Levi Strauss & Co. — Form 10-Q summary
Period clarification: The request metadata says 2019 Q3, but the filing is for the quarter ended August 23, 2020, with comparisons to the quarter ended August 25, 2019. Figures below are in U.S. dollars; financial amounts are generally in millions.
Business context and reporting period
Levi Strauss designs, markets and sells apparel and accessories under the Levi’s, Dockers, Signature and Denizen brands. It reports three geographic segments: Americas, Europe and Asia. The filing covers the three and nine months ended August 23, 2020. COVID-19 materially affected store operations, customer demand and results; most company-operated stores had reopened by quarter-end, often with reduced hours or occupancy.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,063.1 | $1,447.1 | $3,066.8 | $4,194.5 |
| Gross profit | $577.4 | $766.7 | $1,586.4 | $2,250.0 |
| Gross margin | 54.3% | 53.0% | 51.7% | 53.6% |
| Operating income (loss) | $92.3 | $171.2 | $(177.1) | $435.0 |
| Net income (loss) attributable to Levi Strauss | $27.0 | $124.5 | $(183.8) | $299.3 |
| Diluted earnings (loss) per share | $0.07 | $0.30 | $(0.46) | $0.73 |
Q3 revenue fell 26.5% reported and 25.7% at constant currency; nine-month revenue declined 26.9% reported and 25.7% at constant currency. Q3 operating margin was 8.7%, versus 11.8% a year earlier. Q3 adjusted EBIT was $84.2 million, compared with $176.4 million; nine-month adjusted EBIT was $67.7 million, versus $464.3 million. These are non-GAAP measures.
- Regional revenue, Q3: Americas $549.8 million, down 28.7%; Europe $390.4 million, down 15.7%; Asia $122.9 million, down 42.3% year over year.
- Channel mix: Q3 wholesale revenue was $668.8 million and direct-to-consumer revenue was $394.3 million. E-commerce grew approximately 52% in Q3; global digital business represented approximately 24% of revenue, versus 12% a year earlier.
- Cash flow: Nine-month operating cash flow was $240.9 million, versus $205.5 million; investing cash outflow was $117.7 million, versus $198.4 million; financing cash inflow was $302.5 million, versus $146.8 million. Cash and cash equivalents ended at $1,353.0 million.
- Liquidity and debt: Cash, short-term investments of $72.3 million and unused revolver availability of $608.0 million totaled approximately $2.0 billion of liquidity. Total debt was $1,567.2 million; reported net debt was $141.9 million. The company reported a 4.5x leverage ratio, based on last-twelve-month adjusted EBITDA.
- Margins and costs: Q3 gross margin rose 1.3 percentage points, supported by lower COVID-related inventory charges, price increases and a greater DTC mix. Nine-month gross margin declined 1.9 points, including a 2.5-point impact from COVID-related inventory reserves and adverse purchase commitments.
Material changes versus prior comparable period
- Q3 revenue and net income declined sharply year over year, while nine-month results moved from operating and net income to operating and net losses.
- Q3 SG&A decreased 18.7% to $484.0 million, but increased to 45.5% of revenue from 41.2%, reflecting lower sales despite cost reductions. Nine-month SG&A fell 6.6% to $1,695.1 million.
- Nine-month results included $68.4 million of restructuring charges and $162.6 million of net COVID-related inventory and other charges for adjusted EBIT reconciliation purposes. The filing reports $231.0 million in net year-to-date COVID-related and restructuring charges overall.
- Debt rose from $1,014.4 million at November 24, 2019, principally after issuing an additional $500 million of 5.00% senior notes due 2025. The company drew and repaid a $300 million revolver balance during the period.
- Adoption of lease accounting in fiscal 2020 added approximately $1.0 billion of operating lease assets and liabilities; the company said the adoption did not materially affect the income statement or cash flows.
Outlook, commentary, risks and unusual items
- Management said it expected adequate liquidity for the next 12 months, while emphasizing that COVID-19’s duration and financial effects remained highly uncertain. The filing provides no specific revenue or earnings guidance.
- A restructuring initiative targeting approximately 15% of global non-retail and non-manufacturing positions is expected to generate approximately $100 million in annual cost savings and be substantially complete by mid-fiscal 2021. Further charges are expected.
- The company suspended share repurchases and decided not to declare dividends for the third and fourth quarters of fiscal 2020. It had paid $63.6 million in dividends during the first nine months.
- COVID-related exposures include renewed store closures, weaker traffic and consumer demand, wholesale customer distress, excess inventory and markdowns, supply-chain disruption, receivable losses and further asset impairments. Other cited risks include foreign exchange, trade and tariff changes, competition, and reliance on wholesale customers and contract manufacturers.
- COVID-related charges included inventory reserves and adverse fabric commitments, customer receivable allowances, and $60.4 million of asset impairments. Q3 included $11.0 million of net reductions in previously recorded COVID-related charges.
- The company offered a voluntary pension lump-sum cash-out program; because the expected distributions exceed the settlement accounting threshold, a settlement charge was expected when distributions are paid in November 2020.
- Management said ordinary-course litigation reserves were not material and did not expect pending claims to materially affect financial condition, results or cash flows. Customs-duty audits remain subject to uncertainty; the company disputes the assessments.
- Disclosure controls were assessed as effective as of August 23, 2020. The filing reported no material quarter-end changes in internal control over financial reporting.
Important facts for investors to verify
- Whether store reopening, traffic, digital growth and wholesale demand remain durable, and how these trends affect revenue and margins.
- Whether the restructuring achieves the stated annual savings, and what additional implementation charges arise.
- Inventory levels, discounting, supplier commitments, receivable collections and any further COVID-related impairments or charges.
- Cash generation, revolver availability, debt service and compliance with debt covenants, particularly given the reported 4.5x leverage ratio.
- The timing and amount of the pension settlement charge, and future board decisions on dividends and share repurchases.
- How foreign exchange, customs assessments and wholesale customer financial distress affect results and liquidity.