Levi Strauss & Co. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended November 29, 2015. The filing is an annual report, not a 2014 Q4 filing; it includes quarterly results for both 2015 and 2014. FY2015 had 52 weeks, while FY2014 had 53 weeks, including a 14-week fourth quarter. Levi Strauss is privately held, with no publicly traded common stock.
Business context and financial performance
The company designs, markets and sells apparel under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands in more than 110 countries. It reports three geographic segments: Americas, Europe and Asia. Levi’s represented about 85% of FY2015 net sales; company-operated stores and ecommerce generated about 26% of net revenue.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $4.494 billion | $4.754 billion |
| Gross profit / margin | $2.269 billion / 50.5% | $2.348 billion / 49.4% |
| Operating income / margin | $431.0 million / 9.6% | $313.9 million / 6.6% |
| Net income attributable to Levi Strauss & Co. | $209.4 million | $106.1 million |
| Cash from operating activities | $218.3 million | $232.9 million |
| Capital expenditures | $102.3 million | $73.4 million |
| Cash and cash equivalents at year-end | $318.6 million | $298.3 million |
| Total debt, excluding capital leases | $1.153 billion | $1.210 billion |
| Working capital | $682.0 million | $603.2 million |
Reported revenue declined 5.5%, but increased 1.2% on a constant-currency basis. Currency translation reduced revenue across regions and reduced gross profit by approximately $166 million. Gross margin improved 1.1 percentage points, primarily from lower negotiated product costs, supply-chain efficiencies and price increases, partly offset by currency effects and product investment costs. Operating income rose 37%, reflecting improved gross margin and substantially lower restructuring charges. Net income also benefited from lower interest expense.
FY2015 regional revenue was $2.726 billion in the Americas, $1.016 billion in Europe and $751.6 million in Asia. On a constant-currency basis, revenue declined 2.7% in the Americas and grew 7.8% in Europe and 7.7% in Asia. Americas weakness included the prior-year extra sales week and the exit from Dockers women’s products in the United States; international growth reflected retail expansion.
Fourth-quarter results and material comparisons
In Q4 FY2015, revenue was $1.285 billion versus $1.388 billion in Q4 FY2014; gross profit was $658.3 million versus $679.6 million; operating income was $161.2 million versus $49.9 million; and net income attributable to Levi Strauss & Co. was $101.2 million versus a $6.0 million loss. The year-over-year quarterly comparison is affected by the extra week in Q4 FY2014. The filing does not provide a directly adjusted comparable-quarter growth rate.
FY2014 included $128.4 million of net restructuring charges, compared with $14.1 million in FY2015. FY2015 also included a $14.0 million loss on early extinguishment of debt. Interest expense declined to $81.2 million from $117.6 million as debt balances and borrowing rates fell; the weighted-average rate on average borrowings was 6.72% versus 7.58%.
Cash, debt and liquidity
Operating cash flow fell to $218.3 million, mainly due to higher vendor and pension payments, partly offset by higher customer collections, lower inventory-related cash use and lower interest payments. The company ended the year with $318.6 million of cash and $658.6 million of unused revolving-credit availability, for reported total liquidity of $977.2 million. It had $99.0 million drawn under its asset-based revolving facility and $16.0 million of other short-term borrowings. Management said liquidity should be adequate for the next 12 months.
Debt declined from $1.210 billion to $1.153 billion. During 2015, the company issued $500 million of 5.00% senior notes due 2025 and redeemed its 7.625% notes due 2020. Approximately $1.019 billion of debt principal was scheduled for payment after 2020. The company reported compliance with debt covenants at year-end. Debt agreements restrict, among other things, additional borrowing, dividends and share repurchases.
Material longer-term obligations include $624.2 million of operating lease payments, $256 million of projected pension obligations and $114 million of projected postretirement obligations in the contractual-obligations schedule. The balance sheet reported pension liabilities of $358.4 million and postretirement medical liabilities of $105.2 million. A $60 million dividend was declared after year-end; dividends are discretionary and subject to debt restrictions.
Outlook, management commentary and risks
- For FY2016, management’s stated objective was constant-currency revenue growth and gross margin of approximately 51%.
- The global productivity initiative was expected to be substantially implemented by the end of 2016. Management estimated total net annualized benefits of $175–$200 million; actions taken to date were expected to deliver $125–$150 million. Additional restructuring costs remained unestimable in some areas, and implementation delays had occurred in outsourcing.
- Management cited a challenging, promotional retail environment, changing consumer spending, competition from specialty and fast-fashion retailers and ecommerce, and continued strength of the U.S. dollar.
- Key risks include foreign exchange exposure; cotton and other input-cost volatility; reliance on contract manufacturers and wholesale customers; execution of retail, ecommerce, outsourcing and productivity initiatives; pension funding requirements; leverage and restrictive debt covenants; cybersecurity and IT disruption; and fashion, inventory and promotional risks.
- Other notable items: a $7.5 million gain from selling the Turkey finishing and distribution facility; a $26.5 million estimated deferred tax liability if $100 million of indefinitely reinvested foreign earnings were repatriated; and $32.7 million of gross unrecognized tax benefits. Management did not expect pending litigation to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- How FY2016 reported revenue and gross margin performed against the constant-currency growth and approximately 51% margin objectives.
- Whether productivity savings were realized as estimated, and whether further restructuring charges or outsourcing disruptions occurred.
- Whether operating cash flow, capital spending, pension contributions and dividends remained supportable alongside the debt maturity profile.
- The impact of currency movements, promotional activity and regional demand on margins and inventory.
- How the 52-week FY2015 compares with FY2014’s 53-week year, particularly for quarterly trends.
- Because the company is privately held, how its shareholder restrictions, valuation process and debt covenants affect share liquidity and potential distributions.