Levi Strauss & Co. — Form 10-K Summary
Reporting period: Fiscal year ended November 29, 2020 (53 weeks, including a 14-week fourth quarter); filed January 27, 2021. Although the request metadata refers to 2019 Q4, this filing reports fiscal 2020 and includes comparative fiscal 2019 and fourth-quarter results.
Business context and performance
Levi Strauss designs and sells apparel, principally under the Levi’s brand, through wholesale and direct-to-consumer (DTC) channels across the Americas, Europe and Asia. COVID-19 closures and reduced consumer traffic materially affected fiscal 2020; most stores reopened by year-end, but renewed closures occurred in parts of Europe. The extra fiscal week and two Black Fridays in 2020 also affect comparisons with 2019, which had no Black Friday.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $4.453 billion | $5.763 billion |
| Gross profit / margin | $2.353 billion / 52.8% | $3.101 billion / 53.8% |
| Operating income (loss) / margin | $(85.1) million / (1.9)% | $566.7 million / 9.8% |
| Net income (loss) | $(127.1) million | $395.0 million |
| Diluted EPS | $(0.32) | $0.97 |
| Operating cash flow | $469.6 million | $412.2 million |
| Capital expenditures | $130.4 million | $175.4 million |
Revenue declined 22.7% reported and 22.0% in constant currency. Regional revenue fell 23.3% in the Americas, 18.8% in Europe and 28.4% in Asia. Gross margin declined 1.0 percentage point, mainly reflecting pandemic-related inventory reserves and fabric purchase commitments, partly offset by prior-year price increases. Adjusted EBIT, a non-GAAP measure, was $181.1 million (4.1% margin), versus $610.6 million (10.6%) in 2019; adjusted diluted EPS was $0.21 versus $1.12.
In Q4, revenue declined 11.6% reported (12.3% constant currency). Operating income was $92.0 million versus $131.6 million, net income was $56.7 million versus $95.3 million, and diluted EPS was $0.14 versus $0.23. Adjusted EBIT was $113.4 million versus $146.3 million.
Liquidity, debt and material changes
- Year-end cash and equivalents were $1.497 billion, short-term investments $96.5 million, and unused revolver availability $713.5 million; management reported total liquidity of approximately $2.3 billion. Working capital was $1.577 billion.
- Total debt was $1.564 billion, up from $1.014 billion. The company issued an additional $500 million of 5.00% senior notes due 2025 in April 2020. It had no borrowings under its revolving facility at year-end and was in compliance with debt covenants. Net debt, as defined by the company, was $(29.4) million after cash and short-term investments; its non-GAAP leverage ratio was 4.9x versus 1.4x.
- Operating cash flow increased despite the net loss, reflecting lower inventory spending and reduced discretionary and employee-related outlays, partly offset by lower customer receipts. Financing cash flow included note proceeds, dividends, share repurchases and employee equity-award tax withholding.
- Fiscal 2020 included approximately $250 million of net restructuring and COVID-related charges. The filing separately reports $90.4 million of restructuring charges, $68.5 million of COVID-related inventory costs, and $91.1 million of receivable, impairment and other charges. A non-GAAP reconciliation reports $69.3 million of COVID-related inventory costs; investors should check the detailed reconciliation and notes for classification and rounding.
Outlook, management commentary and risks
- Management described the pandemic’s impact as expected to be temporary but said its duration and financial effects remained highly uncertain. At fiscal year-end, 87% of company-operated stores were open for in-store or curbside service; subsequent resurgent cases caused further closures.
- Restructuring eliminates approximately 15% of global non-retail and non-manufacturing positions, is expected to be substantially completed in fiscal 2021, and is forecast to generate approximately $100 million in annual cost savings. Additional charges were expected.
- Longer-term ambitions include DTC approaching 60% of annual revenue over the next decade, global digital sales exceeding one-third of revenue, and Adjusted EBIT margin above 12% once revenue recovers to pre-COVID levels. These are strategic targets, not near-term guidance.
- Company-operated e-commerce revenue grew approximately 29% in fiscal 2020. Global digital business, including wholesale partners’ online sales, represented approximately 22% of revenue versus 13% in 2019. DTC rose to 39% of revenue from 36%.
- Key risks include further pandemic disruption, consumer-demand and inventory uncertainty, wholesale customer distress and concentration, execution of DTC/digital initiatives and restructuring, sourcing and cotton costs, foreign exchange and trade restrictions, cybersecurity, and substantial debt and pension obligations. The top ten wholesale customers represented 29% of revenue; no single customer reached 10%. Sears/Kmart and J.C. Penney were in bankruptcy proceedings.
- Dividends were suspended for the third and fourth quarters of 2020, and the share repurchase program was suspended after $56.2 million of repurchases. In January 2021, the board declared a $0.04-per-share quarterly dividend and indicated expected fiscal 2021 dividends of approximately $64 million, subject to board discretion and debt restrictions.
- Ordinary-course legal proceedings were not expected by the company to have a material financial impact. The filing notes pending customs-duty audit assessments, whose resolution remains uncertain.
Important facts for investors to verify
- Whether revenue, store traffic and margins recover, and how much results benefit from the extra week and Black Friday timing.
- Cash generation and liquidity under renewed closures, including customer collections, inventory commitments and the timing of restructuring payments.
- Progress toward the approximately $100 million savings target and the total remaining restructuring charges.
- Debt maturity, refinancing and covenant flexibility, alongside the reported 4.9x non-GAAP leverage ratio.
- The assumptions supporting deferred tax assets: the auditor identified realizability of $232.2 million of foreign tax credit carryforwards as a critical audit matter.
- How management defines and reconciles non-GAAP measures, particularly COVID-related charges and the difference between reported inventory-charge figures.