Levi Strauss & Co. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended February 26, 2023, Levi Strauss & Co.’s fiscal 2023 first quarter, compared with the 13 weeks ended February 27, 2022. The request metadata says “2022 Q1,” but the filing itself is for 2023 Q1. Amounts are in U.S. dollars unless noted.
Business context and results
The company designs, markets and sells apparel under the Levi’s, Dockers, Signature, Denizen and Beyond Yoga brands through wholesale and direct-to-consumer (DTC) channels. Net revenue rose 6.1% as reported and 8.8% in constant currency. Management estimates about $100 million of wholesale shipments shifted from Q2 into Q1 ahead of a U.S. ERP implementation.
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net revenue | $1,688.9 million | $1,591.6 million | +6.1% reported; +8.8% constant currency |
| Gross profit / margin | $942.3 million / 55.8% | $943.6 million / 59.3% | Gross profit down 0.1%; margin down 350 basis points |
| SG&A | $784.9 million | $709.4 million | +10.6%; 46.5% of revenue versus 44.6% |
| Operating income / margin | $157.4 million / 9.3% | $234.2 million / 14.7% | Down 32.8%; margin down 540 basis points |
| Net income | $114.7 million | $195.8 million | Down 41.4% |
| Diluted EPS | $0.29 | $0.48 | Down 39.6% |
| Adjusted EBIT / margin | $185.3 million / 11.0% | $237.9 million / 14.9% | Adjusted EBIT down 22.1% |
| Adjusted net income / diluted EPS | $134.9 million / $0.34 | $189.2 million / $0.46 | Down 28.7% / 26.1% |
Cash flow, debt and liquidity
- Operating cash flow was negative $160.8 million, versus positive $86.1 million a year earlier, mainly reflecting working-capital changes, higher inventory and SG&A spending, and lower receivables collections. Capital expenditures were $110.9 million, producing adjusted free cash flow of negative $271.7 million, versus positive $12.5 million.
- Cash and cash equivalents were $321.8 million at quarter-end, down from $429.6 million at fiscal 2022 year-end. The company reported approximately $1.2 billion of total liquidity, including $835.1 million of unused credit-facility availability. About $250 million of cash was held by foreign subsidiaries.
- Total debt was $1,155.6 million, up from $996.2 million at fiscal year-end, including $150 million drawn on the revolving facility and $12 million of other short-term borrowings. Net debt was $833.8 million; the reported leverage ratio was 1.4x, versus 1.1x a year earlier. A further $50 million facility borrowing occurred on February 27, after quarter-end.
- The company said it expected adequate liquidity over the next 12 months and longer term, and was in compliance with debt covenants at quarter-end. Long-term notes of approximately $1.0 billion begin principal repayment in 2027.
Material changes and management commentary
- Revenue increased in the Americas, Asia and Other Brands; Europe declined 3.0% as reported but grew 1.5% in constant currency. Constant-currency growth was 6.9% in the Americas, 22.2% in Asia and 24.6% in Other Brands.
- DTC represented 42% of revenue, up from 39%; wholesale represented 58%, down from 61%. Inventory was $1,335.2 million, down from $1,416.8 million at fiscal year-end, but up 33% year over year on a dollar basis. Management said inventory was beginning to normalize after deliberate receipt reductions and U.S. clearance activity.
- Gross margin pressure reflected higher product costs, including cotton and freight, more promotions and inventory-clearing activity, and unfavorable currency effects. Management estimated promotional and clearance activity reduced gross margin by about 300 basis points, higher product costs by about 200 basis points, and the shipment timing shift by about 40 basis points; favorable channel mix, pricing and lower air freight partly offset these effects.
- Q1 included $11.4 million of restructuring charges and $18.2 million of internal-use software impairment charges related to discontinued technology projects. A $3.5 million gain on early termination of Russia-related store leases partly offset SG&A charges. The restructuring program is expected to continue through 2023.
- Other expense was $7.5 million, versus $15.9 million of other income in the prior year, reflecting foreign-currency transaction losses; the prior-year comparison included a $12.5 million German COVID-19 subsidy gain. The effective tax rate was 17.6%, down from 20.4%, due mainly to tax benefits described in the filing.
Outlook, risks and contingencies
The filing provides no specific full-year revenue or earnings guidance. Management described inflation, higher interest rates and consumer caution, currency volatility, promotional competition, supply-chain and distribution capacity risks, and uncertainty from the Russia-Ukraine conflict and lingering COVID-19 effects as potential pressures on demand, costs and margins. It also cited risks related to wholesale customers, sourcing and trade rules, weather, tax changes, ERP implementation and future asset impairments. Russia and Ukraine operations were not material to consolidated results in the quarter; Russia represented about 1% of revenue, and the conflict reduced Europe constant-currency revenue by approximately $16 million.
Capital allocation priorities include investing 3.5%–4% of revenue, targeting dividends of 25%–35% of net income, and aiming to return 55%–65% of adjusted free cash flow through dividends and repurchases. These are stated targets, not a guarantee of future distributions. A $0.12-per-share dividend was declared after quarter-end. The company said ordinary-course litigation and customs matters were not expected to have a material impact; recorded customs reserves were not material.
Important facts for investors to verify
- How much of Q1 revenue growth reflects the estimated $100 million wholesale shipment pull-forward, and its effect on Q2 comparisons.
- Whether inventory normalization continues and whether promotions, product costs and freight allow gross margins to recover.
- Whether operating cash flow and adjusted free cash flow improve, and whether additional revolving-credit borrowing is required.
- Progress and costs of the restructuring and ERP implementation, including any further impairment or execution charges.
- Performance by region and channel, foreign-exchange effects, and the realization of management’s liquidity and capital-return targets.