Levi Strauss & Co. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended November 25, 2018, a 52-week year, compared primarily with the 52-week year ended November 26, 2017. Although the request metadata says “2017 Q4,” the supplied filing is the FY2018 annual report; it also includes quarterly data for FY2018 and FY2017. Levi Strauss is privately held, and its common stock is not publicly traded.
Business context
The company designs, markets and sells apparel and related products under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. It operates in the Americas, Europe and Asia, sells in more than 110 countries, and generates about half of revenue outside the United States. Wholesale accounted for 65% of FY2018 revenue and direct-to-consumer (DTC) for 35%; company-operated e-commerce represented 4% of total revenue. Levi’s products generated 86% of net sales.
Key financial metrics
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net revenue | $5.575 billion | $4.904 billion | Up 13.7% reported; up 12.7% constant currency |
| Gross profit / margin | $2.998 billion / 53.8% | $2.563 billion / 52.3% | Margin up 1.5 percentage points, primarily from higher DTC sales |
| SG&A | $2.461 billion | $2.096 billion | Up 17.4%; 44.1% of revenue versus 42.7% |
| Operating income / margin | $537.1 million / 9.6% | $467.2 million / 9.5% | Operating income up 15.0% |
| Net income attributable to Levi Strauss & Co. | $283.1 million | $281.4 million | Up 0.6%; FY2018 included a substantial tax charge |
| Operating cash flow | $420.4 million | $525.9 million | Down $105.6 million |
| Capital expenditures | $159.4 million | $118.8 million | Increased investment |
| Cash and cash equivalents | $713.1 million | $633.6 million | Up $79.5 million |
| Total debt | $1.052 billion | $1.077 billion | Primarily unsecured senior notes; no revolver borrowings |
| Working capital | $1.236 billion | $1.118 billion | Increased year over year |
Reported revenue grew across all regions: Americas revenue was $3.043 billion, Europe $1.646 billion and Asia $886.5 million. Europe had the fastest reported growth, up 25.4% (20.8% constant currency). The company reported total liquidity of approximately $1.5 billion, including cash and $805.2 million of unused credit-facility availability.
Material changes versus FY2017
- Revenue growth accelerated to 13.7% from 7.7% in FY2017, supported by growth across all three regions and continued expansion of DTC and retail.
- Gross margin rose to 53.8% from 52.3%; however, SG&A grew faster than revenue, reflecting store expansion, higher advertising and promotion, and increased incentive and stock-based compensation.
- Operating margin edged up to 9.6% from 9.5%. Regional operating income increased most sharply in Europe; corporate expenses also rose.
- Operating cash flow declined, primarily due to higher pension contributions, inventory and SG&A payments, and income taxes. Inventory increased to $883.8 million from $759.4 million.
- Interest expense fell to $55.3 million from $68.6 million, while FY2017 had included a $22.8 million loss on early debt extinguishment that did not recur.
- Effective tax rate rose to 43.0% from 18.4%. Net income attributable to the company was nearly flat despite higher pre-tax income.
Outlook, management commentary and risks
- Outlook: Management stated that it expected adequate liquidity for the next 12 months. The filing provides no specific numerical revenue or earnings guidance. The Board declared a $110 million dividend after year-end, payable in two installments during 2019; dividends are discretionary and subject to debt restrictions.
- Growth priorities: Management emphasized strengthening the core business, expanding women’s and tops categories and international markets, growing DTC and e-commerce, and improving supply-chain flexibility and operational efficiency. The company added 74 net company-operated stores during FY2018.
- Tax and unusual items: The Tax Act generated a $143.4 million FY2018 tax charge: $95.6 million from remeasuring deferred taxes, $37.5 million of transition tax, and $10.3 million associated with future remittance of foreign earnings. FY2017 also included an $8.3 million prior-period stock-compensation adjustment that reduced net income by $5.1 million; management said it was not material to the affected periods.
- Debt and obligations: Most debt is fixed-rate, including $500 million of 5.00% notes due 2025 and €475 million of 3.375% notes due 2027. The company reported compliance with debt covenants. Pension and postretirement obligations, leases, and potential equity-award settlements are meaningful cash commitments.
- Principal risks: Apparel demand and competition; reliance on wholesale customers and retail partners; foreign-exchange volatility; tariffs and trade-policy changes; cotton, labor and freight costs; dependence on contract manufacturers and distribution systems; execution of store, e-commerce and technology investments; cybersecurity and privacy; and pension funding exposure. Sears Holdings’ bankruptcy was identified as likely to adversely affect sales to that customer. Customs-duty assessments and appeals are ongoing; management disputes the claims, and the ultimate outcome is uncertain. Management did not expect pending litigation to have a material financial impact.
Most important facts for investors to verify
- Confirm the period: the filing covers FY2018, not a standalone 2017 Q4 report; review the separately presented quarterly results if quarter-level performance is needed.
- Assess whether revenue growth and the gross-margin improvement can continue as DTC expands, given faster growth in SG&A and capital spending.
- Review the sustainability of operating cash flow, inventory growth, pension contributions and the planned 2019 dividend.
- Separate recurring tax performance from the $143.4 million Tax Act charge and monitor subsequent tax effects, including GILTI.
- Track leverage, debt covenants, the large principal maturity after 2022, and potential cash payments under equity plans.
- Monitor tariff and currency exposure, customs-duty proceedings, and the effects of customer distress, particularly Sears-related exposure.