Levi Strauss & Co. — Form 10-Q Summary
Period: Fiscal second quarter and six months ended May 28, 2023; comparative periods ended May 29, 2022. The request metadata says “2022 Q2,” but the filing covers 2023 Q2.
Business context
Levi Strauss designs, markets and sells apparel and accessories through wholesale and direct-to-consumer (DTC) channels. Its reportable segments are Americas, Europe and Asia; Dockers and Beyond Yoga are included in Other Brands. In the first half, DTC generated 44% of revenue versus 38% a year earlier, while wholesale contributed 56% versus 62%.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $1,336.8 million | $1,471.1 million | $3,025.7 million | $3,062.7 million |
| Gross profit / margin | $784.2 million / 58.7% | $855.0 million / 58.1% | $1,726.5 million / 57.1% | $1,798.6 million / 58.7% |
| Operating income / margin | $9.9 million / 0.7% | $76.2 million / 5.2% | $167.3 million / 5.5% | $310.4 million / 10.1% |
| Net income (loss) | $(1.6) million | $49.7 million | $113.1 million | $245.6 million |
| Diluted EPS | $(0.00) | $0.12 | $0.28 | $0.61 |
- Q2 revenue fell 9.1% reported and 8.6% at constant currency. The Americas declined 21.5% reported, Europe 1.6%, while Asia grew 18.0%. First-half revenue fell 1.2% reported but rose 0.4% at constant currency.
- Q2 gross margin improved 60 basis points, reflecting favorable channel mix, including higher DTC and lower wholesale revenue; the estimated Q1-to-Q2 U.S. ERP-related shipment shift also benefited Q2 gross margin by about 70 basis points. First-half gross margin fell 160 basis points, mainly from product mix and fewer full-price sales.
- Q2 SG&A was $774.3 million, down 0.6% year over year, but rose to 57.9% of revenue from 52.9%. First-half SG&A increased 4.8% to $1,559.2 million.
- Management-reported non-GAAP Q2 Adjusted EBIT was $31.5 million, down from $145.4 million; Adjusted diluted EPS was $0.04 versus $0.29. First-half Adjusted EBIT was $216.8 million versus $383.2 million, and Adjusted diluted EPS was $0.37 versus $0.75. These measures exclude specified items and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- First-half operating cash flow was $125.4 million, compared with $145.9 million. Capital expenditures were $186.6 million, versus $120.5 million; company-defined Adjusted free cash flow was negative $61.2 million, versus positive $25.4 million.
- At May 28, cash and cash equivalents were $471.6 million; inventory was $1,313.5 million, down from $1,416.8 million at November 27, 2022. Management said inventory was up 18% year over year in Q2, an improvement from 33% first-quarter growth.
- Total debt was $1,136.6 million, including $125.0 million drawn on the revolving credit facility. Net debt was $665.0 million and the company-reported leverage ratio was 1.6x. Unused facility availability was $860.1 million; cash plus unused availability was approximately $1.3 billion. The company reported compliance with debt covenants.
- On June 30, 2023, after quarter-end, the company repaid $100 million of revolving-credit borrowings. First-half dividends paid were $95.2 million; a further $0.12-per-share dividend was declared after quarter-end.
Changes, outlook and risks
- Management attributed the Q2 revenue decline chiefly to weaker U.S. wholesale demand and a shift of approximately $100 million of shipments from Q2 into Q1 ahead of the U.S. ERP implementation. DTC and international businesses partly offset the decline. First-half DTC growth was offset by weaker U.S. wholesale.
- The company expects adequate liquidity over the next 12 months and longer term. Its stated capital priorities include investing 3.5%–4% of revenue, dividends with a 25%–35% of net income payout target, strategic acquisitions and share repurchases; it aims to return 55%–65% of Adjusted free cash flow through dividends and buybacks. These are capital-allocation objectives, not earnings guidance. The filing provides no specific full-year revenue or earnings guidance.
- A restructuring initiative begun in late 2022 is expected to continue through 2023. First-half 2023 included $17.8 million of net restructuring charges and $18.8 million of software impairment charges related to discontinued technology projects.
- After quarter-end, a pension transaction was expected to result in an approximately $19 million noncash settlement charge and reclassification of approximately $21 million of accumulated other comprehensive losses.
- Key risks cited include inflation and weaker discretionary spending, wholesale customer inventory and demand, supply-chain and U.S. distribution capacity, foreign-exchange volatility, interest rates, geopolitical and trade uncertainty, and weather and climate-related disruptions. Russia and Ukraine revenue was not material to consolidated results in the periods reported, but the company cited continuing uncertainty. Management reported no material changes to previously disclosed risk factors and said ordinary-course legal matters were not expected to have a material impact.
Most important facts for investors to verify
- How much of the Q2 U.S. wholesale decline reflects the approximately $100 million shipment timing shift versus underlying demand, and whether ERP implementation caused any continuing disruption.
- Whether inventory and wholesale-customer stock levels continue to normalize, and whether full-price sales and gross margins recover.
- Whether DTC growth can offset lower wholesale revenue without further pressure from selling, labor and distribution costs.
- Cash generation after elevated capital expenditures, future revolver usage and repayment, and the company’s ability to maintain dividends and other capital returns.
- The total future cost and timing of restructuring, technology impairments and the pension settlement; also monitor foreign-currency effects and the reconciliation of non-GAAP measures to GAAP results.