Levi Strauss & Co. Reports Second-Quarter 2020 Financial Results

Reported Revenues of $0.5 Billion were down 62 percent

Diluted EPS was $(0.91); Adjusted Diluted EPS was $(0.48)

Total Available Liquidity increased to $2.0 Billion; Cash at Quarter End was $1.4 Billion

SAN FRANCISCO–(BUSINESS WIRE)–Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the second quarter ended May 24, 2020.

The coincidence of the company’s fiscal quarter with the roughly ten-week duration of the temporary closure of the company’s and its customers’ stores in response to the COVID-19 pandemic resulted in a significant adverse impact to revenues, earnings and cash flows. As stores have reopened, performance has trended better than the company’s expectations.

Second-Quarter 2020 Results

  • Net revenues declined 62 percent on a reported basis; the decrease was due to the temporary closure of company-operated, franchise and wholesale customer retail locations as a result of the COVID-19 pandemic, partially offset by the company’s e-commerce business which grew 25 percent for the quarter, with sequential month-over-month acceleration to nearly 80 percent growth for the month of May.
  • Gross margin decreased 19.2 percentage points on a reported basis to 34.1 percent; the decrease in gross margin was primarily due to inventory costs of $87 million recorded in connection with COVID-19 business disruptions. Adjusted gross margin was 51.5 percent, a decline of only 180 basis points, primarily reflecting lower wholesale gross margins, due to a higher proportion of Europe’s sales in lower margin markets and channels, which was partially offset by the benefit of price increases. Global DTC and the Americas’ adjusted gross margins were in-line with prior year, and Asia’s rose due to China’s strong gross margin.
  • SG&A declined 14 percent to $551 million, as the company’s cost-savings actions drove a 25 percent reduction in Adjusted SG&A, which was partially offset by $88 million of COVID-19 related charges.
  • The company recorded a net loss for the quarter of $364 million, reflecting $242 million, pre-tax, in restructuring charges and inventory costs and other charges recorded in connection with COVID-19 business disruptions, and an Adjusted net loss of $192 million, primarily resulting from the temporary closures of company-operated, franchise and wholesale customer third-party retail locations.
  • Adjusted EBIT was a loss of $206 million, as the adverse revenue impact of COVID-19 was only partially offset by the company’s cost-savings actions, which drove a $157 million decline in Adjusted SG&A.
  • Adjusted diluted EPS was $(0.48), reflecting the Adjusted net loss.
  • Total inventories at quarter end increased ten percent, net of reserves, compared to a year prior, despite the 62 percent decline in revenues, reflecting the company’s aggressive inventory actions in response to the COVID-19 business disruption and flexibility resulting from the high percentage of sales derived from core products.
  • The company enhanced its liquidity position by issuing an additional $500 million in aggregate principal amount of its 5.00% senior notes due 2025; total liquidity was $2 billion at quarter-end.

“We started the year with strong momentum, but the global pandemic and economic crises had a significantly negative impact on our second quarter results, as our stores and most wholesale doors were closed around the world for the majority of the quarter. I’m proud of how the team stepped up in response, accelerating our activation of key e-commerce and omni-channel capabilities, proactively cutting costs and managing cash smartly, and finding innovative ways to connect the Levi’s brand with its fans,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “As part of our response, to enable us to become a leaner and more market-responsive organization, as well as give us greater confidence in our cost structure given the uncertainties around the impact of the virus, we have made the difficult decision to reduce our non-retail, non-manufacturing workforce by about 700 positions, or roughly 15 percent, which we expect will generate annualized savings of $100 million.”

Bergh continued, “the pandemic is accelerating retail landscape shifts and consumer behavior in ways that play to the strength of the Levi’s brand. And we are doubling down on our digital transformation, incorporating the power of AI and data science, and leveraging our iconic brands to have an even stronger focus on Gen Z and sustainability. We believe this will enable us to further grow our market leadership position and emerge from this crisis a stronger company.”

