflecting retail investment, advertising timing and currency effects; lower restructuring charges and improved constant-currency gross margin partly offset the decline. First-half operating income declined 2.3%. First-half net income attributable to the company fell 18.5%, including a higher effective tax rate and unfavorable foreign-currency transaction effects.
- Cash flow and investment: First-half operating cash flow increased to $102.6, principally from lower inventory cash use and higher customer collections, partly offset by higher vendor payments. Investing activities used $36.0, including $43.2 of property and equipment purchases, partly offset by asset-sale proceeds. Financing activities used $67.4.
- Liquidity: At May 31, cash was $284.6 and unused revolving-credit availability was $532.9, for reported total liquidity of $817.5. Current assets were $1,499.3 and current liabilities $785.1.
- Debt: Total short- and long-term debt was $1,190.9, down from $1,224.0 at November 30, 2014. The company issued $500.0 of 5.00% senior notes due 2025 and tendered or redeemed its 7.625% notes due 2020. It reported a $14.0 loss on early extinguishment of debt. The weighted-average borrowing rate was 6.91% in Q2 and 7.22% for the first half. The company said it complied with debt covenants.
Changes, outlook and risks
- Currency materially affected reported results: the stronger U.S. dollar reduced first-half revenue by approximately $140 million in aggregate across regions, according to the regional discussion, and unfavorably affected gross profit by about $78 million. Currency translation also reduced reported European and Asian sales.
- The company’s global productivity initiative is expected to generate $175–$200 million in net annualized benefits when complete; actions taken to date are expected to yield $125–$150 million. Most actions are expected to be implemented by the end of 2016. Further cost estimates remain undetermined in some areas, and local consultation processes may affect timing and charges.
- Management stated it expects adequate liquidity for the next 12 months. The filing provides no specific revenue or earnings guidance. It describes mixed global consumer spending, promotional retail conditions, competition from specialty and online sellers, and currency movements as near-term pressures.
- A $7.5 million gain from the sale of the company’s Turkey finishing and distribution facility benefited Q2 results. Restructuring charges were $3.0 million in Q2 and $7.3 million in the first half, materially below prior-year amounts; related productivity and outsourcing costs recorded in SG&A were $12.4 million and $20.4 million, respectively.
- The company paid a $50.0 million cash dividend in Q2 and stated it has no established annual dividend policy. It said pending ordinary-course litigation was not expected to have a material financial effect. Management reported disclosure controls were effective; the transition of certain global business services to an outside provider changed processes and the control environment.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q2 2015, not Q2 2014.
- Assess whether constant-currency growth can translate into reported growth and whether continued currency volatility could pressure margins and earnings.
- Track execution, remaining costs and realized savings from the productivity initiative, including the effect of store, ecommerce and advertising investments.
- Review refinancing terms, upcoming principal repayments, revolving-credit availability, covenant compliance and the ability to sustain liquidity and debt reduction.
- Separate recurring operating performance from the Turkey facility gain, debt-extinguishment costs, restructuring charges and foreign-exchange gains or losses.