LEVI

Business Context and Reporting Period

Company: Levi Strauss & Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: November 25, 2001
Business Overview: A leading global branded apparel company marketing jeans and casual wear under the Levi's® and Dockers® brands. Operations are organized into three geographic divisions: Americas (67% of sales), Europe (25%), and Asia Pacific (8%). The company is privately held, with nearly all common equity owned by descendants of the founder through a voting trust.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Decline: Total net sales decreased 8.3% year-over-year. The decline was driven by weak economies in the U.S. and Japan, a weaker euro and yen, and volume declines. On a constant currency basis, sales declined approximately 6.5%.
• Regional Performance:
  • Americas: Sales dropped 9.3% due to the weak U.S. retail market.
  • Europe: Sales decreased 3.5% reported, but increased 0.7% on a constant currency basis, indicating stabilization.
  • Asia Pacific: Sales fell 14.3% reported (5.0% constant currency), heavily impacted by economic uncertainty and retail bankruptcies in Japan.
• Profitability: Net income fell $72.4 million to $151.0 million. This was primarily due to lower sales and foreign currency management losses, partially offset by improved gross margins and lower operating expenses.
• Restructuring: The company recorded a net reversal of $4.3 million in restructuring charges in 2001, compared to a $33.1 million reversal in 2000. New charges of $22.4 million were incurred for workforce reductions in the U.S. and Japan.

Guidance, Outlook, and Risks

• 2002 Outlook: Management anticipates difficult retail and economic conditions to continue. They forecast constant currency net sales to decline in the "low single digits" for fiscal 2002. Operating expenses are being planned accordingly.
• Strategic Focus: The company aims to stabilize the business and resume profitable growth through product innovation, operational excellence, and improved retail relationships. A key goal is regaining investment-grade debt ratings.
• Debt and Liquidity: Total debt was reduced by $168 million. The company has a $1.05 billion senior secured credit facility (maturity August 2003) and $497.5 million in senior notes (maturity 2008). Credit ratings were downgraded by Moody's in August 2001 to "Ba3" (credit facility) and "B2" (senior notes) due to declining sales and excess inventory.
• Key Risks:
  • Substantial Debt: High leverage restricts operational flexibility and increases vulnerability to economic downturns.
  • Customer Concentration: The top 10 U.S. customers accounted for 47% of total net sales; J.C. Penney alone accounted for 13%.
  • Supplier Concentration: Cone Mills is the sole supplier of denim for 501® jeans, accounting for 25% of total fabric purchases.
  • Facility Closures: The company is discussing potential closures of manufacturing facilities in the U.S. and Scotland with unions.

Investor Verification Checklist

• Debt Covenants: Verify compliance with leverage and coverage ratios under the credit facility and senior notes, especially given the recent rating downgrade.
• Inventory Levels: Monitor inventory turnover and markdowns, as excess inventory was cited as a reason for the credit rating downgrade.
• Customer Concentration: Assess the financial health of key U.S. retailers (e.g., J.C. Penney, Sears, Mervyn's) given their significant share of sales.
• Restructuring Progress: Track the execution of U.S. and Japan reorganization initiatives and the potential impact of proposed plant closures on future costs.
• Constant Currency Trends: Distinguish between currency translation effects and actual volume/mix changes, particularly in the Europe and Asia Pacific regions.