Levi Strauss & Co. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended November 30, 2014, not 2013 Q4. Fiscal 2014 included 53 weeks, versus 52 weeks in fiscal 2013; its fourth quarter had 14 weeks. The company is privately held and its common stock is not publicly traded.
Business context
Levi Strauss designs, markets and sells apparel under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. It operates through the Americas, Europe and Asia, with products sold in more than 110 countries. Levi’s generated approximately 85% of 2014 net sales; company-operated stores and eCommerce generated approximately 25% of net revenues.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenues | $4.754 billion | $4.682 billion |
| Gross profit / gross margin | $2.348 billion / 49.4% | $2.350 billion / 50.2% |
| Operating income / margin | $313.9 million / 6.6% | $465.5 million / 9.9% |
| Net income attributable to Levi Strauss & Co. | $106.1 million | $229.2 million |
| Cash from operating activities | $232.9 million | $411.3 million |
| Capital expenditures | $73.4 million | $91.8 million |
| Cash and cash equivalents at year-end | $298.3 million | $489.3 million |
| Total debt, excluding capital leases | $1.224 billion | $1.546 billion |
| Working capital | $777.5 million | $1.054 billion |
At year-end, unused revolving-credit availability was $664.9 million, giving reported cash plus availability of $963.2 million. The company reported $1.2 billion of debt, including $100 million drawn on its revolving facility, and said it was in compliance with debt covenants. Total liabilities were $2.692 billion; pension and postretirement obligations were material, including a $410.5 million pension underfunding and $134.1 million postretirement-plan underfunding.
Material changes versus FY2013
- Reported revenue rose 1.5%; the detailed segment comparison shows 2.6% growth on a constant-currency basis. Management attributed much of the increase to the extra fiscal week and higher company-operated retail sales.
- Gross margin fell 0.8 percentage points, primarily due to heavier discounting, promotional activity and product investment costs; currency reduced gross profit by approximately $22 million.
- Operating income declined 32.6% and attributable net income fell 53.7%. The decline reflected $128.4 million of restructuring charges, $27.6 million of related consulting and productivity costs in SG&A, a $30.7 million noncash pension settlement loss, lower gross margin and a $20.3 million debt-extinguishment loss.
- Operating cash flow decreased $178.4 million, mainly reflecting productivity-initiative payments, lower customer cash receipts, increased inventory purchases and higher vendor payments. Cash declined $191.0 million while debt was reduced by approximately $322 million.
- Regional revenue increased in Europe and Asia, while Americas revenue was nearly flat. Asia operating income declined 12.3%; Americas and Europe operating income increased.
Outlook, commentary and risks
- For 2015, management targeted full-year revenue growth versus 2014, concentrated in the second half, and projected gross margin of approximately 50%.
- The global productivity initiative, expected to continue through 2015, was projected to deliver $175–$200 million in net annualized savings versus the pre-initiative cost structure. Actions taken in 2014 were expected to yield $125–$150 million in annualized savings. Further restructuring costs were not yet estimable.
- Key risks include discretionary consumer spending and promotional pressure; competition and changing fashion preferences; cotton and other sourcing costs; foreign exchange exposure; reliance on wholesale customers and contract manufacturers; execution and service risks from restructuring and outsourcing; cybersecurity and IT disruption; and pension funding requirements.
- The company redeemed the remaining 7.75% Euro senior notes due 2018 in 2014 and recorded the related $20.3 million debt-extinguishment loss. It also amended and extended its revolving credit facility to March 2019.
- Other unusual items: prior-period corrections reduced FY2014 net income by $6.9 million, including $5.6 million of tax expense; the filing says these adjustments were immaterial. The fourth quarter included approximately $6.0 million of net-income reduction from these corrections. Management said pending ordinary-course litigation was not expected to materially affect results or cash flows.
Important facts for investors to verify
- Confirm the correct period: this is FY2014, with an extra week that complicates year-over-year comparisons.
- Assess whether revenue growth and the projected 2015 recovery can be sustained without relying on promotions, and whether gross margin reaches the approximately 50% outlook.
- Track restructuring cash costs and realized savings against the $175–$200 million annualized target, including any additional charges.
- Review debt maturities, facility availability and covenant restrictions, along with pension and postretirement funding needs.
- Consider that shares are privately held, have no established public trading market, and are subject to transfer restrictions; dividends are discretionary and constrained by debt agreements.