Levi Strauss & Co. — Form 10-Q Summary
Period clarification: Although the request metadata says 2019 Q2, this filing reports the quarter ended May 24, 2020, and compares it with the quarter ended May 26, 2019. The six-month comparison is for the periods ended on those same dates.
Business context and reporting period
Levi Strauss designs, markets and sells apparel under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. It reports three regions: Americas, Europe and Asia. COVID-19 disruptions materially affected the quarter: substantially all company-operated stores were closed for varying periods, and wholesale customers also faced closures and disruption. E-commerce remained open and began recovering during the quarter. By the filing date, approximately 90% of company-operated stores had reopened, generally with reduced hours or occupancy.
Financial performance
| Metric | Three months ended May 24, 2020 | Prior-year quarter | Six months ended May 24, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $497.5 million | $1,312.9 million | $2,003.7 million | $2,747.4 million |
| Gross profit / margin | $169.7 million / 34.1% | $700.4 million / 53.3% | $1,009.0 million / 50.4% | $1,483.2 million / 54.0% |
| Operating income (loss) / margin | $(448.2) million / (90.1)% | $62.9 million / 4.8% | $(269.5) million / (13.5)% | $263.8 million / 9.6% |
| Net income (loss) attributable to Levi Strauss | $(363.5) million | $28.2 million | $(210.9) million | $174.8 million |
| Diluted earnings (loss) per share | $(0.91) | $0.07 | $(0.53) | $0.44 |
Quarterly revenue fell 62.1% reported (60.9% constant currency); six-month revenue fell 27.1% reported (25.7% constant currency). Revenue declined in every region. Quarterly decreases were 59.2% in the Americas, 67.6% in Europe and 61.3% in Asia, reported. Management attributed the declines principally to COVID-related store closures and reduced demand.
Quarterly results included $242.0 million of identified pandemic-related incremental charges: $67.4 million restructuring, $86.6 million inventory-related costs and $88.0 million of other charges, mainly receivable and asset impairments. The $88.0 million was recorded in SG&A; inventory-related costs reduced gross profit. Adjusted EBIT, a non-GAAP measure, was a loss of $205.9 million for the quarter and $16.6 million for the six months, versus income of $81.6 million and $287.9 million, respectively, in the comparable 2019 periods.
Cash flow: For the six months, operating cash flow was $41.4 million, versus $161.8 million a year earlier; investing cash outflow was $107.6 million, versus $143.2 million; and financing cash inflow was $589.6 million, versus $131.0 million. Capital expenditures were $75.2 million. Cash and cash equivalents at May 24 were $1.448 billion, compared with $934.2 million at November 24, 2019.
Liquidity and debt: The company reported approximately $2.0 billion of liquidity at May 24, including $1.448 billion cash, $76.1 million short-term investments and $447.7 million unused revolving-credit availability. Total debt was $1.807 billion, up from $1.014 billion at November 24, 2019; reported net debt was $282.6 million. The non-GAAP leverage ratio was 4.1, compared with 1.4 at May 26, 2019. Debt included $1.5 billion of fixed-rate long-term notes and a $300 million revolving-facility draw. The company repaid that $300 million draw on June 30, 2020, after quarter-end. Management said it believed liquidity was adequate for the next 12 months and reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- COVID-19 drove the sharp revenue contraction, operating losses and lower cash generation. Management expected the pandemic and its effects on global economic conditions to continue materially adversely affecting revenue, earnings and cash flows for at least the balance of 2020; duration and severity remained uncertain. The filing provides no specific revenue or earnings guidance.
- An April 2020 restructuring targets elimination of approximately 15% of global non-retail and non-manufacturing positions and approximately $100 million in annualized savings. The company recorded $67.4 million in restructuring charges and expected additional charges; savings and implementation timing were not assured.
- Management took liquidity-preservation actions, including reducing discretionary spending and capital expenditures, payroll reductions and furloughs, seeking extended vendor terms, and suspending share repurchases. The company also decided not to declare a third-quarter fiscal 2020 dividend and planned to reassess dividends in the fourth quarter.
- COVID-related estimates included $49.9 million of incremental inventory reserves, $35.9 million of adverse fabric purchase commitments, $27.6 million of customer-receivable charges, and $60.4 million of non-cash asset impairment charges. Management warned that excess inventory, markdowns, further impairments, customer failures, supply-chain disruption and renewed store closures could add pressure.
- Other material risks include wholesale customer concentration and credit exposure, foreign-exchange volatility, competition and promotional pricing, sourcing and trade/tariff changes, and debt service and covenant restrictions. Top ten wholesale customers represented 32% of quarterly revenue, versus 22% in the prior-year quarter; no single customer accounted for 10% or more.
- Ordinary-course litigation reserves were described as immaterial, and the company did not expect pending claims to materially affect its financial condition, results or cash flows. Customs-duty assessments remained subject to uncertainty; the company was defending its position.
- The company completed its acquisition of the distributor’s operating assets in Chile, Peru and Bolivia for $52.2 million in cash in December 2019. It also adopted lease accounting in fiscal 2020, recognizing approximately $1.0 billion of operating lease assets and liabilities; the adoption did not materially affect the income statement or cash flows.
Most important facts for investors to verify
- Whether store reopenings and e-commerce recovery translate into sustained revenue and cash-flow improvement, and whether further restrictions or closures occur.
- Inventory levels, markdowns and subsequent-period gross margins, including the realization of the $49.9 million inventory reserve and $35.9 million fabric-commitment charge.
- Actual restructuring charges, timing and delivery of the approximately $100 million annualized savings target.
- Liquidity and debt developments after quarter-end, including the June 30 repayment of the revolving-credit draw, borrowing availability, covenant compliance and leverage.
- Wholesale customer credit quality, receivable collections and potential bankruptcies, as well as the resolution of customs-duty assessments.
- Board decisions on future dividends and share repurchases; the filing states that no third-quarter fiscal 2020 dividend was declared and the buyback program was suspended.