Levi Strauss & Co. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended February 23, 2014, compared with the 13 weeks ended February 24, 2013. Although the request metadata says “2013 Q1,” the filing is for fiscal 2014 Q1. Amounts below are U.S. dollars.
Business context and performance
Levi Strauss designs and sells apparel and accessories under the Levi’s, Dockers, Signature and Denizen brands through wholesale, licensed and direct-to-consumer channels. It operates in the Americas, Europe and Asia. Company-operated and online stores generated about 27% of quarterly revenue, up from 24% a year earlier.
Revenue declined amid soft retail conditions, especially in the U.S. Management cited weak holiday traffic, promotional activity and competitive pressure. Revenue was down 1.5% reported and 0.3% on a constant-currency basis.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change or context |
|---|---|---|---|
| Net revenue | $1,130.0 million | $1,146.7 million | Down 1.5% reported; down 0.3% constant currency |
| Gross profit / margin | $576.4 million / 51.0% | $591.9 million / 51.6% | Margin down 0.6 percentage points |
| SG&A | $424.8 million | $410.4 million | Up 3.5%; 37.6% of revenue versus 35.8% |
| Restructuring expense | $57.9 million | None | Primarily severance and consulting |
| Operating income / margin | $93.7 million / 8.3% | $181.5 million / 15.8% | Operating income down 48.4% |
| Net income attributable to Levi Strauss & Co. | $50.0 million | $107.0 million | Down 53.3% |
| Operating cash flow | $35.7 million | $143.1 million | Lower cash receipts and higher inventory; prior year included a California tax refund |
| Capital expenditures | $20.4 million | $20.9 million | Purchases of property, plant and equipment |
Gross margin was pressured by discounting and inventory markdowns, partly offset by the higher-margin direct retail contribution. Interest expense was $31.8 million, approximately flat year over year; the weighted-average borrowing rate rose to 7.91% from 6.91%. The effective tax rate fell to 24.8% from 31.2%, including a $3.7 million benefit from treating $75 million of certain foreign earnings as indefinitely reinvested.
Segments and balance sheet
Revenue by region was Americas $626.8 million (down 3.1% reported), Europe $300.4 million (up 1.3%), and Asia $202.7 million (down 0.1%). Constant-currency revenue changed by -2.6%, +0.4% and +6.4%, respectively. Regional operating income was $229.4 million, down 6.1%; corporate expenses rose to $135.7 million, including restructuring.
At February 23, 2014, cash and equivalents were $502.8 million, total assets $3.15 billion and total equity $190.6 million. Total debt was $1.55 billion ($35.5 million short-term and $1.51 billion long-term), broadly unchanged from fiscal year-end. The company reported $626.0 million of unused revolving-credit availability, giving stated total liquidity of approximately $1.1 billion. It said it was in compliance with debt covenants.
Operating cash flow was substantially below the prior year. Cash increased by $13.6 million to $502.8 million; investing activities used $14.5 million and financing activities used $7.0 million. Inventory rose to $665.6 million from $603.9 million, principally finished goods.
Outlook, significant items and risks
- Productivity initiative: Management expects $175–$200 million of annualized savings from a global initiative to be implemented over 12–18 months. Phase one targets $75–$100 million in annualized savings and includes approximately 800 position eliminations. The quarter included about $64 million of phase-one charges in total, comprising $57.9 million of restructuring expense and about $6.4 million of related SG&A costs. Further charges are expected; estimates for later phases were not available. Most phase-one cash payments were expected in 2014.
- Credit facility: On March 21, 2014, after quarter-end, the company amended and extended its revolving facility through March 2019, subject to an earlier shortening condition tied to the 2018 Euro notes. Maximum availability is $850 million; the amendment reduced borrowing and unused-availability fee ranges. Availability at quarter-end would have been $839.7 million under the amended terms.
- Dividend: The board declared a $30 million cash dividend in Q1, paid April 4, 2014. The company has no established annual dividend policy.
- Other unusual item: Donations to the Levi Strauss Foundation, whose president is the company’s chairman emeritus, were $5.2 million versus $3.1 million a year earlier.
- Risks: Management highlighted weak consumer demand, promotional pressure, competition, foreign-exchange movements, and execution risks from restructuring. Risks include service disruption, weakened business relationships, control and retention challenges, unanticipated costs, delays, or savings below target. Additional restructuring costs could weigh on profitability.
- Contingencies and controls: The company reported no material litigation developments and did not expect pending ordinary-course cases to materially affect results or cash flows. It reported effective disclosure controls and no material quarterly change in internal controls. Management stated that it expected adequate liquidity for the next 12 months.
Key investor verification points
- Track whether the initiative delivers its stated annualized savings, and compare realized savings with restructuring charges, cash payments and implementation timing.
- Monitor inventory levels, markdowns and gross margin, particularly in the Americas, as well as wholesale demand and direct-channel growth.
- Reconcile operating cash flow and working-capital movements against earnings; assess whether the Q1 cash-flow decline persists.
- Review debt maturities, borrowing costs, covenant compliance and the availability conditions on the amended credit facility.
- Assess the durability of reported earnings, including the tax benefit and foreign-exchange gains, and consider the dividend’s effect on liquidity.