Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 1, 2015, compared with the quarter ended February 23, 2014—not 2014 Q1 as stated in the request. Both periods comprised 13 weeks. Levi Strauss is a privately held global apparel company operating in the Americas, Europe and Asia.
Financial results
| Metric | Q1 2015 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net revenue | $1,055.1 million | $1,130.0 million | Down 6.6% reported; down 1.3% in constant currency |
| Gross profit / margin | $537.1 million / 50.9% | $576.4 million / 51.0% | Margin down 0.1 percentage point |
| Operating income / margin | $107.4 million / 10.2% | $93.7 million / 8.3% | Operating income up 14.7% |
| Net income attributable to Levi Strauss | $38.4 million | $50.0 million | Down 23.2% |
| Operating cash flow | $37.6 million | $35.7 million | Up modestly |
| Cash and cash equivalents | $202.7 million | $298.3 million at Nov. 30, 2014 | Quarter-end balance |
| Total debt | $1,125.5 million | $1,224.0 million at Nov. 30, 2014 | Down $98.5 million |
SG&A was $425.3 million, essentially flat year over year, but rose to 40.3% of revenue from 37.6%. Capital expenditures were $21.2 million. Cash used in investing and financing activities was $25.1 million and $96.5 million, respectively; financing outflow primarily reflected repayment of the revolving credit facility. The company reported $717.0 million of unused revolver availability and $919.7 million of total liquidity, including cash. It borrowed approximately $50 million under the revolver after quarter-end.
Comparative performance and drivers
- Reported revenue declines reflected currency translation and weaker Americas sales. Americas revenue fell 8.4% reported; Europe fell 7.6% reported but grew 9.1% in constant currency; Asia grew 0.4% reported and 4.5% in constant currency.
- Management cited fiscal-calendar timing, the Dockers women’s business licensing change and Black Friday timing in the Americas. European constant-currency growth reflected company-operated retail expansion; Asian growth reflected retail expansion and promotional activity.
- Currency translation reduced gross profit by approximately $35 million and gross margin by about 40 basis points. Excluding translation effects, management attributed margin improvement mainly to lower negotiated product costs and supply-chain efficiencies.
- Operating income increased despite lower revenue, principally because restructuring charges fell to $4.3 million from $57.9 million in the prior-year quarter. Regional operating income declined 9.4%; corporate expenses also declined, partly offset by higher corporate staff costs and stock-based compensation.
- Net income fell despite higher operating income, reflecting a $26.0 million other expense versus $4.2 million of other income a year earlier. The 2015 expense principally included foreign-currency transaction losses, particularly from the weaker euro. The effective tax rate rose to 34.1% from 24.8%; the prior-year rate included a benefit tied to foreign earnings reinvestment assertions.
Outlook, risks and notable items
- Management expects the global productivity initiative, planned through the end of 2015, to produce $175–$200 million of net annualized savings. Actions taken to date were expected to deliver $125–$150 million. Additional charge estimates were not yet determinable; related cash payments were expected to continue through the first half of 2016.
- Management said liquidity should be adequate for the next 12 months. Long-term debt was primarily fixed-rate; the company reported compliance with debt covenants. Short-term foreign subsidiary borrowings of $33.8 million were expected to be repaid within nine months or refinanced.
- Management highlighted uncertain global discretionary spending, promotional retail conditions, competition, foreign-exchange volatility, wholesale-channel exposure, sourcing costs, and execution risks for the productivity initiative. No material changes to previously disclosed risk factors were reported.
- The Board declared a $50 million cash dividend in Q1, paid April 2, 2015. The company has no established annual dividend policy. Pending ordinary-course litigation was not expected by management to materially affect results or cash flows.
Important facts for investors to verify
- Confirm the correct reporting period: this filing covers Q1 2015, not Q1 2014.
- Assess how much of the revenue and earnings picture reflects currency effects, calendar timing and the unusually high prior-year restructuring comparison.
- Track whether productivity savings are realized, what further restructuring costs arise, and whether implementation disrupts operations.
- Review liquidity after the post-quarter revolver borrowing and dividend payment, alongside debt maturities and covenant compliance.
- Monitor currency exposure and the effects of foreign-exchange losses on earnings and cash flows.