Levi Strauss & Co. — Form 10-Q Summary
Reporting period: The filing covers the fiscal third quarter and first nine months ended August 27, 2023, compared with periods ended August 28, 2022. The request metadata says “2022 Q3,” but the filing itself is for 2023 Q3.
Business context
Levi Strauss designs, markets and sells apparel and related products under Levi’s, Dockers, Signature, Denizen and Beyond Yoga brands. It sells through wholesale partners and direct-to-consumer (DTC) stores, e-commerce and shop-in-shops. In the first nine months of 2023, DTC accounted for 43% of revenue, up from 37% a year earlier; wholesale accounted for 57%, down from 63%.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,511.0 million | $1,517.2 million | $4,536.7 million | $4,579.9 million |
| Gross profit / margin | $839.5 million / 55.6% | $862.9 million / 56.9% | $2,566.0 million / 56.6% | $2,661.5 million / 58.1% |
| Operating income / margin | $34.8 million / 2.3% | $199.1 million / 13.1% | $202.1 million / 4.5% | $509.5 million / 11.1% |
| Net income | $9.6 million | $172.9 million | $122.7 million | $418.5 million |
| Diluted EPS | $0.02 | $0.43 | $0.31 | $1.03 |
- Reported revenue declined 0.4% in Q3 and 0.9% year to date; constant-currency revenue declined approximately 2% in Q3 and 0.4% year to date.
- Q3 Adjusted EBIT was $137.8 million, down 26.5%, with a 9.1% margin versus 12.4%. Nine-month Adjusted EBIT was $354.6 million, down 37.9%, with a 7.8% margin versus 12.5%. Adjusted diluted EPS was $0.28 for Q3 and $0.65 year to date, compared with $0.40 and $1.15, respectively. These are non-GAAP measures.
- Cash from operations was $176.6 million for the first nine months, versus $210.3 million. Capital expenditures were $259.0 million, resulting in Adjusted free cash flow of negative $82.4 million, compared with positive $13.5 million in the prior-year period.
- At August 27, 2023, cash and equivalents were $294.5 million; inventory was $1,373.8 million; and total debt was $1,044.1 million. Non-GAAP net debt was $749.6 million and leverage ratio was 1.6x, versus 1.1x a year earlier.
- Liquidity was approximately $1.1 billion, including $294.5 million cash and $840.9 million of unused revolving-credit availability. The company reported compliance with debt covenants.
Material changes and unusual items
- Q3 included $90.2 million of noncash Beyond Yoga impairment charges: $75.4 million against goodwill and $14.8 million against the trademark. The filing attributes the impairment to investment and expansion plans amid macroeconomic conditions, lower expected cash flows and higher discount rates. The company said the impairment reduced Q3 diluted EPS by $0.17, net of tax.
- Q3 also included a $19.0 million noncash U.S. pension settlement loss, recorded in other expense, after pension assets were used to purchase annuity contracts and transfer certain liabilities to an insurer.
- Other expense was $26.7 million in Q3, versus $5.2 million a year earlier, reflecting the pension settlement and foreign-currency transaction losses, partly offset by foreign-exchange management gains. Nine-month other expense was $38.1 million, versus $16.7 million of other income in the prior-year period.
- Interest expense rose to $11.5 million in Q3 and $35.4 million year to date, versus $7.7 million and $16.3 million, respectively. The filing cites higher borrowing costs and revolver borrowings, among other factors.
- Inventory was up 6% year over year in Q3 on a dollar basis, an improvement from 18% growth in Q2. The company said revised supplier terms—taking ownership nearer shipment—accounted for about 5% of the Q3 dollar increase.
- Revenue trends varied by region: Q3 Americas revenue fell 4.8% reported, Europe fell 1.6%, and Asia rose 11.7%; Other Brands rose 12.4%. U.S. wholesale softness and cautious retailer demand weighed on results, while DTC and international growth provided offsets.
Outlook, management commentary and risks
- Management said it expects adequate liquidity for the next 12 months and longer term. Its stated capital priorities include investing 3.5%–4% of revenue, dividends targeted at 25%–35% of net income, strategic acquisitions and share repurchases; it aims to return 55%–65% of Adjusted free cash flow through dividends and repurchases. These are capital-allocation aims, not earnings guidance.
- After quarter-end, the company began reviewing its operating model and cost structure, with expected material cost savings beginning in 2024. The filing gives no quantified savings target or detailed implementation timetable.
- No specific fiscal 2023 revenue or earnings guidance is provided in the supplied filing text. Management notes that Q4 is typically the largest revenue quarter.
- Principal stated risks include inflation and reduced discretionary spending, promotional activity and wholesale customer inventory rebalancing, distribution-center capacity, supply-chain and product-cost pressures, foreign-exchange movements, geopolitical uncertainty including Russia-Ukraine, weather and climate-related disruptions, changing consumer and e-commerce expectations, and potential future asset impairments.
- The company said ordinary-course litigation and customs-duty matters were not expected to have a material financial impact. It reported no material changes to previously disclosed risk factors, market-risk exposures or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Beyond Yoga’s revised cash-flow assumptions and discount rates support the remaining carrying value, and whether further impairment is possible.
- Whether revenue and margins stabilize as DTC expands, given higher selling expenses and weaker wholesale demand.
- Whether inventory normalization and distribution capacity improve, and how supplier-term changes affect reported inventory and working capital.
- Whether operating cash generation recovers after negative year-to-date Adjusted free cash flow and elevated capital expenditures.
- How the operating-model review translates into measurable savings, implementation costs and any restructuring charges beginning in 2024.
- How leverage, borrowing costs, foreign-exchange exposure and dividend commitments affect liquidity and capital allocation. Non-GAAP measures should be assessed alongside GAAP results.