Levi Strauss & Co. — FY2017 Form 10-K Summary
Period note: The filing is for the 52-week fiscal year ended November 26, 2017, not fiscal 2016. It provides fourth-quarter comparisons for both 2017 and 2016.
Business context and reporting period
Levi Strauss designs and sells apparel under Levi’s, Dockers, Signature and Denizen brands in more than 110 countries. Its three reporting regions are Americas, Europe and Asia. Levi’s generated about 86% of FY2017 net sales. The company is privately held; its common stock is not publicly traded.
Management’s priorities include growing core businesses, expanding brands and geographies, developing omnichannel retail, and improving operating efficiency. Company-operated stores and e-commerce generated approximately 30% of FY2017 net revenues, up from 28% in FY2016.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenues | $4.904 billion | $4.553 billion |
| Gross profit / gross margin | $2.563 billion / 52.3% | $2.329 billion / 51.2% |
| Operating income / operating margin | $467.2 million / 9.5% | $462.2 million / 10.2% |
| Net income attributable to Levi Strauss & Co. | $281.4 million | $291.1 million |
| Operating cash flow | $525.9 million | $306.6 million |
| Capital expenditures | $118.8 million | $103.0 million |
| Cash and cash equivalents | $633.6 million | $375.6 million |
| Working capital | $1.117 billion | $924.4 million |
| Total debt, excluding capital leases | $1.077 billion | $1.045 billion |
FY2017 operating cash flow less capital expenditures was approximately $407 million; this is a simple derived measure, not a filing-defined free-cash-flow metric. The company reported total liquidity of about $1.4 billion, comprising cash and $758.3 million of unused revolving-credit availability. It had no borrowings under that revolver at year-end.
FY2017 fourth-quarter net revenues were $1.466 billion versus $1.300 billion in FY2016; operating income was $149.9 million versus $142.7 million, and net income attributable to Levi Strauss & Co. was $115.8 million versus $96.2 million.
Material changes versus comparable periods
- Full-year revenue increased 7.7% as reported and 7.5% in constant currency. Europe led regional growth, with reported revenue up 20.2% (18.8% constant currency); Americas rose 3.4% and Asia 5.0% as reported.
- Gross margin improved 1.1 percentage points, attributed mainly to company-operated retail and international revenue growth.
- Operating income rose only 1.1%, while operating margin fell 0.7 percentage points. Higher store-related selling costs, advertising and corporate expenses offset revenue and gross-margin growth.
- Net income attributable to the company fell 3.3%, reflecting lower pretax income, a $22.8 million loss on early debt extinguishment and a $45.2 million adverse year-over-year swing in other income/expense, largely related to foreign-exchange derivatives. Lower income-tax expense partly offset these items.
- Operating cash flow increased by $219.4 million year over year. Cash increased by $258.1 million during FY2017.
- The company issued €475 million of 3.375% notes due 2027 and used proceeds and cash on hand to retire its $525 million 6.875% notes due 2022. The refinancing lowered the weighted-average borrowing rate to 5.60% from 6.37%, but generated the $22.8 million extinguishment loss.
Outlook, commentary, risks and unusual items
- FY2018 objective: Management targeted full-year revenue growth over FY2017 on a constant-currency basis and maintenance of strong gross margins. This is an objective, not quantified earnings guidance.
- Tax reform: The U.S. Tax Cuts and Jobs Act was enacted after year-end. The company estimated a preliminary transition charge of $110 million to $160 million, to be reflected in the period ending February 25, 2018; ongoing effects were still under evaluation.
- Unusual adjustment: FY2017 included an out-of-period stock-compensation correction that increased SG&A by approximately $8.3 million and reduced net income by approximately $5.1 million. Management said it was not material to FY2017 or the prior periods affected.
- Market and operating risks: Management described a challenging, promotional retail environment, changing consumer preferences, intense competition, wholesale-channel pressure, foreign-exchange volatility, cotton and other input-cost fluctuations, and uncertainty around trade and tax rules. The company sources about 98% of products from independent contractors and has no material long-term contracts with them.
- Debt, benefits and liquidity: Debt agreements restrict certain dividends, share repurchases, investments and other actions. Pension and postretirement liabilities create material funding needs; estimated FY2018 pension contributions were about $95 million. The company reported compliance with debt covenants at year-end.
- Contingencies: Management did not expect pending ordinary-course legal proceedings to materially affect financial condition, results or cash flows. Certain potential stock-award settlements could require up to approximately $92 million in 2018, subject to liquidity and Board discretion.
- The company paid $70 million in FY2017 dividends and declared a further $90 million dividend after year-end. It has no established annual dividend policy, and debt terms constrain distributions.
Most important facts for investors to verify
- Whether FY2018 constant-currency revenue growth and gross-margin objectives were achieved, and how store expansion affected profitability.
- How much of FY2017 growth was organic versus currency, channel mix and retail-network expansion, especially the strong Europe performance.
- The realized tax-reform transition charge and subsequent effective tax rate, cash-tax burden and treatment of foreign earnings.
- Debt levels, refinancing benefits, future maturities, covenant headroom and the company’s capacity to sustain dividends and fund pension obligations.
- Whether the stock-compensation correction, foreign-exchange volatility or potential award settlements create further material charges or cash requirements.