Business context and reporting period
Levi Strauss & Co. designs, markets and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through wholesale, licensed and retail channels. This Form 10-Q covers the fiscal second quarter and six months ended May 26, 2013; each quarter comprises 13 weeks. The request metadata says “2012 Q2,” but the filing itself reports fiscal 2013 Q2. The company is privately held, with no public trading in its common stock.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $1,098.9 | $1,047.2 | $2,245.6 | $2,212.1 |
| Gross profit / margin | $548.7 / 49.9% | $480.7 / 45.9% | $1,140.6 / 50.8% | $1,029.5 / 46.5% |
| Operating income / margin | $99.6 / 9.1% | $45.6 / 4.4% | $281.1 / 12.5% | $155.8 / 7.0% |
| Net income attributable to Levi Strauss & Co. | $48.1 | $13.2 | $155.2 | $62.5 |
| Operating cash flow | Not separately presented | Not separately presented | $254.2 | $327.6 |
Q2 revenue grew 4.9% reported and 5.9% in constant currency; six-month revenue increased 1.5% reported and 1.8% in constant currency. Improved gross margin, primarily from lower cotton costs, drove much of the operating-income and profit growth. Six-month effective tax rate was 29.7%, versus 29.3%.
Regional performance
- Americas: Q2 revenue rose 10.0% and six-month revenue 4.8%; retail, online and outlet sales and selected wholesale accounts contributed.
- Europe: Q2 revenue was nearly flat as reported, up 0.9% constant currency; six-month revenue rose 1.2% reported. Retail growth was partly offset by weaker traditional wholesale sales, particularly in Southern Europe.
- Asia Pacific: Revenue declined 4.4% in Q2 and 8.0% for six months as reported, reflecting difficult market conditions and lower Levi’s sales.
Financial position, cash flow and debt
At May 26, 2013, cash and equivalents were $389.8 million, total debt was $1.542 billion, and stockholders’ equity was $13.9 million, compared with a $101.5 million deficit at November 25, 2012. Current assets were $1.518 billion and current liabilities $685.9 million. Six-month operating cash flow declined to $254.2 million from $327.6 million; management cited lower cash collections associated with the lower opening receivables balance, and increased inventory cash use, partly offset by lower pension funding and a California tax refund. Capital expenditures were $41.9 million; investing cash use was $47.9 million.
The company issued $140 million of 6.875% senior notes due 2022 and used the proceeds and cash on hand to repay its 2014 term loan in full. Long-term debt fell to $1.488 billion from $1.669 billion at fiscal year-end. Short-term borrowings were $54.4 million. Revolver borrowings were zero; unused availability was $558.9 million, and cash plus unused availability totaled $948.7 million. The company reported compliance with debt covenants. Most debt was fixed-rate; the weighted-average borrowing rate was 7.29% for the six-month period.
Outlook, commentary and risks
- Management expected full-year 2013 gross margin of approximately 50%, more than 200 basis points above 2012, but said the benefit from lower cotton costs was expected to abate in the second half.
- Management said liquidity was adequate for the next 12 months and projected 2013 capital expenditures of approximately $90 million. No revenue or earnings guidance was provided in the filing.
- Management cited continuing economic and retail uncertainty, especially in Asia Pacific and an increasing number of European markets. Risks also include apparel demand and fashion changes, customer and supplier concentration, input costs, foreign exchange, competition, pension funding, tax matters and litigation.
- On July 8, 2013, after quarter-end, the company settled a U.S. federal tax audit for fiscal 2003–2008. It expected to record $23.4 million of previously unrecognized tax benefits, of which approximately $11 million was expected to reduce Q3 2013 income tax expense.
- The additional notes refinancing resulted in a $0.7 million early-extinguishment loss. The company paid a $25.1 million dividend in Q1 and stated it has no established annual dividend policy. It did not believe pending ordinary-course litigation would materially affect its financial condition, results or cash flows.
Most important facts for investors to verify
- Confirm the fiscal period: the filing is for Q2 2013, notwithstanding the request metadata’s Q2 2012 label.
- Assess whether the gross-margin improvement and approximately 50% full-year outlook can hold as cotton-cost benefits fade.
- Track regional sales, particularly continued weakness in Asia Pacific and European wholesale channels, alongside growth in company-operated retail.
- Review cash conversion, inventory levels and the company’s ability to maintain liquidity while servicing substantial debt and pension obligations.
- Verify the timing and realized tax benefit from the post-quarter federal audit settlement, including the expected Q3 tax-expense reduction.
- Consider the company’s private ownership and lack of public trading when assessing equity liquidity and valuation.