Levi Strauss & Co. — FY2022 Form 10-K
Period clarification: The request specifies “2021 Q4,” but the supplied filing is the Form 10-K for the fiscal year ended November 27, 2022. Fiscal 2022 and fiscal 2021 were both 52-week years. The filing also provides fourth-quarter FY2022 comparisons.
Business context
Levi Strauss designs, markets and sells apparel and accessories globally, principally under the Levi’s brand, alongside Dockers, Signature by Levi Strauss & Co., Denizen and Beyond Yoga. It reports Americas, Europe and Asia as segments; Dockers and Beyond Yoga are included in Other Brands. Products are sold through wholesale and direct-to-consumer (DTC) channels. FY2022 revenue mix was 62% wholesale and 38% DTC; international markets contributed 53% of net revenues. Beyond Yoga, acquired in FY2021’s fourth quarter, contributed a full year of revenue in FY2022.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenues | $6,168.6 million | $5,763.9 million |
| Gross profit / gross margin | $3,548.8 million / 57.5% | $3,346.7 million / 58.1% |
| Operating income / margin | $646.5 million / 10.5% | $686.2 million / 11.9% |
| Net income | $569.1 million | $553.5 million |
| Diluted EPS | $1.41 | $1.35 |
| Adjusted EBIT / margin (non-GAAP) | $713.0 million / 11.6% | $712.9 million / 12.4% |
| Adjusted net income / diluted EPS (non-GAAP) | $603.9 million / $1.50 | $600.9 million / $1.47 |
| Cash provided by operating activities | $228.1 million | $737.3 million |
| Adjusted free cash flow (non-GAAP) | $(39.0) million | $570.4 million |
At year-end, cash and cash equivalents were $429.6 million and short-term investments were $70.6 million. Total debt was $996.2 million; net debt, a non-GAAP measure, was $496.0 million. The company reported $985.6 million of unused revolving-credit availability and total liquidity of approximately $1.5 billion. Inventory was $1,416.8 million, up from $898.0 million a year earlier.
Fourth-quarter FY2022 revenue fell 5.7% reported but 0.4% on a constant-currency basis. Operating income was $137.0 million versus $186.3 million, net income was $150.6 million versus $153.0 million, and diluted EPS was $0.38 versus $0.37. Adjusted EBIT was $142.3 million versus $202.5 million; adjusted diluted EPS was $0.34 versus $0.41.
Material changes versus FY2021
- FY2022 revenue increased 7.0% reported and 11.9% in constant currency; currency translation reduced reported revenue by approximately $252 million.
- Gross margin declined 60 basis points. Management cited currency effects, higher product costs, fewer full-price sales and the prior-year benefit from COVID-related inventory-cost reductions; price increases and favorable product mix partly offset these pressures.
- Operating income declined 5.8%, reflecting lower gross margin and higher SG&A, including Russia-Ukraine-related charges. Adjusted EBIT was essentially flat, while adjusted EBIT margin fell 80 basis points reported.
- Net income rose 2.8%, supported by lower interest expense and a COVID-19 subsidy gain, partly offset by lower operating income and higher income tax expense. The FY2021 comparison included a $36.5 million debt-extinguishment loss.
- Operating cash flow fell to $228.1 million, mainly because of increased inventory and SG&A spending. Capital expenditures rose to $267.1 million from $166.9 million; the company reported negative adjusted free cash flow.
- Year-end inventory rose 58% year over year, reflecting early receipts, goods in transit, ERP preparation and higher product costs.
Outlook, management commentary and risks
- Long-term targets: Management aims for annual net revenue growth of approximately 6–8%, revenue of approximately $9–10 billion and Adjusted EBIT margin of approximately 15%; it also targets long-term return on invested capital above 23%. These goals assume no significant worsening in inflation, supply-chain disruption, currency impacts or COVID-19 effects.
- FY2023 planning: The company expects approximately $280 million in capital expenditures, primarily for stores, distribution capacity and technology. It plans to reduce inventory buys by approximately 25% through FY2023’s second quarter and expects supply-chain disruption to continue into the first half of FY2023.
- Shipment timing: To mitigate risks related to the planned April 2023 U.S. ERP implementation, the company expects to move approximately $80–$100 million of wholesale revenue from FY2023’s second quarter into its first quarter. Management expects this shift to weigh on first-quarter gross margin and benefit second-quarter gross margin.
- Inflation, demand and logistics: Higher labor, product and freight costs, a stronger U.S. dollar and softer consumer demand pressured FY2022 results. Distribution-center constraints and logistics disruption prevented fulfillment of an estimated $35–$45 million of U.S. wholesale orders in FY2022’s fourth quarter.
- Russia-Ukraine crisis: The company suspended most commercial activity in Russia and Ukraine. FY2022 included $60.4 million of related charges in the second quarter, including impairment and other charges; a $15.8 million gain from early lease terminations was recognized in the second half. The company estimated an approximately $57 million constant-currency revenue impact in Europe for FY2022.
- Other risks: Key exposures include economic weakness and discretionary-spending declines; foreign exchange, raw-material and tariff volatility; wholesale-customer concentration; supply-chain and inventory risks; cybersecurity, privacy and ERP implementation; competition; pension and postretirement obligations; and debt covenants. The top ten wholesale customers generated 31% of FY2022 revenue, although no single customer represented 10% or more.
- Capital returns and financing: FY2022 cash dividends paid were $174.3 million and share repurchases were $175.7 million. A $750 million repurchase authorization was approved in May 2022. After year-end, the company borrowed $150 million under its revolving facility; it declared a $0.12-per-share dividend in January 2023.
- Unusual accounting item: FY2022 included a $19.9 million out-of-period gain on marketable securities, increasing reported EPS by $0.04; management concluded the adjustment was not material to the current or prior periods. The auditor identified Beyond Yoga goodwill and indefinite-lived intangible-asset impairment testing as a critical audit matter; no impairment was recorded for Beyond Yoga in FY2022.
Important facts for investors to verify
- Reconcile reported and constant-currency growth, and assess whether pricing and product mix can offset currency and cost pressures.
- Track inventory levels, markdowns, operating cash flow and free cash flow as supply-chain constraints and early receipts unwind.
- Monitor the ERP implementation and the expected $80–$100 million quarterly revenue shift, including its effects on margins and order fulfillment.
- Review debt maturities, facility availability, covenant restrictions and the effects of dividends and repurchases on liquidity.
- Assess the assumptions supporting Beyond Yoga’s valuation and the company’s long-term growth and margin targets.
- Note that the auditor issued an unqualified opinion and management and the auditor reported effective internal control over financial reporting as of November 27, 2022.