Levi Strauss & Co. — Form 10-Q Summary
Period: Quarter ended August 28, 2016, with nine-month results compared with the periods ended August 30, 2015. The request identifies 2015 Q3, but the supplied filing is for 2016 Q3.
Business context
Levi Strauss designs, markets and sells apparel and accessories under the Levi’s, Dockers, Signature and Denizen brands. It operates through the Americas, Europe and Asia and is privately held, with no public trading in its common stock. Company-operated stores and ecommerce generated about 27% of nine-month 2016 revenue.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $1,185.1 million | $1,142.0 million | $3,253.2 million | $3,209.3 million |
| Gross profit / margin | $592.8 million / 50.0% | $573.4 million / 50.2% | $1,669.6 million / 51.3% | $1,610.7 million / 50.2% |
| Operating income / margin | $144.9 million / 12.2% | $114.8 million / 10.1% | $319.5 million / 9.8% | $269.8 million / 8.4% |
| Net income attributable to Levi Strauss & Co. | $98.3 million | $58.2 million | $194.9 million | $108.3 million |
- Q3 revenue rose 3.8% reported and 4.8% in constant currency; nine-month revenue rose 1.4% reported and 3.7% constant currency.
- For the nine months, operating cash flow was $102.8 million, versus $110.3 million. Capital expenditures were $74.8 million; operating cash flow less capital expenditures was approximately $28.0 million.
- Cash and equivalents were $271.6 million at August 28, 2016, down from $318.6 million at November 29, 2015. Total current assets were $1,673.9 million and current liabilities $836.4 million.
- Total debt was $1,106.9 million, compared with $1,152.5 million at fiscal 2015 year-end. Unused revolving-credit availability was $665.0 million; cash plus unused availability was approximately $936.6 million.
Changes versus prior comparable periods
- Q3 operating income increased 26.3%, with operating margin up 2.1 percentage points. SG&A declined and restructuring was a $0.6 million net reversal, compared with a $4.1 million charge in Q3 2015.
- Nine-month net income attributable to the company rose about 80%, aided by improved operating income, lower interest expense, no repeat of the prior-year $14.0 million debt-extinguishment loss, and a lower effective tax rate. The nine-month effective tax rate was 28.2%, versus 35.1%.
- Revenue increased in Europe and Asia in both reported and constant-currency terms. Americas revenue grew in Q3 but declined 1.3% for the nine-month period on a reported basis; U.S. wholesale weakness remained a headwind.
- Inventory increased to $851.2 million from $606.9 million at fiscal year-end, primarily due to timing of receipts and lower-than-anticipated U.S. demand. This contributed to lower operating cash flow.
Outlook, risks and unusual items
- Management said it expected adequate liquidity for the next 12 months. Estimated 2016 capital expenditures were revised to $110–$120 million. No specific revenue or earnings guidance was provided.
- Management cited mixed global consumer spending, weak retail traffic, promotional pressure, competition from online and other apparel sellers, and U.S. dollar strength as ongoing business challenges.
- The company expected most actions under its global productivity initiative to be implemented through the end of 2016 and did not anticipate significant additional initiative costs. Related cash payments were expected to continue through 2017.
- Q3 and nine-month Americas operating income included an approximately $7.0 million benefit from resolving a vendor dispute and reversing prior-period liabilities. Nine-month European operating income included a $6.1 million U.K. distribution-center sale-leaseback gain.
- The company paid a $60.0 million dividend in Q2 2016 and stated it has no established annual dividend policy. It was in compliance with debt covenants at quarter-end.
- Foreign-exchange exposure, consumer demand, wholesale customer health, execution of productivity and outsourcing initiatives, pension obligations, cybersecurity, and legal and regulatory matters were identified as risks. The company reported no material changes to its risk factors or market-risk exposures; it said pending legal proceedings were not expected to have a material impact.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q3 2016, not Q3 2015.
- Track inventory levels and U.S. demand to assess whether the inventory build unwinds and cash generation improves.
- Assess the durability of operating-margin gains, including the impact of currency, U.S. wholesale weakness, retail expansion costs and the $7.0 million vendor-dispute benefit.
- Review debt maturities, refinancing needs and revolver availability, including repayment of the 2016 yen-denominated Eurobonds.
- Monitor whether the company meets its capital-spending outlook and executes its productivity and outsourced-services transition without disruption.