Levi Strauss & Co. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q1, but this filing covers the 13 weeks ended February 25, 2018, with comparison to the 13 weeks ended February 26, 2017. Dollar amounts below are U.S. dollars.
Business context and reporting period
Levi Strauss designs, markets and sells apparel and accessories under the Levi’s, Dockers, Signature and Denizen brands. It operates in the Americas, Europe and Asia, and sells through wholesale, franchised, company-operated retail and e-commerce channels. Company-operated stores and e-commerce generated about 33% of quarterly revenue, versus 32% a year earlier. The company is privately held, with no public trading in its common stock.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net revenue | $1,343.7 million | $1,102.0 million | Up 21.9% reported; up 16.1% at constant currency |
| Gross profit / margin | $738.1 million / 54.9% | $564.6 million / 51.2% | Margin up 3.7 percentage points |
| Operating income / margin | $174.1 million / 13.0% | $108.3 million / 9.8% | Income up 60.8% |
| Income before taxes | $149.0 million | $88.8 million | Up 67.8% |
| Income tax expense | $167.7 million | $28.7 million | Includes $136 million provisional Tax Act charge |
| Net income (loss) attributable to Levi Strauss | $(19.0) million | $60.1 million | Reported loss reflects tax charge |
| Operating cash flow | $66.2 million | $49.0 million | Capital expenditures were $31.0 million, versus $25.1 million |
Cash and cash equivalents were $590.2 million at February 25, 2018, down from $633.6 million at November 26, 2017. Current assets were $1.98 billion and current liabilities $909.8 million. Total debt was $1.09 billion, comprising $24.9 million short-term debt and $1.06 billion long-term debt; cash less debt was approximately $497 million. The company reported $744.6 million of unused revolving-credit availability and total liquidity of approximately $1.3 billion. It said it expected adequate liquidity for the next 12 months and was in compliance with debt covenants.
Financing cash use was $73.9 million, including a $45 million dividend installment. A further $45 million installment was expected in Q4 2018. The board had declared a total $90 million dividend; the company has no established dividend policy. Inventory was $826.4 million, up from $759.4 million at fiscal year-end.
Material changes and segment performance
- Revenue increased across all regions. Reported growth was 13.7% in the Americas, 45.9% in Europe and 9.4% in Asia; constant-currency growth was 12.5%, 29.6% and 4.6%, respectively. Europe’s reported growth included favorable currency effects.
- Management attributed revenue growth to broad-based Levi’s brand performance, growth in company-operated retail, and strong European performance in tops and women’s products. Levi’s products represented approximately 89% of sales, versus 88% a year earlier.
- Gross margin expansion reflected company-operated retail growth, lower product sourcing costs and favorable transactional currency impacts.
- SG&A rose 23.6% to $564.0 million, faster than revenue. Drivers included store-network expansion, higher advertising and promotion, incentive compensation, distribution and information-technology costs. The company had 56 more company-operated stores than a year earlier.
- Interest expense fell to $15.5 million from $19.9 million, primarily reflecting lower average borrowing rates following 2017 refinancing. The weighted-average borrowing rate was 4.77%, versus 6.67%.
- Other expense was $9.6 million, compared with $0.4 million of income a year earlier, primarily due to foreign-exchange derivative losses.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said liquidity should be adequate over the coming 12 months and reported no material change to estimated 2018 cash requirements. The $136 million provisional income-tax charge comprised approximately $99 million to remeasure deferred tax balances and a $37 million transition tax on undistributed foreign earnings. The final accounting could change as interpretations and guidance develop; the company was also evaluating the Tax Act’s GILTI provisions and had not estimated their effect.
Management cited volatile consumer discretionary spending, promotional retail conditions, wholesale-channel challenges and customer consolidation, competition, supply-chain and sourcing cost volatility, currency fluctuations, and uncertainty about tax, trade and tariff policy as key risks. Customs duty audits and related appeals are ongoing; the company disputes the claims, but their resolution is uncertain. Ordinary-course litigation was not expected by management to have a material impact. The company said there had been no material changes to risk factors or market-risk exposures from its 2017 Form 10-K.
Important facts for investors to verify
- How the provisional Tax Act charge is finalized, and the eventual effect of GILTI and other tax provisions.
- Whether revenue and margin growth persists after separating currency effects, and whether higher SG&A and store expansion produce sustained returns.
- Inventory levels and working-capital needs, given the quarterly inventory increase and cash use for inventory purchases.
- Foreign-exchange exposures and derivative losses, including the effect of currency movements on reported results.
- Debt, covenant compliance, revolver availability and the company’s capacity to fund dividends and other cash needs.
- Outcomes of customs duty audits and appeals, which could involve uncertain costs.