Levi Strauss & Co. — Form 10-K summary
Reporting period: The filing is the annual report for the fiscal year ended November 28, 2021, not a 2020 Q4 filing. It also reports fourth-quarter comparisons. The filing contains inconsistent descriptions of whether fiscal 2021 or fiscal 2020 had 53 weeks; fiscal 2020 Q4 is identified as 14 weeks, so period-length comparisons warrant verification.
Business context
Levi Strauss designs, markets and sells apparel under Levi’s, Dockers, Signature by Levi Strauss & Co., Denizen and, following its 2021 acquisition, Beyond Yoga. Products were sold in more than 110 countries. Levi’s Brands are reported in Americas, Europe and Asia; Dockers and Beyond Yoga are included in Other Brands. The company identifies brand strength, direct-to-consumer (DTC) growth, portfolio diversification, digital transformation and operational efficiency as strategic priorities.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $5.764 billion | $4.453 billion |
| Gross profit / gross margin | $3.347 billion / 58.1% | $2.353 billion / 52.8% |
| Operating income (loss) / margin | $686.2 million / 11.9% | ($85.1) million / (1.9%) |
| Net income (loss) | $553.5 million | ($127.1) million |
| Diluted earnings (loss) per share | $1.35 | ($0.32) |
| Adjusted EBIT / margin | $712.9 million / 12.4% | $181.1 million / 4.1% |
| Cash from operating activities | $737.3 million | $469.6 million |
| Capital expenditures | $166.9 million | $130.4 million |
Revenue rose 29.5% year over year (27.1% at constant currency), returning to approximately fiscal 2019 revenue levels. FY2021 adjusted net income was $600.9 million and adjusted diluted EPS was $1.47; these are non-GAAP measures. The filing reports Q4 revenue growth of 21.6% reported (21.5% constant currency), operating income of $186.3 million, net income of $153.0 million and diluted EPS of $0.37. It does not provide a clear Q4 revenue dollar value in the supplied text.
FY2021 revenue mix was 64% wholesale and 36% DTC, versus 61% and 39%, respectively, in FY2020. Company-operated e-commerce was 8% of total revenue in both years. Top ten wholesale customers represented 32% of revenue, up from 29%; no single customer reached 10%.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $810.3 million, with $91.5 million of short-term investments. Undrawn credit-facility availability was $794.3 million; the company reported total liquidity of approximately $1.7 billion.
- Total debt was $1.027 billion, including $5.9 million of short-term borrowings; reported net debt was $124.8 million and leverage was 1.2x adjusted EBITDA. The revolving facility had no borrowings outstanding. Debt covenants were reported in compliance.
- Operating cash flow increased to $737.3 million. Investing activities used $571.8 million, including $390.9 million for the Beyond Yoga acquisition; financing activities used $840.9 million, primarily reflecting debt redemption, share repurchases and dividends.
- The company redeemed $1.0 billion of 5.00% notes due 2025, issued $500 million of 3.50% notes due 2031 and recorded a $36.5 million loss on early debt extinguishment. FY2021 interest expense was $72.9 million.
- FY2022 capital expenditures were expected to be approximately $270 million. Management expected approximately $160 million of FY2022 dividends, subject to Board decisions and debt restrictions; a $0.10-per-share quarterly dividend was declared in January 2022.
Changes, outlook and notable items
- Compared with FY2020, revenue and profitability rebounded as stores reopened and demand recovered; FY2020 included $250 million of COVID-related and restructuring charges. FY2021 gross margin benefited from product mix, pricing and the absence of much of the prior-year inventory charges. FY2021 GAAP results included $8.3 million of restructuring charges and the debt-extinguishment loss.
- Supply-chain disruption, including transport shortages, labor constraints and port congestion, was estimated to have reduced Q4 FY2021 revenue by approximately $50 million. Higher freight and distribution costs were also incurred to mitigate delays.
- The 2020 restructuring initiative was completed in FY2021, eliminating approximately 15% of global non-retail and non-manufacturing roles. Management expects about $100 million in annual savings; $98.7 million of charges had been recorded to date, and the company did not anticipate significant further costs for the initiative.
- Management reported FY2021 adjusted EBIT margin of 12.4%, targets margins above 12%, and intends to achieve modest annual improvement. Its stated ambition is to increase DTC toward 60% of annual revenue by 2030; this is a long-term objective, not near-term financial guidance.
- Beyond Yoga was acquired in Q4 for cash. Preliminary purchase accounting included $123.7 million of goodwill and a $216.0 million indefinite-lived trademark valuation. Integration benefits and growth plans are not assured.
- COVID-19 effects remained uncertain. Other material risks include inflation and input costs, foreign exchange, customer and consumer demand, wholesale-customer concentration, competition, tariffs and sourcing restrictions, cyber and privacy risks, and pension and postretirement obligations. Management stated that ordinary-course legal proceedings were not expected to materially affect financial condition, results or cash flows.
- The 4.6% FY2021 effective tax rate was unusually low, principally reflecting the foreign-derived intangible income deduction and tax benefits from stock-based compensation. Future tax rates may differ.
Most important facts for investors to verify
- Confirm the fiscal-week count and comparable-quarter lengths: the filing’s descriptions conflict, and FY2020 Q4 included an extra week.
- Assess whether revenue and margin recovery is sustainable after reopening effects, and monitor Asia’s recovery and the impact of supply-chain delays, freight costs and inflation.
- Review the reconciliation and exclusions in non-GAAP adjusted results, particularly the 12.4% adjusted EBIT margin and adjusted free cash flow of $229.6 million.
- Track liquidity and debt service alongside acquisition spending, planned capital expenditures, dividends and repurchases; dividend capacity is subject to debt covenants and Board discretion.
- Monitor the Beyond Yoga integration, acquisition valuation and expected growth, as well as progress toward restructuring savings and the long-term DTC target.