Levi Strauss & Co. - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories, for men, women and children under the Levi’s^®, Dockers^®, Signature by Levi Strauss & Co.^tmand Denizen^tmbrands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.

 

 

The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 28, 2010, included in the Annual Report onForm 10-Kfiled by the Company with the Securities and Exchange Commission (“SEC”) on February 8, 2011.

 

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. Certain prior-year amounts have been reclassified to conform to the current presentation. The results of operations for the three months ended February 27, 2011, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2011.

 

The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of both fiscal years 2011 and 2010 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.

 

Subsequent events have been evaluated through the issuance date of these financial statements. The recent earthquake, tsunami and related events in Japan, which occurred subsequent to the Company’s first fiscal quarter, did not have an immediate material impact to the Company’s assets or obligations.

 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.

 

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2010 Annual Report onForm 10-K.

 

 

 

 

The changes in the carrying amount of goodwill by business segment for the three months ended February 27, 2011, were as follows:

 

 

Other intangible assets, net, were as follows:

 

 

For the three months ended February 27, 2011, amortization of these intangible assets was $3.0 million, compared to $3.9 million in the same period of 2010.

 

 

 

 

The following table presents the Company’s financial instruments that are carried at fair value:

 

 

 

 

 

The following table presents the carrying value — including accrued interest — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:

 

 

 

 

 

 

As of February 27, 2011, the Company had forward foreign exchange contracts to buy $715.4 million and to sell $426.3 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through April 2012.

 

The table below provides data about the carrying values of derivative instruments and non-derivative instruments designated as net investment hedges:

 

 

 

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:

 

 

 

 

The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:

 

 

 

 

 

As of February 27, 2011, the Company’s total availability of $376.4 million under its senior secured revolving credit facility was reduced by $78.2 million of letters of credit and other credit usage under the facility, yielding a net availability of $298.2 million.

 

 

 

 

The Company’s weighted-average interest rate on average borrowings outstanding during the three months ended February 27, 2011, and February 28, 2010, was 6.84% and 7.25%, respectively.

 

 

The following table summarizes the components of net periodic benefit cost (income) and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans:

 

 

 

As of February 27, 2011, based on changes in discount rates and the updated valuation of the Company’s pension assets, as well as its current evaluation of alternative methods available for measuring the funding obligation, the Company’s expected required contribution amount in 2011 is estimated to be in the range of $60 million to $80 million. The Company made a contribution of $40 million during the first quarter of 2011 towards this anticipated requirement.

 

 

 

 

 

The Company uses derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 4 for additional information.

 

 

Litigation.  There have been no material developments in the Company’s litigation matters since it filed its 2010 Annual Report onForm 10-K.

 

In the ordinary course of business, the Company has various pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe there are any of these pending legal proceedings that will have a material impact on its financial condition or results of operations or cash flows.

 

 

The Company paid a cash dividend of $20 million in the first quarter of 2011. The Company does not have an annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company’s Board of Directors depending upon, among other factors, the tax impact to the dividend recipients, the Company’s financial condition and compliance with the terms of its debt agreements.

 

 

The following is a summary of the components of total comprehensive income (loss), net of related income taxes:

 

 

 

 

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:

 

 

 

The following table summarizes significant components of “Other income (expense), net”:

 

 

 

 

The effective income tax rate was 32.5% for the three months ended February 27, 2011, compared to 34.7% for the same period ended February 28, 2010. The reduction in the effective tax rate was primarily due to an increase in the amount of expected earnings from foreign operations subject to tax rates lower than the U.S. statutory rate.

 

As of February 27, 2011, the Company’s total gross amount of unrecognized tax benefits was $152.0 million, of which $89.1 million would impact the effective tax rate, if recognized. As of November 28, 2010, the Company’s total gross amount of unrecognized tax benefits was $150.7 million, of which $87.2 million would have impacted the effective tax rate, if recognized.

 

 

 

 

Robert D. Haas, a director and Chairman Emeritus of the Company, is the President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three-month periods ended February 27, 2011, and February 28, 2010, the Company donated $0.3 million and $0.2 million, respectively, to the Levi Strauss Foundation.

 

 

The Company manages its business according to three regional segments: the Americas, Europe and Asia Pacific. Each regional segment is managed by a senior executive who reports directly to the chief operating decision maker: the Company’s chief executive officer. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.

 

In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in the Company’s geographic regions, was centralized under corporate management in conjunction with the Company’s key strategy of driving productivity. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of the Company’s regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.

 

Business segment information for the Company is as follows:

 

 

 

We design and market jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s^®, Dockers^®, Signature by Levi Strauss & Co.^tm(“Signature”) and Denizen^tmbrands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear and other products.

