Levi Strauss & Co. — Form 10-Q Summary
Business context and period: The company designs and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through wholesale, franchise, company-operated retail and online channels. This unaudited report covers the 13 weeks ended February 26, 2012, the first quarter of fiscal 2012, compared with the 13 weeks ended February 27, 2011. Levi Strauss is privately held, with no public trading in its common stock.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenues | $1,165.0 million | $1,120.7 million | +4.0% reported; +5.4% constant currency |
| Gross profit / margin | $548.8 million / 47.1% | $558.0 million / 49.8% | Profit -1.6%; margin -2.7 percentage points |
| Operating income / margin | $110.2 million / 9.5% | $98.9 million / 8.8% | Income +11.5%; margin +0.7 percentage points |
| Net income attributable to Levi Strauss | $49.2 million | $40.7 million | +21.0% |
| Operating cash flow | $104.8 million | $46.0 million | Increased, primarily on higher customer collections |
| Capital expenditures | $17.3 million | $40.5 million | Lower, mainly reflecting prior-year ERP spending |
Interest expense increased to $38.6 million from $34.9 million. The effective tax rate was 32.3%, compared with 32.5%. Cash and cash equivalents were $238.3 million at quarter-end, versus $249.1 million a year earlier.
Material changes and operating performance
- Americas revenue rose 9.3% reported (10.1% constant currency), supported by Levi’s price increases, premium product mix and growth in Signature and Denizen; some wholesale volume declined.
- Europe revenue fell 7.1% reported (3.2% constant currency), reflecting weaker franchise and traditional wholesale sales, particularly in southern Europe. Regional operating income declined 27.0%.
- Asia Pacific revenue rose 5.2% reported, with growth from pricing, premium mix and dedicated retail expansion, partly offset by volume declines.
- Higher cotton costs pushed cost of goods sold up 9.5%, faster than revenue, and reduced gross margin; price increases did not fully offset the cost pressure. Lower advertising and promotion and administration expenses more than offset the gross-profit decline, lifting consolidated operating income.
- Company-operated and online stores generated about 21% of revenue, up from 18% in the prior-year quarter. Levi’s products accounted for about 84% of sales.
Liquidity, debt and balance sheet
- Total debt was approximately $1.93 billion, down from $1.97 billion at November 27, 2011. About 75% was fixed-rate and 25% variable-rate; the weighted-average interest rate on average borrowings was 6.99%, versus 6.84% a year earlier.
- Cash plus unused revolving-credit availability totaled $792.9 million: $238.3 million cash and $554.6 million unused availability. The facility’s reported total availability was $636.9 million before $82.3 million of letters of credit and other allocated usage.
- Current assets were $1.68 billion and current liabilities $773.1 million. Stockholders’ deficit was $96.5 million. Pension liabilities were $395.7 million.
- Operating cash flow was partly offset by $20.7 million of investing outflows and $53.5 million of financing outflows. Financing activity included net repayments under the revolving facility; the prior-year quarter included a $20.0 million dividend.
- Management stated it expected adequate liquidity for the next 12 months, was in compliance with debt covenants, and anticipated no material change in estimated 2012 cash requirements from its 2011 Form 10-K.
Outlook, risks and other notable items
- Management said cotton-cost pressure was expected to continue through the first half of 2012. No numerical revenue, earnings or margin guidance is provided in the filing.
- Management cited continuing economic challenges, including increasingly adverse effects on traditional growth markets in Asia Pacific. Forward-looking risks include consumer demand and fashion shifts, competition, cotton and sourcing costs, foreign exchange, wholesale-channel dependence, pension funding, tax matters, litigation and ERP-system implementation.
- Foreign-exchange management losses were $15.3 million, partly offset by $15.4 million of foreign-currency transaction gains; other income, net, was $1.2 million. The company had forward contracts to buy $763.3 million and sell $425.1 million against various currencies, expiring through November 2012.
- Gross unrecognized tax benefits were $145.7 million, of which $90.2 million would affect the effective tax rate if recognized. The company reported no material litigation developments and did not expect pending ordinary-course cases to materially affect its financial condition, results or cash flows.
- On February 16, 2012, the company announced changes to regional commercial leadership. Disclosure controls were concluded to be effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether cotton costs, pricing actions and sales volumes developed as expected after the first half of 2012, and whether gross margin recovered.
- Whether Europe’s revenue and operating-income declines persisted, and whether growth in the Americas and Asia Pacific continued.
- Debt maturities, variable-rate exposure, revolving-credit availability and covenant compliance, alongside the company’s substantial pension liability.
- The effects of foreign-exchange exposures and the unrecognized tax-benefit balance.
- The filing’s cover page marks “No” for having filed all required reports during the preceding 12 months; investors may wish to confirm the reporting-history context.