“It’s been an unprecedented quarter, and we have been swift and agile in responding to the impact of the pandemic on our business,” said Harmit Singh, executive vice president and chief financial officer of Levi Strauss & Co. “We have taken measures to improve the structural economics of our company, prudently manage inventories and further solidify liquidity. As a result of our actions, in the second quarter, we increased total liquidity to $2 billion, reduced Adjusted SG&A by $157 million and managed inventories to only a ten-percent increase over prior year. We are encouraged by early signs of recovery, as roughly 90 percent of our company-operated and franchisee doors have now reopened globally, with nearly 40 percent of our company-operated stores comping positive as we exited the month, which in combination with our cost and working capital actions resulted in positive cash flow generation in June. We are confident that the steps we are taking to sustainably reduce our costs and drive greater efficiencies in working capital will enable us to further expand Adjusted EBIT margins and drive cash flows as we emerge from the crisis.”

COVID-19 Update

In mid-March, in response to the COVID-19 pandemic, the substantial majority of the company’s and its franchise and wholesale customers’ retail locations temporarily closed in the Americas and Europe, as well as in most of Asia outside greater China and Korea. By the end of May, only a portion of these doors had reopened, and with a wide variation in level of sales productivity as compared to prior year, depending on local market conditions. The coincidence of the company’s fiscal second quarter with the roughly ten-week duration of the temporary closures resulted in a significant adverse impact to revenues, earnings and cash flows.

In response to the pandemic and the uncertainty of its duration, the company took several measures to respond. It accelerated the deployment of several omni-channel initiatives including virtual concierge, ship from store, buy online pick up in store, and continued the roll out of its mobile app and loyalty program to augment its direct-to-consumer business. To reduce its costs and streamline operations, the company implemented cost-reduction and inventory-management initiatives that the company expects will support its objective to expand Adjusted EBIT margins over time. It enhanced its liquidity position by issuing an additional $500 million of its 5.00% senior notes due 2025. These actions resulted in $2 billion of liquidity at the end of the second quarter. The company’s goal is to become a stronger, more profitable company coming out of this unprecedented crisis.

In addition to the adverse impacts of the COVID-19 pandemic on the company’s second quarter financial results, the company recorded $242 million in incremental charges taken in connection with the pandemic. The $242 million was comprised of incremental COVID-19 related inventory costs of $87 million and $88 million of other charges for customer receivables and asset impairments, and $67 million of charges related to restructuring actions which the company anticipates will generate annualized cost savings of approximately $100 million.

Currently, roughly 90 percent of company-operated doors and franchisee doors have reopened globally, as well as the majority of third-party retail locations. While traffic and sales remain down to prior year, weekly sales performance in company-operated doors is sequentially improving, as store sales productivity in the final week of June as compared to prior year approached 80 percent, with nearly 40 percent of open company-operated store locations delivering positive net revenues growth compared to the same week in the prior year. As store locations have reopened, the company’s e-commerce net revenues growth has remained strong, at nearly 70 percent growth for the month of June as compared to the same month in the prior year. Cash flow trends are also improving, as net cash flows from operations were positive in June.

Although trends appear to be improving sequentially, the ultimate health and economic impact of the COVID-19 pandemic remains highly uncertain. The company expects that its business and results of operations, including net revenues, earnings and cash flows, will continue to be significantly adversely impacted for at least the balance of 2020, and there remains the possibility of additional COVID-19 related inventory and other charges.

Second-Quarter Total Company Overview

 

 

Three Months Ended

 

Increase

(Decrease)

As Reported

 

Six Months Ended

 

Increase

(Decrease)

As Reported

($ millions, except per-share amounts)

 

May 24,

2020

 

May 26,

2019

 

 

May 24,

2020

 

May 26,

2019

 

Net revenues

 

$

498

 

 

$

1,313

 

 

(62

)%

 

$

2,004

 

 

$

2,747

 

 

(27

)%

Net income (loss)

 

$

(364

)

 

$

29

 

 

(1,376

)%

 

$

(211

)

 

$

175

 

 

(221

)%

Adjusted net income (loss)