 

Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s^®and Dockers^®products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s^®and Dockers^®products through our online stores operated by us, and 482 company-operated stores located in 31 countries, including the United States. These stores generated approximately 18% of our net revenues in the three-month period in 2011, as compared to 16% for the same period in 2010. In addition, we distribute our Levi’s^®and Dockers^®products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under the Signature brand primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific. We currently distribute our Denizen^tmproducts through franchised stores in Asia Pacific, and starting in the second half of 2011, will distribute them through certain wholesale channels in the United States and Mexico.

 

Our Europe and Asia Pacific businesses, collectively, contributed approximately 47% of our net revenues and 59% of our regional operating income in the three-month period in 2011. Sales of Levi’s^®brand products represented approximately 85% of our total net sales in the three-month period in 2011.

 

 

Our business and industry continued to feel the lingering impact of the challenged economy around the world during the first quarter of 2011. During the quarter, we remained focused on our key long-term strategies: build upon our leadership position in the jean and khaki categories through product and marketing innovation, enhance relationships with wholesale customers and expand our dedicated store network to drive sales growth, capitalize on our global footprint, and increase our productivity. We expect that the impact of increasing prices and tightened supply of raw materials, such as cotton, will contribute to ongoing pricing pressure throughout the supply chain during 2011 and thereafter. Our response to these conditions may include additional product price increases or enhanced support of our supply chain partners to maintain a sufficient flow of product. The conditions within our industry and our response to them may impact our margins, working capital, and sales volumes. Additionally, our results of operations will be adversely affected by a slowdown in the Japanese economy caused by the impact of the recent earthquake, tsunami and related events in Japan, which occurred subsequent to our first fiscal quarter and did not have an immediate material impact to our assets or obligations.

 

 

Our first quarter 2011 results reflect net revenue growth and the effects of the strategic investments we have made in line with our long-term strategies.

 

 

 

 

Fiscal year.  Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2011 and 2010 consisted of 13 weeks.

 

Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in our geographic regions, was centralized under corporate management in conjunction with our key strategy of driving productivity. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of our regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.

 

Classification.  Our classification of certain significant revenues and expenses reflects the following:

 

 

Our gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.

 

Constant currency.  Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitateperiod-to-periodcomparisons without regard to the impact of changing foreign currency exchange rates.

 

The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

 

 

The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.

 

 

Total net revenues increased on both reported and constant-currency bases for the three-month period ended February 27, 2011, as compared to the same prior-year period.

 

Americas.  On both reported and constant-currency bases, net revenues in our Americas region increased for the three-month period, with currency affecting net revenues favorably by approximately $3 million.

 

The region’s increased net revenues were driven by the Levi’s^®brand, reflecting a higher volume of sales in our dedicated retail stores and at wholesale. Sales from our online stores also increased.

Europe.  Net revenues in Europe increased on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $13 million.

 

Despite the region’s ongoing depressed economic environment, our net revenues increased, driven by the expansion and improved performance of our company-operated retail network throughout the region, and higher sales to franchised stores. Growth primarily reflected the success of our Levi’s^®brand new women’s products. Sales increases were partially offset by lower traditional wholesale revenues in certain markets.

 

Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant-currency bases, with currency affecting net revenues favorably by approximately $9 million.

 

The net revenues increase was primarily from our Levi’s^®brand, driven by the continued expansion of our brand-dedicated retail network in China and India as well as other of our emerging markets, offset by the continued decline of net revenues in Japan. Sales of our Denizen^tmbrand products were offset by corresponding declines in Signature brand sales as we transition the brand in the region.

 

 

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

 

As compared to the same prior-year period, the gross profit increase was driven by the increase in our net revenues, and was partially offset by a decline in our gross margin. The effect of currency on gross profit was insignificant. The gross margin decrease was primarily due to an increase in sales allowances and discounts, in both our Levi’s^®and Dockers^®brands, to drive sales and manage inventory; in addition, we marked down excess and obsolete inventory in selected markets. These factors were partially offset by the impact to our gross margin of the increased revenue contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.

 

 

The following table shows our selling, general and administrative (“SG&A”) expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

The effect of currency on our SG&A expenses for the three-month period ended February 27, 2011, was insignificant.

 

Selling.  Selling expenses increased across all business segments, primarily reflecting additional costs, such as rents and increased headcount, associated with the continued expansion of our company-operated store network. We had 56 more company-operated stores at quarter end than we did at February 28, 2010.

 

Advertising and promotion.  Advertising and promotion expenses continued to reflect our ongoing strategy of investment behind our brands. The increase for the three-month period primarily reflected our expanding presence in Asia Pacific and our recently-launched Denizen^tmbrand.

 

Administration.  The increase in administration expenses for the three-month period was driven primarily by an increase in incentive compensation expense related to higher projected funding.

 

Other.  Other SG&A expenses include distribution, information resources, and marketing organization costs, all of which increased slightly as compared to prior year.

 

 

The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues: