Levi Strauss & Co. — FY2019 Form 10-K
Reporting period: Fiscal year ended November 24, 2019 (52 weeks). Although the request references 2018 Q4, the supplied filing is the FY2019 10-K; it also reports fourth-quarter results. Figures below are in U.S. dollars.
Business and financial performance
Levi Strauss designs and sells apparel under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. It operates across the Americas, Europe and Asia, selling through wholesale and direct-to-consumer (DTC) channels.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $5.763 billion | $5.575 billion |
| Gross profit / margin | $3.101 billion / 53.8% | $2.998 billion / 53.8% |
| Operating income / margin | $566.7 million / 9.8% | $540.4 million / 9.7% |
| Net income attributable to Levi Strauss & Co. | $394.6 million | $283.1 million |
| Diluted EPS | $0.97 | $0.73 |
| Cash from operating activities | $412.2 million | $420.4 million |
| Capital expenditures | $175.4 million | $159.4 million |
Reported revenue increased 3.4%; constant-currency growth was 5.8%. Europe grew 7.4% reported (13.3% constant currency), Asia 5.8% (9.5% constant currency), and the Americas 0.5% (0.8% constant currency). Foreign exchange reduced revenue by approximately $126 million. DTC represented 36% of revenue, up from 35%; wholesale represented 64%.
FY2019 adjusted EBIT was $610.6 million, up 4% reported and 8% constant currency; adjusted EBIT margin was 10.6%, flat reported. Adjusted net income was $456.2 million and adjusted diluted EPS was $1.12. These are non-GAAP measures defined by the company.
Fourth-quarter results
Q4 FY2019 revenue was $1.569 billion versus $1.592 billion in Q4 FY2018. Gross profit was $851.4 million versus $847.4 million; operating income was $131.6 million versus $128.8 million; net income was $95.8 million versus $97.3 million; and diluted EPS was $0.23 versus $0.25. The 2019 fiscal year did not include Black Friday, while FY2018 did, affecting comparability; management estimated this timing difference reduced FY2019 adjusted EBIT margin comparison by about 25 basis points.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $934.2 million and short-term investments were $80.7 million. Working capital was $1.703 billion. Total debt, excluding capital leases, was $1.014 billion; the company reported net debt of negative $0.5 million after cash and short-term investments. It had $819.5 million of unused credit-facility availability and reported approximately $1.8 billion of total liquidity. The revolving facility had no borrowings outstanding; debt covenants were met.
Operating cash flow less capital expenditures was approximately $236.8 million before other financing and investing items. Company-defined adjusted free cash flow was $116.0 million, including dividends and equity-award-related repurchases under its definition. Cash dividends paid were $113.9 million, versus $90.0 million in FY2018.
Changes, outlook and notable items
- Net income rose 39.3%, mainly reflecting the prior-year $143.4 million Tax Act charge and higher FY2019 operating income; FY2019 also included a $24.9 million IPO-related underwriter commission paid on behalf of selling stockholders. The effective tax rate was 17.3%, versus 43.0% in FY2018.
- Operating cash flow declined slightly, while investing cash use increased, primarily due to higher capital expenditures and purchases of short-term investments. Selling costs increased to support DTC expansion; administration costs declined.
- Management said it expected adequate liquidity for the next 12 months. It expected FY2020 dividends of approximately $130 million, subject to board discretion and debt-agreement limits. FY2020 is a 53-week year, with a 14-week fourth quarter and two Black Fridays; the filing provides no specific revenue or earnings guidance.
- After year-end, the company acquired distributor assets in Chile, Peru and Bolivia for $52 million plus transaction costs, and acquired the remaining minority interest in Levi Strauss Japan for $13.6 million. The board declared a $0.08-per-share dividend in January 2020.
- Management identified consumer-spending weakness, promotional retail conditions, wholesale customer pressures, competition, foreign-exchange volatility, tariffs and sourcing costs, and dependence on contract manufacturers as risks. In December 2019, coronavirus-related store closures and reduced traffic in Wuhan were reported; the potential impact was uncertain at the filing date. Pending legal proceedings were not expected by management to have a material financial impact, although customs-duty assessments remained subject to uncertainty.
Key facts for investors to verify
- Separate underlying growth from currency effects and assess the weak reported Americas growth and continued wholesale challenges.
- Review the sustainability of DTC growth, store-expansion costs and the company’s ability to maintain margins.
- Assess cash conversion, capital spending, pension and postretirement obligations, and the large lease commitments; the filing estimated $1.0–$1.2 billion of operating lease liabilities upon adoption of the new lease standard.
- Check debt maturities, covenant restrictions, dividend capacity and the assumptions behind management’s liquidity outlook.
- Consider the effect of Black Friday timing, the 53-week FY2020 calendar, the new acquisitions and the then-uncertain coronavirus and trade-policy impacts.