LEVI STRAUSS & CO. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report and with our audited financial statements and related notes in our Annual Report on Form 10-K for the year endedNovember 24, 2019 , filed with theSecurities and Exchange Commission onJanuary 30, 2020 . We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday in November that is closest toNovember 30 of that year. See "-Financial Information Presentation - Fiscal Year." Non-GAAP Financial Measures To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), we use certain non-GAAP financial measures throughout this Quarterly Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management's view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP. Overview We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began inSan Francisco, California , in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi's, Dockers, Signature byLevi Strauss & Co. and Denizen brands. Our business is operated through three geographic regions that comprise our three reporting segments:Americas ,Europe andAsia (which includes theMiddle East andAfrica ). We service consumers through our global infrastructure, developing, sourcing, and marketing our products around the world. Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi's brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi's as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized, and original. This approach has enabled the Levi's brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers brand helped drive "Casual Friday" in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature byLevi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices. We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers ("direct-to-consumer" or "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As ofMay 24, 2020 , our products were sold in over 50,000 retail locations in more than 110 countries, including approximately 3,200 brand-dedicated stores and shop-in-shops. As ofMay 24, 2020 , we had 981 company-operated stores located in 34 countries and approximately 500 company-operated shop-in-shops. The remainder of our brand-dedicated stores and shop-in-shops were operated by franchisees and other partners. Due to the COVID-19 pandemic, substantially all of our company-operated stores were temporarily closed for varying periods of time throughout the second quarter of 2020. See "-Impact of COVID-19 on our Business" below. 27
--------------------------------------------------------------------------------
Table of Contents
OurEurope andAsia businesses, collectively, contributed 49% of our net revenues and 44% of our regional operating income in the first six months of 2020, as compared to 49% of our net revenues and 52% of our regional operating income in the same period in 2019. Sales of Levi's brand products represented 87% of our total net sales in the first six months of both 2020 and 2019. Our wholesale channel generated 59% and 61% of our net revenues in the first six months of 2020 and 2019, respectively. Our DTC channel generated 41% and 39% of our net revenues in the first six months of 2020 and 2019, respectively, with sales through our company operated e-commerce sites representing 21% and 14% of DTC channel net revenues in the first six months of 2020 and 2019 and 9% and 6% of total net revenues in the first six months of 2020 and 2019, respectively. Impact of COVID-19 on Our Business The COVID-19 pandemic has materially impacted our business operations and results of operations for the three-month and six-month periods endedMay 24, 2020 . For the three-month period, consolidated net revenues decreased 62.1% and we recognized a consolidated operating loss of$448.3 million , compared to the recognition of operating income of$62.9 million in the second quarter of 2019, primarily due to adverse impacts of the COVID-19 pandemic on our business, as well as$242.0 million in incremental charges taken in connection with the pandemic. The$242.0 million comprised$67.4 million of restructuring charges COVID-19 related inventory costs of$86.6 million and other charges for customer receivables and asset impairments of$88.0 million . For more information on the restructuring charges and COVID-19 related inventory costs and other charges refer to Note 6 and Note 1, respectively, to the consolidated financial statements included in this report. Substantially all of our company-operated stores were temporarily closed for varying periods of time throughout the second quarter of 2020. Substantially all of our wholesale customers, including third-party retailers and franchise partners, were also impacted by temporary store closures, resulting in decreased demand and revenue from this channel as well. Throughout the quarter, our e-commerce business remained open. Although it was initially adversely impacted by COVID-19 as customers began to work from home, shelter in place and otherwise experience disruption to their lives as a result of the pandemic, our e-commerce business began to recover mid-quarter. Beginning in early April and throughout May, some of our company-operated retail stores inEurope andAsia began to re-open, while most company-operated retail stores in theAmericas remained closed. By the end of the quarter, about half of our company-operated retail stores were re-opened, mainly within ourAsia andEurope regions, although most were still operating on reduced hours and occupancy. As of the date of this filing, approximately 90% of our retail stores have reopened globally, although with varying levels of performance due to reduced hours and occupancy levels as well as reduced traffic. During this challenging economic environment, we are focused on continuing to take the necessary steps to strengthen our financial flexibility, preserve liquidity and manage our cash flow to continue to meet our short-term liquidity needs. Such actions include, but are not limited to, reducing our discretionary spending, reducing capital expenditures, suspending our share buyback program, not declaring a dividend during our third fiscal quarter, implementing restructuring plans, reducing payroll costs, including through employee furloughs and pay cuts and working with our vendors to extend credit terms. In earlyApril 2020 , as a preemptive measure to further strengthen our balance sheet, we drew down$300 million on our senior secured revolving credit facility and issued an additional$500 million in aggregate principal amount of 5.00% senior notes due 2025. OnJune 30, 2020 , subsequent to our quarter end, we repaid the$300 million borrowing under the Credit Facility. We are also applying certain beneficial provisions of the CARES Act, including the net operating loss carryback provision. For more information on the credit facility and senior notes and application of CARES Act provisions, refer to Note 4 and Note 13, respectively, to our consolidated financial statements included in this report. 28
