Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The supplied metadata says 2013 Q2, but this filing is for the quarter ended May 25, 2014. Comparisons are with the quarter and six months ended May 26, 2013. Amounts below are in U.S. dollars.
Business context and reporting period
Levi Strauss designs and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through wholesale, licensed, company-operated retail and online channels. It reports three regions: Americas, Europe and Asia. Company-operated and online stores generated approximately 26% of first-half 2014 revenue, up from 24% a year earlier. The company is privately held, with no public trading in its common stock.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $1,081.8 million | $1,098.9 million | $2,211.8 million | $2,245.6 million |
| Gross profit / margin | $530.3 million / 49.0% | $548.7 million / 49.9% | $1,106.7 million / 50.0% | $1,140.6 million / 50.8% |
| Operating income / margin | $65.1 million / 6.0% | $99.6 million / 9.1% | $158.8 million / 7.2% | $281.1 million / 12.5% |
| Net income attributable to Levi Strauss & Co. | $11.5 million | $48.1 million | $61.4 million | $155.2 million |
- Cash flow: First-half operating cash flow was $72.4 million, down from $254.2 million. Investing cash use was $27.2 million versus $47.9 million; financing cash use was $150.0 million versus $218.5 million. Cash declined to $386.1 million from $489.3 million at fiscal year-end.
- Debt and liquidity: Total debt was $1.441 billion, down from $1.546 billion at November 24, 2013; this included $137.9 million of short-term debt and $1.303 billion of long-term debt. Unused revolver availability was $625.3 million, giving reported total liquidity of approximately $1.0 billion. The company said it was in compliance with debt covenants.
- Other balance-sheet items: Inventories were $687.0 million, up from $603.9 million at fiscal year-end. Current liabilities were $819.2 million and current assets were $1.739 billion at May 25, 2014.
Material changes versus the prior comparable period
- Second-quarter revenue fell 1.6% reported and 1.0% in constant currency; first-half revenue fell 1.5% and 0.6%, respectively. Americas revenue declined, while Europe improved; Asia increased on a constant-currency basis but declined as reported.
- Lower gross margins reflected unfavorable sales mix and product investment costs. Retail’s higher-margin contribution partly offset these pressures.
- Operating income fell 34.6% in Q2 and 43.5% for the first half. Restructuring charges of $19.1 million in Q2 and $77.0 million year to date were a major factor; weaker gross margin and lower revenue also weighed on results.
- Q2 included an $11.2 million loss on early debt extinguishment, including redemption premiums and write-off of debt issuance costs. Other expense also included unfavorable foreign-exchange management results.
- In May, the company redeemed €150 million principal amount of its 7.75% Euro notes due 2018, funded with $100 million of revolver borrowings and cash. The March amendment extended the revolving facility to 2019 and reduced stated borrowing-rate margins.
Outlook, management commentary and risks
- Management cited soft retail conditions, particularly in denim, weak traffic and heavy promotions, and expected these trends to continue in the near term. Competition, changing consumer preferences and foreign-exchange movements were also identified as challenges.
- The global productivity initiative is being implemented in phases over nine to 15 months. Its stated target is $175–$200 million in annualized savings; actions taken in the first half were expected to produce $100–$125 million in annualized savings. The first phase includes approximately 800 non-retail and non-manufacturing position eliminations.
- Further restructuring charges are expected; costs for later phases could not yet be reasonably estimated. Cash payments for charges recognized to date were expected through the first half of 2015. Management warned that execution delays, unanticipated costs, operational disruption or failure to achieve savings could adversely affect results.
- Management anticipated a non-cash pension settlement charge in excess of $25 million in Q4 2014, subject to evaluation. It also stated that it expected adequate liquidity for the next twelve months.
- Legal proceedings were described as ordinary-course matters with no expected material impact. Disclosure controls were considered effective as of May 25, 2014.
Most important facts for investors to verify
- Whether revenue, gross margin and operating performance recover, especially in the Americas and wholesale channels.
- Whether the productivity initiative achieves its savings targets and what additional restructuring charges and cash costs arise.
- Whether inventory levels convert to sales and cash, given the first-half inventory build and lower operating cash flow.
- Debt reduction, revolver usage, refinancing needs and compliance with debt covenants.
- The size and timing of the anticipated pension settlement charge and the effects of currency movements.