Levi Strauss & Co. — Form 10-Q Summary
Reporting period: Quarter ended August 28, 2022, with comparisons to the quarter ended August 29, 2021; year-to-date figures cover nine months. The request metadata says “2021 Q3,” but the filing itself is for fiscal 2022 Q3.
Business context and results
Levi Strauss designs, markets and sells apparel and accessories globally through wholesale and direct-to-consumer (DTC) channels. Its brands include Levi’s, Dockers, Signature, Denizen and, following its 2021 acquisition, Beyond Yoga.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $1.517 billion | $1.498 billion | $4.580 billion | $4.079 billion |
| Gross margin | 56.9% | 57.6% | 58.1% | 58.2% |
| Operating income | $199.1 million | $216.3 million | $509.5 million | $499.9 million |
| Operating margin | 13.1% | 14.4% | 11.1% | 12.3% |
| Net income | $173.0 million | $193.3 million | $418.5 million | $400.6 million |
| Diluted EPS | $0.43 | $0.47 | $1.03 | $0.97 |
| Adjusted EBIT (non-GAAP) | $187.5 million | $221.8 million | $570.7 million | $510.4 million |
| Adjusted EBIT margin (non-GAAP) | 12.4% | 14.8% | 12.5% | 12.5% |
Financial position and cash flow
- At quarter-end, cash and cash equivalents were $498.9 million and short-term investments were $100.5 million. Total liquidity, including $837.5 million of unused revolving-credit availability, was approximately $1.4 billion.
- Total debt was $971.8 million, down from $1.027 billion at November 28, 2021. Debt was fixed-rate; long-term notes mature in 2027 and 2031. The company reported covenant compliance and no borrowings under its revolving credit facility.
- Nine-month operating cash flow fell to $210.3 million from $498.9 million. Capital expenditures were $196.8 million, versus $108.4 million; adjusted free cash flow, a non-GAAP measure, was $13.5 million, versus $390.5 million.
- Cash and cash equivalents declined to $498.9 million from $810.3 million at fiscal 2021 year-end. Inventory rose to $1.292 billion from $898.0 million, approximately 43% higher year over year, according to management.
- Nine-month financing cash outflows included $140.7 million of share repurchases and $127.0 million of dividends. Net debt, a non-GAAP measure, was $372.4 million, compared with $124.8 million at fiscal 2021 year-end.
Changes versus the prior comparable periods
- Q3 revenue grew 1.3% reported and 6.7% in constant currency; currency translation reduced revenue growth by approximately $76 million. Nine-month revenue grew 12.3% reported and 16.9% in constant currency.
- Q3 operating income fell 8.0% and net income fell 10.6%, while nine-month operating income rose 1.9% and net income rose 4.5%. Q3 adjusted EBIT declined 15.5%; nine-month adjusted EBIT increased 11.8%.
- Q3 gross margin contracted 70 basis points, primarily from inflation-driven product costs and fewer full-price sales, partly offset by pricing and channel mix. SG&A increased 2.8% in Q3 and 14.9% year to date.
- Regional performance diverged: Q3 revenue rose in the Americas, Asia and Other Brands, but fell 18.5% in Europe reported (down 9.0% constant currency). Asia’s Q3 revenue increased 52.5% constant currency. Other Brands growth included Beyond Yoga revenue of $21.6 million for the quarter.
- Lower interest expense supported year-to-date results; the prior-year period included a $30.3 million debt-extinguishment loss. Current-year year-to-date other income included a $12.5 million German COVID-19 subsidy gain.
Outlook, commentary and risks
- Long-term targets announced in June 2022: annual revenue growth of 6–8% and 15% adjusted EBIT margin by 2027. The company also targets DTC at 55% of annual revenue and a tripling of e-commerce by 2027. These are long-term objectives, not a specific near-term forecast.
- Management said supply-chain disruption was expected to continue into the first half of fiscal 2023. It estimated Q3 unfulfilled orders reduced revenue by $30–$40 million and planned to reduce inventory buys by approximately 25% through Q2 fiscal 2023, using inventory received in 2022.
- Inventory included $361.3 million in transit at quarter-end. Management cited inflation, early receipts intended to mitigate supply risk and prepare for the 2023 U.S. ERP implementation, and distribution-center processing constraints as contributors to elevated inventory.
- Inflation, freight and labor costs, a stronger U.S. dollar, softer consumer demand beginning in July, and potential discounting were cited as pressures on revenue and margins. China COVID-related restrictions and the Russia-Ukraine crisis also affected operations.
- The company recorded $60.4 million of Russia-Ukraine-related charges in Q2, including impairment and other costs; year-to-date SG&A reflected $51.1 million of impairment charges, net of a $7.6 million Q3 lease-termination gain. Management said the conflict’s broader impact remained uncertain.
- The nine-month effective tax rate was 17.9%, versus 3.1% a year earlier, reflecting lower tax benefits and nondeductible Russia-related charges. The filing noted the Inflation Reduction Act’s future corporate minimum tax and stock-repurchase excise tax, with no immediate material effect expected by management.
- Management stated it expected adequate liquidity over the next 12 months and longer term. It had a $750 million share-repurchase authorization and targeted returning 55–65% of adjusted free cash flow to stockholders through dividends and repurchases. The board’s dividend decisions remain discretionary.
- Ordinary-course litigation and customs-duty matters were disclosed; the company said it did not expect them to materially affect its financial condition, results or cash flows. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor verification points
- Confirm the intended period: the filing is for Q3 fiscal 2022, despite the request’s “2021 Q3” metadata.
- Track whether elevated inventory converts to sales without substantial markdowns, and whether planned purchase reductions and distribution-center throughput ease inventory and fulfillment pressures.
- Assess margin and earnings trends against inflation, currency movements, consumer demand, and the company’s non-GAAP adjustments; compare adjusted measures with GAAP results.
- Monitor Europe and Russia-related exposure, including the effects of the conflict, store closures, sanctions, impairments and any further charges.
- Evaluate cash generation and capital returns: operating cash flow and adjusted free cash flow fell sharply year to date while dividends and repurchases continued.
- Assess progress toward the 2027 growth and margin targets, including DTC expansion, e-commerce growth and Beyond Yoga integration.