LEVI

Business Context and Reporting Period

Company: Levi Strauss & Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: November 24, 2002
Business Overview: A leading global branded apparel company selling jeans, casual pants, and accessories under the Levi’s and Dockers brands. The company operates in three geographic divisions: Americas (65% of sales), Europe (26%), and Asia Pacific (9%).
Ownership: Privately held; nearly all common equity is owned by descendants of the founder via a voting trust.

Key Financial Metrics

Note: EBITDA is defined as EBITDA before net restructuring charges and related expenses.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 2.9% due to weak global retail and economic conditions. On a constant currency basis, sales declined 3.2%. Americas sales fell 5.7%, while Europe (2.5%) and Asia Pacific (4.5%) saw nominal growth.
• Profitability Compression: Operating income dropped significantly, primarily driven by a net restructuring charge of $124.6 million and lower gross profit. Gross margin declined to 40.7% due to $49.5 million in restructuring-related expenses (plant closures in U.S. and Scotland), retailer promotions, and price reductions.
• Restructuring Activity: The company closed six U.S. manufacturing plants and two in Scotland during 2002. Total restructuring charges were $151.7 million, partially offset by $27.1 million in reversals of prior reserves.
• Debt Reduction: Total debt decreased by over $800 million since the end of 1999. Interest expense fell 19.2% to $186.5 million due to lower average debt levels and interest rates.

Guidance, Outlook, and Risks

Management Commentary & Strategy

• Turnaround Status: Management believes the company has stabilized and is positioning for profitable growth. Positive quarterly net sales growth on a constant currency basis was achieved in the second half of 2002.
• New Brand Launch: In October 2002, the company announced the Levi Strauss Signature brand for value-conscious consumers in the mass channel, launching at Wal-Mart in July 2003.
• 2003 Outlook:
  • Sales: Anticipated constant currency net sales increase of 2% to 5%.
  • Gross Margin: Expected to range between 40% and 42%.
  • Operating Expenses: Marketing, general, and administrative expenses expected to be 32% to 34% of net sales.

Risks and Contingencies

• Mass Channel Execution: Significant risk associated with logistics, production, and delivery for the new Wal-Mart partnership; potential adverse reaction from existing retailers.
• Debt and Liquidity: High leverage limits flexibility. The company must refinance $350 million in notes due November 2003 and its 2001 credit facility maturing in August 2003. (Note: Subsequent events in Jan 2003 show new financing secured).
• Supplier Concentration: Cone Mills is the sole supplier of denim for 501 jeans until March 2003. The U.S. textile industry faces financial difficulties.
• Legal Proceedings: Named as a defendant in a class action suit regarding working conditions in Saipan; company intends to vigorously defend.
• Tax Settlement: Reached a settlement with the IRS for 1990-1995 returns; expects a net cash payment of approximately $90 million in Q2 2003.

Investor Verification Checklist

• Refinancing Success: Verify the successful closing of the new $750 million credit facility and the $575 million senior notes offering (completed Jan 2003) to ensure debt maturity walls are cleared.
• Mass Channel Impact: Monitor Q3/Q4 2003 results for the launch of the Levi Strauss Signature brand to assess cannibalization of core brands and execution risks.
• Restructuring Costs: Track the utilization of the remaining $65.6 million restructuring reserve and the impact of post-retirement medical benefits shifting to operating expenses in 2003.
• Supplier Stability: Assess the financial health of Cone Mills and the transition of 501 denim supply post-March 2003.
• Tax Payment: Confirm the $90 million net cash outflow to the IRS in Q2 2003 and its impact on liquidity.