Levi Strauss & Co. — Form 10-Q Summary
Period: Fiscal first quarter ended February 28, 2021 (13 weeks), compared with the quarter ended February 23, 2020. The request metadata labels the period “2020 Q1,” but the filing itself reports fiscal 2021 Q1. Unaudited consolidated statements are prepared under U.S. GAAP.
Financial results
| Metric | Q1 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenues | $1,305.6 million | $1,506.1 million | Down 13.3% reported; down 15.6% constant currency |
| Gross profit / margin | $760.0 million / 58.2% | $839.3 million / 55.7% | Profit down 9.4%; margin up 2.5 percentage points |
| Operating income / margin | $177.1 million / 13.6% | $178.8 million / 11.9% | Down 1.0%; margin improved |
| Net income | $142.5 million | $152.7 million | Down 6.7% |
| Diluted EPS | $0.35 | $0.37 | Down 5.4% |
| Operating cash flow | $69.5 million | $197.9 million | Down $128.4 million |
| Capital expenditures | $37.0 million | $44.4 million | Down $7.4 million |
- Margins and expenses: Cost of goods sold fell 18.2%, faster than revenue, lifting gross margin. Management attributed the margin gain mainly to wholesale product mix, price increases, fewer promotions and a $7.2 million reduction in COVID-related inventory charges; the lower DTC share partly offset these factors. SG&A fell 11.7% to $582.9 million, largely reflecting cost reductions, but rose as a share of revenue to 44.6% from 43.9%.
- Regional revenue: Americas revenue was $641.3 million, down 14.0% reported; Europe was $429.0 million, down 16.4%; Asia was $235.3 million, down 5.0%. Europe’s constant-currency decline was 22.3%. Revenue was pressured by pandemic-related store and wholesale closures and the prior-year quarter’s Black Friday week.
- Channel mix: Wholesale generated $838.8 million, versus $876.3 million; DTC generated $466.8 million, versus $629.8 million. DTC represented 36% of revenue, down from 42%; company-operated e-commerce revenue represented 10% of total revenue, up from 7%. Management said global digital business, including wholesale customers’ online sales, was about 26% of revenue versus 16%.
- Interest and taxes: Interest expense rose to $23.3 million from $16.7 million, primarily due to new debt issuance. The effective tax rate was 7.9%, compared with 7.4%.
Balance sheet, liquidity and debt
- At February 28, 2021, cash and cash equivalents were $1.974 billion and short-term investments were $94.3 million. Total liquidity, including $689.1 million of unused revolver availability, was approximately $2.8 billion. Management said it expected adequate liquidity for the next 12 months.
- Total debt was $2.060 billion, including $797.3 million classified as short-term or current maturities. The company issued $500 million of 3.50% senior notes due 2031 in February. On March 4, after quarter-end, it used those proceeds and cash to redeem $800 million of 5.00% notes due 2025. It expected to record an approximately $30 million early-extinguishment loss in Q2, including about $20 million of call premium.
- The company reported non-GAAP net debt of negative $7.9 million at quarter-end, based on debt less cash and short-term investments. It reported a 6.8x non-GAAP leverage ratio, versus 1.4x a year earlier; the filing’s comparison reflects a sharp reduction in trailing-twelve-month adjusted EBITDA.
- The revolving credit facility was extended to January 5, 2026. The company reported no revolver borrowings and said it complied with debt covenants at quarter-end.
- Operating cash flow decreased substantially, which management attributed mainly to lower sales, partly offset by reduced inventory spending and employee incentives. Financing cash flow included the $500 million note issuance. The company paid a $0.04-per-share dividend during the quarter.
Material changes, outlook and risks
- COVID-19: Approximately 85% of company-operated stores were open for in-store or curbside service at quarter-end; closures affected about one-third of the European store network during portions of the quarter. The filing warns that renewed closures, reduced traffic and consumer spending, wholesale customer weakness, supply-chain disruption and excess inventory could further affect revenue, earnings and cash flow.
- Restructuring: The initiative, begun in April 2020, included eliminating approximately 15% of global non-retail and non-manufacturing positions and was expected to continue through fiscal 2021. Management estimated approximately $100 million in annual cost savings, while noting that additional charges were expected. The company recorded a net $0.8 million reversal of restructuring charges in the quarter and had $48.4 million of related liabilities, including long-term liabilities.
- Capital allocation: Management said share repurchases would remain on hold until further notice and dividends would be reviewed quarterly. After quarter-end, the board declared a $0.06-per-share dividend, about $24 million in total. Management said it expected to consider paying down the remaining $200 million of 2025 notes during fiscal 2021 if business conditions improved.
- Other unusual items: The company recorded $3.1 million of COVID-related store asset impairment charges. It also reduced its estimated adverse inventory purchase commitment liability by $6.5 million, leaving $16.6 million at quarter-end. Management said the quarter’s results may not indicate full-year performance and did not provide formal numerical revenue or earnings guidance in the supplied filing text.
- Key risks and contingencies: Risks include pandemic uncertainty, consumer demand and store traffic, wholesale customer financial health, competition and promotional pressure, inventory and supply-chain exposure, cotton and other input costs, foreign currency and trade policy, restructuring execution, cybersecurity and technology implementation, and debt service. Ordinary-course litigation reserves were described as not material; the company said pending proceedings were not expected to have a material impact, while customs audit outcomes remain subject to uncertainty.
Important facts for investors to verify
- Whether store reopenings, especially in Europe, and online growth can offset continued weakness in physical retail and wholesale demand.
- Whether higher gross margins and cost savings are sustainable as revenue recovers, and how much restructuring cost remains.
- The post-redemption debt balance, interest savings and Q2 early-extinguishment charge, including the planned treatment of the remaining $200 million of 2025 notes.
- How operating cash flow and working capital develop relative to reported earnings and inventory levels.
- Whether the approximately $100 million annual restructuring savings estimate is achieved without operational disruption.