 

$

(192

)

 

$

69

 

 

(376

)%

 

$

(29

)

 

$

220

 

 

(113

)%

Adjusted EBIT

 

$

(206

)

 

$

82

 

 

(352

)%

 

$

(17

)

 

$

288

 

 

(106

)%

Diluted earnings per share*

 

$

(0.91

)

 

$

0.07

 

 

(98

 

$

(0.53

)

 

$

0.44

 

 

(97

Adjusted diluted earnings per share*

 

$

(0.48

)

 

$

0.17

 

 

(65

 

$

(0.07

)

 

$

0.55

 

 

(62

*Note: per share increase (decrease) compared to prior year displayed in cents

  • Net revenues declined 62 percent on a reported basis, and 61 percent on a constant-currency basis excluding $41 million in unfavorable currency effects. The decrease was primarily due to the temporary closures of company-operated and third-party retail locations as a result of the COVID-19 pandemic. The decrease was partially offset by 25 percent growth in its company-operated e-commerce business, including the benefit of accelerating its omni-channel initiatives, which after declining in March began to recover in April and accelerated to nearly 80 percent growth in May compared to the same month of the prior year. Company-operated e-commerce comprised 15 percent of total company net revenues in the second quarter, compared to 5 percent in the second quarter of the prior year, and growing at a faster rate due to the company’s digital initiatives and the pandemic’s impact to consumer shopping behaviors.
  • Gross profit was $170 million compared to $700 million in the same quarter in the prior year. Gross margin was 34 percent of net revenues, down from 53 percent in the same quarter of the prior year. The decrease in gross profit and gross margin is primarily due to lower revenues across all regions and $87 million in inventory-related costs recorded in connection with COVID-19 business disruptions, including the recognition of incremental inventory reserves of $50 million and adverse fabric purchase commitments of $36 million, directly related to the expected impact of COVID-19 on forecasted sales and expected selling prices.
  • Adjusted gross margin, which excludes the COVID-19 related charges, was 51.5 percent, a decline of 180 basis points compared to prior year, reflecting a decline in Europe’s wholesale gross margin, as the benefit of price increases was more than offset by a higher proportion of sales in lower-margin markets and channels. Gross margins for global DTC as well as for the Americas region were in line with the same quarter in the prior year, and Asia’s gross margin rose due to the benefit of price increases and a higher proportion of sales in China.
  • Selling, general and administrative (SG&A) expenses were $551 million, a 14 percent decline compared to $638 million in the same quarter in the prior year. SG&A in the second quarter of 2020 included COVID-19 related non-cash charges of $60 million in asset impairments primarily associated with the company’s store fleet and charges of $28 million related to customer receivables.

Adjusted SG&A for the second quarter declined $157 million to $462 million, 25 percent lower than $619 million for the same quarter in the prior year, reflecting substantial decreases in selling expenses, advertising, administration costs and distribution, all in connection with COVID-19 and the company’s related cost-reduction initiatives.

  • Restructuring charges of $67 million were recorded in the second quarter of 2020 in connection with the company’s restructuring initiative, which is designed to reduce costs, streamline operations and support agility. The action the company announced today includes an approximately 15 percent reduction of the company’s global non-retail and non-manufacturing organization, or roughly 700 positions, and is anticipated to be substantially completed in 2020.
  • Operating loss of $448 million reflected lower Adjusted EBIT as well as the recognition of $67 million of restructuring charges, $87 million of COVID-19 related inventory costs and $88 million of COVID-19 related other charges for customer receivables and asset impairments.
  • Adjusted EBIT was a loss of $206 million, reflecting the adverse revenue impact of COVID-19, which was partially offset by the company’s cost-reduction initiatives.
  • Adjusted net loss was $192 million as compared to Adjusted net income of $69 million in the same quarter of the prior year, reflecting the decline in Adjusted EBIT.
  • Adjusted diluted earnings per share declined to $(0.48) compared to $0.17 for the same prior-year period.

