Levi Strauss & Co. Form 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended February 28, 2010. Levi Strauss & Co. is a privately held global apparel company operating through three geographic segments: Americas, Europe, and Asia Pacific. The company markets products under the Levi's, Dockers, and Signature brands. The fiscal year ends on the last Sunday of November.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenues | $1,035.2 million | $951.5 million |
| Gross Profit | $532.9 million | $445.1 million |
| Gross Margin | 51.5% | 46.8% |
| Operating Income | $107.3 million | $106.0 million |
| Net Income (Attributable to LSC) | $56.4 million | $48.1 million |
| Operating Cash Flow | $75.5 million | $9.7 million |
| Cash and Equivalents | $315.4 million | $186.1 million |
| Total Debt (Long + Short Term) | $1,821.2 million | $1,852.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 8.8% year-over-year (4.4% on a constant-currency basis). Growth was driven by acquisitions in 2009 and strong Levi's brand performance in the Americas.
- Margin Expansion: Gross margin improved to 51.5% from 46.8%, aided by a higher mix of company-operated retail sales, lower inventory markdowns, and favorable currency impacts ($29 million).
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 25.5% to $425.6 million. This was primarily due to the expansion of the dedicated store network (134 additional stores), increased advertising spend, and higher pension-related costs.
- Segment Performance:
- Americas: Operating income increased 40.3% to $76.1 million.
- Europe: Operating income increased 13.9% to $66.4 million, driven by currency and retail expansion.
- Asia Pacific: Operating income decreased 3.4% to $30.6 million due to sales declines in Japan, despite currency benefits.
- Cash Flow: Operating cash flow surged to $75.5 million from $9.7 million, reflecting disciplined inventory management and higher collections.
Outlook, Risks, and Unusual Items
- Legislative Impact (Unusual Item): The Patient Protection and Affordable Care Act (signed March 23, 2010) eliminates the tax deductibility of retiree health care costs to the extent of federal subsidies. The company expects to record a discrete charge to income tax expense of approximately $14 million in the second quarter of 2010.
- Liquidity: Total liquidity (cash plus unused credit facility availability) stands at $508.8 million. The company has $193.4 million available under its revolving credit facility.
- Risks: Management cites persistent difficult economic conditions, high unemployment, and weak consumer spending, particularly in southern Europe and Japan. Risks also include foreign currency fluctuations and the ability to successfully expand the company-operated store network.
- Guidance: No specific numerical guidance for the full year was provided in this text, though management remains focused on productivity, inventory management, and store expansion.
Investor Verification Checklist
- Verify the impact of the $14 million tax charge related to the Affordable Care Act on Q2 2010 earnings.
- Monitor the sustainability of gross margin improvements as the company continues to expand its lower-margin wholesale channels versus higher-margin retail stores.
- Assess the performance of the Dockers brand, which continues to face declines in the U.S. market.
- Review the company's ability to manage inventory levels in response to weak consumer spending in Europe and Japan.
- Confirm compliance with debt covenants, specifically the fixed charge coverage ratio, as unused availability under the credit facility fluctuates.