--------------------------------------------------------------------------------
Table of Contents
We expect the COVID-19 pandemic and its associated impact on global economic conditions to continue to have an adverse impact on our results of operations. Even as government restrictions are lifted and retail stores reopen, the ultimate impact of the COVID-19 pandemic remains highly uncertain, and we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will continue to be materially adversely impacted for at least the balance of 2020, including as a result of: • Temporary closure of a significant number of our owned and operated
retail stores globally as well as the doors owned by substantially all
of our wholesale customers, including third-party retailers and
franchise partners;
• Decreased foot traffic in retail stores;
• Decreased consumer confidence and consumer spending habits, including
spending for the merchandise that we sell and negative trends in
consumer purchasing patterns due to changes in consumers' disposable
income, credit availability and debt levels;
• Decreased wholesale channel sales and increased likelihood of wholesale
customer failure;
• Increased inventory, inventory write-downs and the sale of excess
inventory at discounted prices;
• Disruption to the supply chain caused by distribution and other
logistical issues;
• Decreased productivity due to travel bans, work-from-home policies or
shelter-in-place orders; and
• A slowdown in the
outlook or a credit crisis.
2020 Restructuring InApril 2020 , our Board of Directors ("the Board") endorsed a restructuring initiative designed to reduce costs, streamline operations and support agility. The adverse impacts of the COVID-19 pandemic on our business necessitated cost reduction actions while plans to streamline operations continue to be developed. The initiative includes the elimination of approximately 15% of our global non-retail and non-manufacturing positions and is expected to result in approximately$100 million in annual cost savings. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes. For the three-month and six-month periods endedMay 24, 2020 , we recognized restructuring charges of$67.4 million , which were on a separate line item in our consolidated statements of operations; within the consolidated balance sheet, we recorded$51.3 million and$14.5 million in restructuring liabilities and other long-term liabilities, respectively, and an immaterial amount of pension and postretirement curtailment losses was recorded in accumulated other comprehensive income. These charges primarily relate to severance benefits, based on separation benefits provided by Company policy or statutory benefit plans, and consulting fees. No payments have been made during the three and six months endedMay 24, 2020 . We estimate that we will incur future additional charges related to this restructuring initiative. Other Factors Affecting Our Business We believe the other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, that are impacting our business include the following: • A complex and challenging retail environment for us and our customers,
characterized by unpredictable traffic patterns and a general promotional
environment. In developed economies, mixed real wage growth and shifting
consumer spending also continue to pressure global discretionary
spending. Consumers continue to focus on value pricing and convenience
with the off-price retail channel remaining strong and increased
expectations for real-time delivery.
• The diversification of our business model across regions, channels,
brands, and categories affects our gross margin. For example, if our
sales in higher gross margin business regions, channels, brands and
categories grow at a faster rate than in our lower gross margin business
regions, channels, brands and categories, we would expect a favorable
impact to aggregate gross margin over time. Gross margin in Europe is
generally higher than in our other two regional operating segments. DTC
sales generally have higher gross margins than sales through thirdparties, although DTC sales also typically have higher selling expenses.
Value brands, which are focused on the value-conscious consumer,
generally generate lower gross margin. Enhancements to our existing
product offerings, or our expansion into new products categories, may
also impact our future gross margin.
29--------------------------------------------------------------------------------
Table of Contents
• More competitors are seeking growth globally, thereby increasing
competition across regions. Some of these competitors are entering
markets where we already have a mature business such as the United
States , Mexico , Western Europe and Japan , and may provide consumersdiscretionary purchase alternatives or lower-priced apparel offerings.
• Wholesaler/retailer dynamics and wholesale channels remain challenged by
mixed growth prospects due to increased competition from e-commerce
shopping, pricing transparency enabled by the proliferation of online
technologies, and vertically-integrated specialty stores. Retailers,
including our top customers, have in the past and may in the future
decide to consolidate, undergo restructurings or rationalize their
stores, which could result in a reduction in the number of stores that
carry our products.