Additional information regarding Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income and Adjusted diluted earnings per share, as well as amounts presented above on a constant-currency basis, all of which are non-GAAP financial measures, is provided at the end of this press release.

Second-Quarter Regional Overview

Reported regional net revenues and operating income (loss) for the quarter are set forth in the table below:

 

 

Net Revenues

 

Operating Income (Loss) *

 

 

Three Months Ended

 

% Increase

(Decrease)

 

Three Months Ended

 

% Increase

(Decrease)

($ millions)

 

May 24, 2020

 

May 26, 2019

 

 

May 24, 2020

 

May 26, 2019

 

Americas

 

$

283

 

 

$

693

 

 

(59

)%

 

$

(38

)

 

$

102

 

 

(137

)%

Europe

 

$

129

 

 

$

398

 

 

(68

)%

 

$

(68

)

 

$

59

 

 

(215

)%

Asia

 

$

86

 

 

$

222

 

 

(61

)%

 

$

(29

)

 

$

17

 

 

(268

)%

* Note: Regional operating income is equal to regional Adjusted EBIT.

  • In the Americas, net revenues declined 59 percent on a reported basis. The decrease in net revenues was across channels and brands due to the impacts of COVID-19 and the temporary closure of company-operated and third-party retail locations across the region. The majority of these locations closed mid-March and remained closed through the end of the quarter. The decrease in net revenues was partially offset by growth in e-commerce revenue; after an initial slowdown in response to COVID-19, online traffic on the company’s e-commerce websites increased partway through the quarter, accelerating through May in which U.S. company-operated e-commerce net revenues grew more than 100 percent compared to the same month of the prior year.

Operating loss for the Americas was due to the adverse impacts of COVID-19, as lower net revenues were only partially offset by declines in discretionary and variable SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19.

  • In Europe, net revenues declined 68 percent on a reported basis. Net revenues decreased due to the impact of COVID-19, with the exception of the e-commerce business, where increasing growth rates accelerated to 35 percent growth in May after an initial slowdown in response to COVID-19. Company-operated and third-party retail locations began to close mid-March, with some markets reopening by the end of April and others during the month of May.

Europe’s operating loss was due to the adverse impacts of COVID-19, as lower net revenues were only partially offset by declines in discretionary and variable SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19.

  • In Asia, net revenues decreased 61 percent on a reported basis. The decrease in net revenues was across channels due to the impacts of COVID-19 and the temporary closures of company operated and third-party retail locations in the region. Retail locations in China and the neighboring countries that were impacted earlier by COVID-19 began to reopen their doors mid-March and saw foot traffic improve sequentially during the quarter, whereas locations in the rest of the region closed mid-March and remained closed through the end of the second quarter. E-commerce revenue grew significantly driven by increased traffic.

Asia’s operating loss was due to the adverse impacts of COVID-19, as lower net revenues were only partially offset by declines in discretionary and variable SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19.

Year-to-date 2020 Results are included in the company’s Quarterly Report on Form 10-Q for the quarter ended May 24, 2020.

