Levi Strauss & Co. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended February 28, 2016, compared with the 13 weeks ended March 1, 2015. Although the request identifies 2015 Q1, the supplied filing is for fiscal 2016 Q1. Levi Strauss is a privately held global apparel company operating in the Americas, Europe and Asia.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $1,056.5 million | $1,055.1 million |
| Gross profit / margin | $559.6 million / 53.0% | $537.1 million / 50.9% |
| Operating income / margin | $116.6 million / 11.0% | $107.4 million / 10.2% |
| Net income attributable to Levi Strauss | $65.8 million | $38.4 million |
| Operating cash flow | $46.1 million | $37.6 million |
| Capital expenditures | $30.7 million | $21.2 million |
- Reported revenue was nearly flat (+0.1%); constant-currency revenue increased 4.7% (rounded to 5% in management’s overview). Foreign exchange reduced revenue across all three regions.
- Gross margin improved 2.1 percentage points, primarily from lower negotiated product costs, supply-chain efficiencies and international retail growth; unfavorable currency effects partly offset these benefits.
- SG&A increased 3.7% to $441.2 million, reflecting store and ecommerce expansion, higher advertising and distribution costs. Operating income nevertheless rose 8.5%.
- Interest expense fell to $14.9 million from $23.3 million, reflecting lower borrowing rates after 2015 refinancing and lower deferred-compensation-plan interest. Other expense narrowed to $2.2 million from $26.0 million, mainly because foreign-currency transaction losses were lower than in the prior-year quarter.
- Effective tax rate was 33.4%, versus 34.1%. Comprehensive income attributable to Levi Strauss was $57.9 million, versus $31.2 million.
Segments and material period changes
- Americas revenue was $571.2 million, down 0.5% reported but up 1.5% in constant currency; regional operating income fell 20.1% to $81.7 million, primarily due to higher SG&A, including advertising. U.S. wholesale sales were slightly lower, including a Dockers decline during product transitions.
- Europe revenue was $276.5 million, down 0.4% reported and up 8.1% constant currency; operating income increased 6.0% to $61.7 million.
- Asia revenue was $208.8 million, up 2.6% reported and 9.7% constant currency; operating income decreased 1.6% to $46.6 million. Retail expansion, particularly in China, and improved Japanese wholesale performance supported sales.
- Company-operated stores and ecommerce generated approximately 31% of revenue, versus 28% a year earlier. The company had 86 more company-operated stores year over year.
- Operating cash flow improved, supported by customer collections and lower vendor payments, but was partly offset by higher inventory. Inventory rose to $740.3 million from $606.9 million at the November 2015 year-end; management cited earlier receipts and lower-than-anticipated sales, particularly in the Americas.
Liquidity, debt and capital allocation
- At February 28, 2016, cash and cash equivalents were $271.1 million. Total debt was $1.081 billion, down from $1.153 billion at November 29, 2015. Long-term debt was $1.005 billion; current debt and maturities totaled $76.2 million.
- Unused revolving-credit availability was $739.7 million, giving reported total liquidity of approximately $1.0 billion. The company stated it expected adequate liquidity for the next 12 months and was in compliance with debt covenants.
- Approximately 98% of debt was fixed-rate. The 6.875% senior notes mature in 2022 and the 5.00% notes in 2025; the 4.25% yen-denominated Eurobonds mature in 2016.
- The board declared a $60 million cash dividend in Q1, paid April 7, 2016. The company has no established annual dividend policy; future dividends are discretionary and subject to financial condition and debt-agreement terms.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management’s stated priorities are profitable growth, stronger cash flow and debt reduction, and it expects liquidity to be adequate over the next 12 months.
- The global productivity initiative, begun in 2014, is expected to continue through the end of 2016. Q1 restructuring expense was $1.8 million, down from $4.3 million; additional restructuring actions and their cost estimates were not determinable. Associated cash payments are expected to continue through 2017.
- Management described mixed global consumer spending, declining retail traffic, promotional pressure, competition from ecommerce and off-price channels, and U.S.-dollar strength as business challenges. Currency affected gross profit unfavorably by approximately $24 million and operating income by approximately $9 million.
- Other disclosed risks include wholesale-customer financial distress, product and sourcing costs, execution of restructuring and store expansion, foreign exchange and interest-rate movements, data security, pension funding, intellectual property, litigation and political or economic instability. The company reported no material changes to its previously disclosed risk factors; it did not expect pending ordinary-course litigation to materially affect results.
- Disclosure controls were assessed as effective. The company noted continued outsourcing of certain global business service activities and related changes to processes and the control environment, with no other material internal-control changes reported.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is fiscal 2016 Q1, not 2015 Q1.
- Track whether revenue growth on a constant-currency basis converts into reported growth, and whether currency continues to pressure margins and regional results.
- Monitor inventory levels and sell-through, particularly in the Americas, alongside the costs and returns from store, ecommerce and advertising investment.
- Review the 2016 Eurobond maturity, debt repayment or refinancing, revolving-credit usage and compliance with covenants.
- Assess the remaining restructuring costs and execution risks, as management could not estimate costs of additional actions.