• Many apparel companies that have traditionally relied on wholesale
distribution channels have invested in expanding their own retail store
and e-commerce distribution and consumer-facing technologies, which has
increased competition in the retail market.
• Competition for, and price volatility of, resources throughout the supply
chain have increased, causing us and other apparel manufacturers to
continue to seek alternative sourcing channels and create new
efficiencies in our global supply chain. Trends affecting the supplychain include the proliferation of lower-cost sourcing alternatives,
resulting in reduced barriers to entry for new competitors, and the
impact of fluctuating prices of labor and raw materials as well as the
consolidation of suppliers. Trends such as these can bring additional
pressure on us and other wholesalers and retailers to shorten lead-times,
reduce costs and raise product prices.
• Foreign currencies continue to be volatile. Significant fluctuations of
the U.S. Dollar against various foreign currencies, including the Euro,
British Pound and Mexican Peso, will impact our financial results,
affecting translation, revenue, operating margins and net income.
• The current environment has introduced greater uncertainty with respect
to potential tax and trade regulations. The current domestic and
international political environment, including changes to other
policies related to global trade and tariffs, have resulted in
uncertainty surrounding the future state of the global economy. Such
changes may require us to modify our current sourcing practices, which
may impact our product costs, and, if not mitigated, could have a
material adverse effect on our business and results of operations.
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. Effects of Inflation We believe inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability. Our Second Quarter 2020 Results
• Net revenues. Consolidated net revenues decreased 62.1% on a reported
basis and 60.9% on a constant-currency basis compared to the second
quarter of 2019. The decrease was primarily due to the temporary closures
of company-operated and third-party retail locations globally as a result
of the COVID-19 pandemic.
• Operating income (loss). We recognized a consolidated operating loss of
second quarter of 2019, primarily due to adverse impacts of the COVID-19
pandemic, including the recognition of
charges and $174.6 million of COVID-19 related inventory costs and other
charges.
• Adjusted EBIT. Adjusted EBIT loss was
EBIT of $81.6 million in the second quarter of 2019.
• Diluted loss per share. Diluted loss per share was $0.91 compared to
diluted earnings per share of $0.07 in the second quarter of 2019.
• Adjusted diluted loss per share. Adjusted diluted loss per share was
compared to adjusted diluted earnings per share of
quarter of 2019.
Our Year-to-Date 2020 Results • Net revenues. Consolidated net revenues decreased 27.1% on a reported
basis and 25.7% on a constant-currency basis compared to the first six
months of 2019. The decrease was primarily due to the temporary closures
of company-operated and third-party retail locations globally as a result
of the COVID-19 pandemic.
30--------------------------------------------------------------------------------
Table of Contents
• Operating income (loss). We recognized a consolidated operating loss of
first six months of 2019, primarily due to adverse impacts of the COVID-19
pandemic, including the recognition of
charges and
charges.
• Adjusted EBIT. Adjusted EBIT loss was $16.6 million for the first six
month of 2020 compared to Adjusted EBIT of
six months of 2019. The adverse impacts of the COVID-19 pandemic were
partially offset by higher net revenues and gross margin expansion in the
first quarter of 2020.
• Diluted loss per share. Diluted loss per share was $0.53 compared to
diluted earnings per share of $0.44 in the second quarter of 2019.
• Adjusted diluted loss per share. Adjusted diluted loss per share was
compared to adjusted diluted earnings per share of
quarter of 2019.
Financial Information Presentation Fiscal year. We use a 52- or 53- week fiscal year, with each fiscal year ending on the Sunday in November that is closest toNovember 30 of that year. Certain of our foreign subsidiaries have fiscal years endingNovember 30 . Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the last Sunday of the last month of that quarter. Each quarter of fiscal years 2020 and 2019 consists of 13 weeks, with the exception of the fourth quarter of 2020, which consists of 14 weeks. Due to the impact of the COVID-19 pandemic, our results of operations for the three-month period endedMay 24, 2020 are not necessarily indicative of those for a full fiscal year. Segments. We manage our business according to three regional segments: theAmericas ,Europe andAsia . OurAsia segment includes theMiddle East andAfrica . Classification. Our classification of certain significant revenues and expenses reflects the following:
• Net revenues comprise net sales and licensing revenues. Net sales include
sales of products to wholesale customers, including franchised stores, and
direct sales to consumers at our company-operated stores and shop-in-shops
located within department stores and other third-party locations, as well
as company-operated e-commerce sites. Net revenues include discounts,
allowances for estimated returns and incentives. Licensing revenues, which
include revenues from the use of our trademarks in connection with the
manufacturing, advertising and distribution of trademarked products bythird-party licensees, are earned and recognized as products are sold by
licensees based on royalty rates as set forth in the applicable licensing
agreements.
