Levi Strauss & Co. — Form 10-K Summary
Reporting period: Fiscal year ended November 24, 2013; the filing also gives fourth-quarter results. This differs from the request metadata of “2012 Q4.” 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 and Denizen brands in more than 110 countries. Operations are reported across the Americas, Europe and Asia Pacific. Levi’s products generated about 84% of fiscal 2013 net sales; company-operated stores and online stores together generated about 22% of net revenue.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net revenue | $4.682 billion | $4.610 billion |
| Gross profit / margin | $2.350 billion / 50.2% | $2.199 billion / 47.7% |
| Operating income / margin | $465.5 million / 9.9% | $334.0 million / 7.2% |
| Net income attributable to Levi Strauss & Co. | $229.2 million | $143.9 million |
| Cash from operating activities | $411.3 million | $531.0 million |
| Capital expenditures | $91.8 million | $83.9 million |
| Cash and cash equivalents at year-end | $489.3 million | $406.1 million |
| Total debt, excluding capital leases | $1.546 billion | $1.729 billion |
| Working capital | $1.054 billion | $881.5 million |
Operating cash flow declined year over year, primarily due to increased inventory investment and higher vendor payments. The company reported $635.3 million of unused availability under its secured revolving facility; cash plus unused availability totaled approximately $1.1 billion. It reported compliance with debt covenants at year-end. Interest expense was $129.0 million, and the weighted-average interest rate on average borrowings was 7.52%.
Fourth-quarter revenue was $1.295 billion versus $1.297 billion in the prior-year quarter. Operating income was $66.3 million versus $91.4 million, and net income attributable to Levi Strauss & Co. was $16.9 million versus $53.0 million.
Changes versus comparable periods
- Full-year revenue increased 1.6% as reported (1.8% on a constant-currency basis), led by the Americas; Europe was flat as reported and Asia Pacific declined 4.0% as reported.
- Gross margin rose 2.5 percentage points, primarily reflecting lower cotton costs and the absence of prior-year Denizen exit-related customer support and markdown charges. Fourth-quarter discounting and inventory markdowns, particularly in women’s products, partly offset the improvement.
- Operating income increased 39.4%. The comparison benefited from Asia Pacific charges recorded in 2012 related to phasing out Denizen; higher 2013 SG&A partially offset the gain.
- Debt decreased by about $183 million from year-end 2012. In 2013, the company issued $140 million of additional 6.875% notes due 2022 and used proceeds and cash to repay its remaining 2014 term loan.
Outlook, commentary and risks
Management’s fiscal 2014 objective was revenue growth versus 2013, with gross margin projected at approximately 50%. It also planned phased global process, procurement and cost-structure streamlining during 2014, with upfront charges expected; the filing does not provide a clear estimate of those charges.
Management described a challenging retail environment, weak discretionary spending in some markets, promotional pressure, wholesale-channel consolidation, and increased competition from vertically integrated retailers, fast fashion and e-commerce. Key exposures include cotton and other input-cost volatility, foreign exchange, reliance on wholesale customers and contract manufacturers, and pension and postretirement obligations. The top ten wholesale customers represented 31% of revenue, although no single customer accounted for 10% or more.
Unusual or notable items included a $15.2 million discrete tax benefit in 2013 from finalizing a federal tax audit; 2012 benefited from a $27.0 million California tax-related benefit. The company recorded a $0.7 million loss on early debt extinguishment in 2013. Management said pending legal proceedings were not expected to have a material effect on financial condition, results or cash flows.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is for fiscal 2013, not fiscal 2012; compare the fourth-quarter figures with the filing’s unaudited quarterly table.
- Assess whether 2013 margin gains from lower cotton costs are sustainable and how promotional activity or inventory markdowns may affect future margins.
- Track inventory, operating cash flow and working-capital needs; operating cash flow fell despite higher reported earnings.
- Review debt maturities, interest costs, facility availability and the restrictions debt agreements place on dividends and other actions.
- Monitor execution and upfront costs of the 2014 streamlining initiatives, as well as regional performance, especially in Europe and Asia Pacific.