LEVI

Business Context and Reporting Period

Company: Levi Strauss & Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 30, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: A privately held global apparel company marketing jeans, casual, and dress pants under the Levi's, Dockers, and Signature brands. Operations are divided into three regions: Americas, Europe, and Asia Pacific.

Key Financial Metrics

All figures in millions unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 6.3% in the quarter and 7.5% for the nine-month period compared to the prior year. On a constant-currency basis, the decline was 1.9% and 1.3%, respectively.
  • Americas: Decreased due to weak economic conditions and lower demand for Dockers and Signature brands.
  • Europe: Decreased significantly (13.0% reported) due to wholesale channel weakness and currency headwinds.
  • Asia Pacific: Increased 1.6% reported in the quarter, driven by store expansion and promotions, offset by declines in Japan.
• Profitability Compression: Operating income fell 31.6% in the quarter and 31.8% for the nine months. Operating margins contracted from 13.0% to 9.5% (quarter) and 12.2% to 9.0% (nine months).
  • Declines were driven by lower revenues, increased investment in retail expansion, and unfavorable currency impacts.
  • Corporate expenses increased 31.1% year-over-year for the nine months, largely due to higher pension expenses.
• Foreign Exchange Impact: The weakening U.S. Dollar against the Euro, Swedish Krona, and Australian Dollar resulted in significant losses on foreign exchange derivatives ($58.6 million loss for the nine months) and reduced reported revenues and gross profit.
• Acquisitions: Goodwill increased by $35.9 million due to acquisitions in Europe (Russian Federation venture and former licensee) and the Americas (73 outlet stores from Anchor Blue).

Guidance, Outlook, and Risks

• Liquidity: The company maintains a net liquidity position of $386.1 million (cash plus unused credit facility availability). Management believes liquidity is adequate for the next 12 months.
• Outlook Challenges: Management cites continuing macroeconomic downturns driving weak consumer spending and wholesale customers managing leaner inventories as key challenges for the remainder of the year.
• Restructuring: The company is closing a manufacturing facility in Hungary, eliminating approximately 549 jobs. Additional charges of ~$1.6 million are expected.
• Risk Factors:
  • Dependence on wholesale customers facing their own economic pressures.
  • Foreign currency exchange rate fluctuations.
  • Ability to revitalize the Dockers and Signature brands in the U.S.
  • Potential changes in U.S. tax laws regarding foreign tax credits and repatriation.
• Dividends: A cash dividend of $20 million was paid in the second quarter of 2009. Future dividends are subject to Board determination and debt covenant compliance.

Investor Verification Checklist

• Constant Currency Performance: Verify the distinction between reported declines and constant-currency declines to assess organic growth trends versus currency translation effects.
• Debt Covenants: Review the fixed charge coverage ratio requirements, particularly as unused availability under the revolving credit facility fluctuates.
• Pension Liability: Monitor the impact of the 2008 decline in pension plan asset fair values on future periodic benefit costs and cash contributions.
• Acquisition Integration: Assess the financial performance of the newly acquired outlet stores (Americas) and the Russian Federation venture (Europe) in subsequent quarters.
• Inventory Levels: Track inventory turnover and markdown activity, as the company noted higher inventory markdowns impacted gross margins in the quarter.