Cash Flow and Balance Sheet

  • Cash and cash equivalents at the end of the second quarter of 2020 of $1,448 million and short-term investments of $76 million were complemented by $448 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $2.0 billion. To further increase liquidity and strengthen the balance sheet, during the quarter the company drew down $300 million on its senior secured revolving credit facility and issued an additional $500 million in aggregate principal amount of its 5.00% senior notes due 2025, some or all of which the company may redeem at once or over time, at redemption prices specified in the indenture governing the notes. Subsequent to quarter end, the company repaid the $300 million drawn on its credit facility, reflecting the company’s strong liquidity position and confidence in its ability to draw on the facility in the future if necessary.
  • Net debt at the end of the second quarter of 2020 was $283 million. The company’s leverage ratio was 4.1 at the end of the second quarter of 2020, an increase as compared to 1.4 at the end of the second quarter of 2019, due to the increase in gross debt and adverse impact of COVID-19 on the company’s Adjusted EBIT.
  • Cash from operations for the first six months of 2020 decreased to $41 million compared to $162 million for the first six months of 2019, reflecting the significant impact of the widespread temporary store closures and other significant adverse impacts of the COVID-19 pandemic. The adverse impact on cash from operations related to COVID-19 was partially mitigated by the company’s focus on working capital management, in particular managing inventories, including reducing and canceling inventory commitments and redeploying basic inventory items to subsequent seasons, as well as negotiating extended payment terms with suppliers, vendors and landlords, and vigorously pursuing collection of receivables.
  • Adjusted free cash flow for the first six months of 2020 was $(214) million, a decline of $253 million compared to the first six months of 2019, primarily reflecting lower cash from operations and higher share repurchases. The company has suspended its share repurchase program, and as it exited the second quarter had returned to positive cash flow generation.
  • Total inventories were up ten percent compared to the end of the corresponding prior-year period, despite the sales decline of 62 percent, reflecting the swift actions the company took to curtail inventory inflow.
  • The company declared and paid dividends of $0.08 per share in the second quarter totaling approximately $32 million. Collectively, dividends for the first and second quarter of 2020 represent a 16 percent increase compared to the $55 million paid in the first half of 2019. The company has determined not to declare a dividend for the third quarter and will reassess dividend payments for the fourth quarter as circumstances evolve.

Additional information regarding net debt, leverage ratio and Adjusted free cash flow, non-GAAP financial measures, is provided at the end of this press release.

Annual Guidance

Given the ongoing substantial uncertainty resulting from the COVID-19 pandemic and related economic impact, the company has withdrawn all guidance provided on January 30, 2020, and is not providing further guidance at this time.

Investor Conference Call

The company’s second-quarter 2020 investor conference call will be available through a live audio webcast at https://engage.vevent.com/rt/levistraussco/index.jsp?seid=80 on July 7, 2020, at 2 p.m. Pacific / 5 p.m. Eastern or via the following phone numbers: 800-884-6765 in the United States and Canada or +1-973-200-3064 internationally; I.D. No. 2179823. A replay is available the same day on http://www.levistrauss.com/investors/earnings-webcast and will be archived for one quarter. A telephone replay is also available through July 13, 2020, via the following phone numbers: 855-859-2056 in the United States and Canada or +1-404-537-3406 internationally; I.D. No. 2179823.

About Levi Strauss & Co.

Levi Strauss & Co. is one of the world’s largest brand-name apparel companies and a global leader in jeanswear. The company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™, and Denizen® brands. Its products are sold in more than 110 countries worldwide through a combination of chain retailers, department stores, online sites, and a global footprint of approximately 3,200 retail stores and shop-in-shops. Levi Strauss & Co.’s reported 2019 net revenues were $5.8 billion. For more information, go to http://levistrauss.com, and for company news and announcements go to http://investors.levistrauss.com.

Forward Looking Statements

This press release and related conference call contain, in addition to historical information, forward-looking statements, including statements related to the company’s ability to manage its business and liquidity during and after the COVID-19 pandemic; the impact of the COVID-19 pandemic on the company’s results of operations, including net revenues, margins, earnings and cash flows; the company’s ability to reduce costs and capital spending in response to the COVID-19 pandemic; the company’s balance sheet, liquidity and inventory position throughout and following the COVID-19 pandemic; the company’s prospects for financial performance, growth, expanded Adjusted EBIT margins, cash flows, and achievement of its long-term growth algorithm following the COVID-19 pandemic; future dividends and share repurchases; the company’s ability to grow its omni-channel and e-commerce business, and the expected financial performance; the company’s reduction in workforce and the expected timing, impacts, and annualized savings; the company’s ability to keep its company-operated retail stores open and productive; the future availability of the company’s credit facility; the company’s capital expenditure expectations; and the company’s store opening expectations.

Contacts

Investor Contact:

Aida Orphan

Levi Strauss & Co.

(415) 501-6194

Investor-relations@levi.com

Media Contact:

Kelly Mason

Levi Strauss & Co.

(415) 501-7777

newsmediarequests@levi.com

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