Business context and reporting period
Levi Strauss & Co. designs and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through the Americas, Europe and Asia Pacific. This filing covers the fiscal quarter ended May 27, 2012, and the six months then ended, compared with the corresponding 2011 periods. The request metadata says “2011 Q2,” but the filing itself is for 2012 Q2.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $1,047.2 million | $1,092.9 million | $2,212.1 million | $2,213.6 million |
| Gross profit / margin | $480.7 million / 45.9% | $540.7 million / 49.5% | $1,029.5 million / 46.5% | $1,098.7 million / 49.6% |
| Operating income / margin | $45.6 million / 4.4% | $65.0 million / 5.9% | $155.8 million / 7.0% | $163.9 million / 7.4% |
| Net income attributable to Levi Strauss & Co. | $13.2 million | $21.0 million | $62.5 million | $61.6 million |
- Q2 revenue declined 4.2% reported and 1.0% on a constant-currency basis. First-half revenue was down 0.1% reported but up 2.3% constant currency.
- Q2 gross margin fell 3.6 percentage points, principally because cotton costs rose faster than price increases could offset them. Lower advertising and promotion spending helped reduce SG&A, but did not prevent lower operating income.
- Six-month operating cash flow was $327.6 million, versus $85.4 million in 2011. Investing used $33.8 million versus $80.9 million; financing used $212.2 million versus $20.1 million. Management attributed stronger operating cash flow mainly to collections and lower vendor payments.
- At May 27, 2012, cash was $277.9 million; unused revolving-credit availability was $586.6 million, for reported total liquidity of $864.5 million. Total short- and long-term debt was $1.756 billion, down from $1.972 billion at November 27, 2011. The company reported $1.4 billion of fixed-rate and $0.4 billion of variable-rate debt. Its weighted-average borrowing rate was 7.17% for Q2 and 7.08% for the first half, compared with 6.84% in the corresponding 2011 periods.
Material changes and unusual items
- Americas revenue increased 1.0% in Q2 reported (2.0% constant currency), while Europe fell 9.7% (1.5% constant currency) and Asia Pacific fell 11.6% (8.9% constant currency). European sales weakness reflected depressed retail conditions, particularly in southern Europe; Asia Pacific faced a broad economic slowdown.
- In May, the company issued $385 million of 6.875% senior notes due 2022, used primarily to refinance its 8.875% notes due 2016 and partially repurchase yen-denominated Eurobonds due 2016. The transactions extended debt maturities. The company recorded an $8.2 million loss on early extinguishment of debt, including tender premiums and write-offs, partly offset by a gain on the discounted Eurobond repurchase.
- Other income included foreign-exchange management gains; Q2 other income was $10.7 million versus a $1.0 million expense in 2011. First-half other income was $11.9 million versus a $7.0 million expense. These items affected comparisons and reflect currency movements and derivative activity.
- The company paid a $20.0 million dividend in Q2 and states it has no established annual dividend policy.
Outlook, risks and contingencies
- Management said it expects cotton-cost pressure to improve in the second half of 2012. No specific revenue or earnings guidance was provided. It cautioned that operating-model and organizational changes intended to improve profitability could adversely affect results during the remainder of fiscal 2012.
- Management believed liquidity would be adequate for the next 12 months and reported compliance with debt covenants. Short-term foreign-subsidiary borrowings of $65.7 million were expected to be repaid or refinanced within 12 months.
- Key cited risks include weak consumer and wholesale demand, cotton and other sourcing costs, competition and changing preferences, foreign-exchange movements, dependence on key customers and distribution channels, pension funding, and political or economic instability. The company reported $141.3 million of gross unrecognized tax benefits, of which $88.8 million could affect the effective tax rate if recognized.
- The company said there were no material developments in previously reported litigation and did not expect ordinary-course pending matters to materially affect its financial condition, results or cash flows.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for fiscal Q2 2012, not Q2 2011.
- Assess whether pricing, channel mix and expected second-half cotton-cost relief can recover gross margin.
- Track Europe and Asia Pacific sales and operating performance, including currency effects.
- Review debt maturities, refinancing terms, borrowing costs and revolver availability, as well as the company’s ability to sustain cash generation and discretionary dividends.
- Consider the sensitivity of reported earnings to foreign-exchange gains and losses, restructuring or operating-model changes, and tax contingencies.