• Cost of goods sold primarily comprises product costs, labor and related
overhead, sourcing costs, inbound freight, internal transfers and the cost
of operating our remaining manufacturing facilities, including the related
depreciation expense. On both a reported and constant-currency basis, cost
of goods sold reflects the transactional currency impact resulting from
the purchase of products in a currency other than the functional currency.
• Selling expenses include, among other things, all occupancy costs and
depreciation associated with our company-operated stores and commissions
associated with our company-operated shop-in-shops, as well as costs
associated with our e-commerce operations.
• We reflect substantially all distribution costs in SG&A, including costsrelated to receiving and inspection at distribution centers, warehousing,
shipping to our customers, handling, and certain other activities
associated with our distribution network.
31--------------------------------------------------------------------------------
Table of Contents
Results of Operations for Three and Six Months EndedMay 24, 2020 , as Compared to Comparable Periods in 2019 The following table presents, for the periods indicated, our consolidated statements of operations, the changes in these items from period to period and these items expressed as a percentage of net revenues: Three Months Ended Six Months Ended May 24, May 26, May 24, May 26, % 2020 2019 % 2020 2019 May 24, May 26, Increase % of Net % of Net May 24, May 26, Increase % of Net % of Net 2020 2019 (Decrease) Revenues Revenues 2020 2019 (Decrease) Revenues Revenues (Dollars and shares in millions, except per share amounts) Net revenues$ 497.6 $ 1,312.9 (62.1 )% 100.0 %
100.0 %
46.7 % 994.7 1,264.2 (21.3 )% 49.6 % 46.0 % Gross profit
169.7 700.4 (75.8 )% 34.1 % 53.3 % 1,009.0 1,483.2 (32.0 )% 50.4 % 54.0 %
Selling, general and
administrative expenses 550.6 637.5 (13.6 )% 110.7 % 48.6 % 1,211.1 1,219.4 (0.7 )% 60.4 % 44.4 % Restructuring
67.4 - - 13.5 % - 67.4 - - 3.4 % -
Operating income (loss) (448.3 ) 62.9 * (90.1 )% 4.8 % (269.5 ) 263.8 (202.2 )% (13.5 )% 9.6 % Interest expense
(11.2 ) (15.2 ) (26.3 )% (2.3 )% (1.2 )% (27.9 ) (32.7 ) (14.7 )% (1.4 )% (1.2 )%
Underwriter commission
paid on behalf of
selling stockholders - (24.9 ) (100.0 )% - (1.9 )% - (24.9 ) (100.0 )% - % (0.9 )%
Other income, net 1.3 3.2 (59.4 )% 0.3 % 0.2 % 4.0 1.6 150.0 % 0.2 % 0.1 %
Income (loss) before
income taxes (458.2 ) 26.0 * (92.1 )% 2.0 % (293.4 ) 207.8 (241.2 )% (14.6 )% 7.6 %
Income tax (benefit)
expense (94.6 ) (2.5 ) * (19.0 )% (0.2 )% (82.5 ) 32.8 (351.5 )% (4.1 )% 1.2 % Net income (loss) (363.6 ) 28.5
* (73.1 )% 2.2 % (210.9 ) 175.0 (220.5 )% (10.5 )% 6.4 %
Net income attributable
to noncontrolling
interest - (0.3 ) (100.0 )% - - - (0.2 ) (100.0 )% - - %
Net income (loss)
attributable to Levi
Strauss & Co. $ (363.6 ) $ 28.2 * (73.1 )% 2.1 % $ (210.9 ) $ 174.8 (220.7 )% (10.5 )% 6.4 %
Earnings (loss) per
common share
attributable to common
stockholders:
Basic $ (0.91 ) $ 0.07 * * * $ (0.53 ) $ 0.46 (215.2 )% * *
Diluted $ (0.91 ) $ 0.07 * * * $ (0.53 ) $ 0.44 (220.5 )% * *
Weighted-average common
shares outstanding:
Basic 397.5 389.5 2.1 % * * 396.8 383.3 3.5 % * *
Diluted 397.5 409.3 (2.9 )% * * 396.8 401.4 (1.1 )% * *
_____________
* Not meaningful
32--------------------------------------------------------------------------------
Table of Contents
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 basis from period to period.
