Business context and reporting period
This filing is Levi Strauss & Co.’s Form 10-Q for the quarter ended August 24, 2014—not 2013 Q3 as stated in the request metadata. The company is a privately held global apparel business operating through the Americas, Europe and Asia; its common equity is not publicly traded. Comparisons below are with the quarter or nine months ended August 25, 2013.
Financial performance
Amounts are in millions of dollars unless stated otherwise.
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenues | $1,154.1 | $1,141.3 | $3,366.0 | $3,386.9 |
| Gross profit / margin | $562.2 / 48.7% | $572.8 / 50.2% | $1,668.9 / 49.6% | $1,713.4 / 50.6% |
| Operating income / margin | $105.1 / 9.1% | $118.1 / 10.3% | $263.9 / 7.8% | $399.2 / 11.8% |
| Net income attributable to Levi Strauss & Co. | $50.6 | $57.1 | $112.0 | $212.2 |
- Cash flow: Nine-month operating cash flow was $81.3, down from $273.8. Investing cash outflow was $46.0 versus $63.4; financing cash outflow was $157.2 versus $227.7. Capital expenditures were $50.5. Cash ended at $367.4, compared with $489.3 at November 24, 2013.
- Liquidity: Cash plus unused revolving-credit availability was approximately $1.0 billion at August 24, 2014. Unused availability was $606.0, after availability reductions for collateral levels and other credit usage.
- Debt: Total short- and long-term debt was $1,426.9, down from $1,545.9 at fiscal year-end 2013. Debt was predominantly fixed-rate; the company reported covenant compliance.
- Balance sheet: Total assets were $3,058.4; current assets were $1,855.7 and current liabilities $845.9. Inventories increased to $722.3 from $603.9 at fiscal year-end, primarily reflecting increased product purchases and lower-than-anticipated sales.
Material changes and management commentary
- Third-quarter revenue increased 1.1%, while nine-month revenue declined 0.6%. Americas revenue fell 1.8% for the quarter and 2.7% for the nine months; Europe and Asia grew in the quarter.
- Gross margin declined in both periods, primarily due to higher promotional discounting to manage elevated inventory and product investment costs. Management cited soft retail conditions, particularly in denim, weaker traffic and elevated industry promotions, and expected these pressures to continue near term.
- Nine-month operating income fell 33.9%, reflecting lower gross margin and $79.4 of restructuring charges. The prior-year comparison also benefited from a $14.2 discrete tax benefit in Q3 2013 related to the resolution of a U.S. federal tax audit.
- The global productivity initiative began in 2014 and is expected to continue through 2015. Approximately 800 non-retail and non-manufacturing positions were eliminated. Management expects $175–$200 of net annualized savings overall; actions taken through the first nine months were expected to deliver $100–$125 of net annualized savings. Restructuring charges were $79.4 for the nine months, with additional Q4 2014 charges anticipated, but the company could not estimate them reliably.
- In May 2014, the company redeemed €150.0 principal amount of 2018 Euro Notes, funding the redemption with revolving-credit borrowings and cash. It recorded an $11.2 nine-month loss on early debt extinguishment. The revolving facility was amended to extend its term through March 2019, subject to specified conditions.
Outlook, risks and unusual items
- Management stated it expected adequate liquidity for the next 12 months and forecast 2014 capital expenditures of $80–$90.
- A non-cash pension settlement charge of approximately $25 was anticipated in Q4 2014. The filing also notes the risk that restructuring could disrupt operations or fail to deliver expected savings, and that further charges may weigh on profitability.
- A $3.0 Q3 tax correction related to errors in previously filed returns increased tax expense and reduced net income; management said it was not material to prior or current financial statements and had no effect on operating income or cash. The nine-month effective tax rate was 28.7%, versus 28.8%.
- Other stated risks include consumer spending and apparel demand, wholesale-customer health, competition and changing preferences, foreign-exchange movements, sourcing and raw-material costs, pension obligations, and political or economic instability. The company said pending ordinary-course litigation was not expected to materially affect its financial condition, results or cash flows.
Important facts for investors to verify
- Confirm the filing period: the document covers Q3 and the first nine months of fiscal 2014, despite the request’s 2013 Q3 label.
- Track inventory levels, promotional activity and gross-margin recovery, particularly as management described elevated inventory and weak retail traffic.
- Assess whether the productivity initiative achieves its savings targets and monitor additional restructuring costs and the expected pension settlement charge.
- Review cash conversion, debt maturities and revolving-credit availability; operating cash flow declined sharply year over year.
- Consider the impact of the prior-year discrete tax benefit when comparing reported earnings, and note the company’s private ownership and lack of publicly traded common equity.