Three Months Ended Six Months Ended
% Increase (Decrease) % Increase (Decrease)
May 24, May 26, As Constant May 24, May 26, As Constant
2020 2019 Reported Currency 2020 2019 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 282.7 $ 692.7 (59.2 )% (58.1 )% $ 1,028.3 $ 1,410.0 (27.1 )% (26.2 )%
Europe 129.1 398.3 (67.6 )% (66.4 )% 642.0 863.0 (25.6 )% (23.5 )%
Asia 85.8 221.9 (61.3 )% (59.8 )%
333.4 474.4 (29.7 )% (28.1 )%
Total net revenues
Total net revenues decreased on both a reported and constant-currency basis for the three-month and six-month periods endedMay 24, 2020 , as compared to the same prior-year periods.Americas . On both a reported and constant-currency basis, net revenues in ourAmericas region decreased for the three-month and six-month periods endedMay 24, 2020 , with currency translation affecting net revenues unfavorably by approximately$18 million and$17 million , respectively. The decrease in net revenues for the three-month period endedMay 24, 2020 was driven by decreased demand across channels and brands, due to the impacts of COVID-19 and the temporary closure of company-operated and wholesale customer retail locations across the region. The majority of these locations closed mid-March and remained closed through the second quarter endingMay 24, 2020 . The decrease in net revenues was slightly offset by an increase in e-commerce revenue as online traffic increased partway through the quarter, after an initial slowdown attributable to COVID-19, as customers began to work from home, shelter in place and otherwise experience disruption to their lives as a result of the pandemic. As ofMay 24, 2020 , approximately 25% of our company-operated stores in theAmericas region were open. The decrease in net revenues for the six-month period endedMay 24, 2020 was primarily due to the COVID-19 impacts in the second quarter which were partially offset by first quarter growth in DTC net revenues for the first half of the year and the inclusion of non-comparable net revenues from the week of Black Friday in the 2020 period.Europe . Net revenues inEurope decreased on both a reported and constant-currency basis for the three-month and six-month periods endedMay 24, 2020 , with currency translation affecting net revenues unfavorably by approximately$14 million and$24 million , respectively. Net revenues decreased for the three-month period endedMay 24, 2020 due to the impact of COVID-19. With the exception of our e-commerce business, which grew during the quarter after an initial slowdown attributable to COVID-19, as customers began to work from home, shelter in place and otherwise experience disruption to their lives as a result of the pandemic. The decline in revenue was across channels as company-operated and wholesale customer retail locations started closing mid-March with some markets reopening end of April and during the month of May. As ofMay 24, 2020 , approximately 30% of our company-operated stores in theEurope region were open. The decrease in net revenues for the six-month period endedMay 24, 2020 was primarily due to the COVID-19 impacts in the second quarter which were partially offset by first quarter growth across channels driven by increased demand from our wholesale customers as well as expansion within our company-operated retail network and outlets, and the inclusion of non-comparable revenue from the week of Black Friday in the 2020 period.Asia . Net revenues inAsia decreased on both a reported and constant-currency basis for the three-month and six-month periods endedMay 24, 2020 , with currency affecting net revenues unfavorably by approximately$8 million and$10 million , respectively. As ofMay 24, 2020 , approximately 85% of our company-operated stores in theAsia region were open. The decrease in net revenues for the three-month period endedMay 24, 2020 was driven by decreased demand across channels due to the impacts of COVID-19 and the temporary closures of company-operated and wholesale customer retail locations in the region. Retail locations inChina and the neighboring countries which were impacted earlier by COVID-19, began to reopen their doors mid-March, and saw foot traffic increase sequentially during the quarter, whereas locations in the rest of the region 33
--------------------------------------------------------------------------------
Table of Contents
closed mid-March and remained closed through the end of the second quarter.
E-commerce revenue grew driven by increased traffic to the site.
The decrease in net revenues for the six-month period ended
34--------------------------------------------------------------------------------
Table of Contents
Gross profit
The following table shows consolidated gross profit and gross margin for the
periods indicated and the changes in these items from period to period:
Three Months Ended Six Months Ended
% %
May 24, May 26, Increase May 24, May 26, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions)
Net revenues $ 497.6 $ 1,312.9 (62.1 )% $ 2,003.7 $ 2,747.4 (27.1 )%
Cost of goods sold 327.9 612.5 (46.5 )% 994.7 1,264.2 (21.3 )%
Gross profit $ 169.7 $ 700.4 (75.8 )% $ 1,009.0 $ 1,483.2 (32.0 )%
Gross margin 34.1 % 53.3 % 50.4 % 54.0 %
Currency translation unfavorably impacted gross profit by approximately $21
million and $27 million for the three-month and six-month periods ended May 24,
2020 , respectively.
For the three-month period ended May 24, 2020 , the decreases in gross profit and
gross margin were primarily due to lower net revenues across our regions and
inventory costs recorded in connection with COVID-19 related business
disruptions. Incremental COVID-19 related inventory costs of $86.6 million were
recognized, including the recognition of incremental inventory reserves of $49.9
million and adverse fabric purchase commitments of $35.9 million , directly
related to the expected impact of COVID-19 on forecasted sales and expected
selling prices. The sale of excess inventory at expected selling prices is
expected to unfavorably impact gross margins for the remainder of the year
relative to the prior year. Of the 19.2 percentage-point decrease in gross
margin, 17.4 percentage points were attributable to the
COVID-19 related charges, and the remaining 1.8 percentage points were
primarily due to a decline in Europe's wholesale gross margin, reflecting 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 period in the prior year, and Asia's wholesale margin rose due to the
benefit of price increases and a higher proportion of sales in China .
The decrease in gross margin for the six-month period ended May 24, 2020 was
primarily due to the COVID-19 impacts in the second quarter which decreased
gross margin by 4.3 percentage points, partially offset by the impact of price
increases implemented in the second half of the prior year across all three
regions and both channels coupled with first quarter revenue growth within our
company-operated retail network, including the benefit of a Black Friday week.
Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these
items from period to period and these items expressed as a percentage of net
revenues:
Three Months Ended Six Months Ended
May 24, May 26, May 24, May 26,
% 2020 2019 % 2020 2019
May 24, May 26, Increase % of Net % of Net May 24, May 26, Increase % of Net % of Net
2020 2019 (Decrease) Revenues Revenues 2020 2019 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 217.9 $ 269.1 (19.0 )% 43.8 % 20.5 % $ 525.6 $ 547.5 (4.0 )% 26.2 % 19.9 %
Advertising and
promotion 72.3 114.5 (36.9 )% 14.5 % 8.7 % 161.4 187.0 (13.7 )% 8.1 % 6.8 %
Administration 53.0 111.8 (52.6 )% 10.7 % 8.5 % 168.7 206.2 (18.2 )% 8.4 % 7.5 %
Other 119.4 142.1 (16.0 )% 24.0 % 10.8 % 267.4 278.7 (4.1 )% 13.3 % 10.1 %
COVID-19
related charges 88.0 - - % 17.7 % - % 88.0 - - % 4.4 % - %
Total SG&A $ 550.6 $ 637.5 (13.6 )% 110.7 % 48.6 % $ 1,211.1 $ 1,219.4 (0.7 )% 60.4 % 44.4 %
Currency translation impacted SG&A favorably by approximately $15 million and
$18 million for the three-month and six-month periods ended May 24, 2020 ,
respectively.
Selling. Currency translation impacted selling expenses favorably by
approximately $8 million and $10 million for the three-month and six-month
periods ended May 24, 2020 , respectively. For the three-month period ended
May 24, 2020 , lower selling expenses primarily reflected decreased costs
associated with the temporary closure of our company-operated retail stores. For
the
35--------------------------------------------------------------------------------
Table of Contents
three-month and six-month periods endedMay 24, 2020 , selling expenses as a percentage of net revenues increased due to the adverse impact of COVID-19 on revenues, offset in part by cost reductions implemented during the quarter. Advertising and promotion. Currency translation impacted advertising and promotion expenses favorably by approximately$3 million and$4 million for the three-month and six-month periods endedMay 24, 2020 , respectively. The decrease in advertising and promotion expenses for the three-month and six-month periods endedMay 24, 2020 is due to our decision to reduce spending in response to COVID-19 in the channels most affected by the economic shutdown. Administration. Administration expenses include functional administrative and organization costs. Currency translation impacted administration expenses favorably by approximately$2 million for the three-month and six-month periods endedMay 24, 2020 . Administration costs decreased largely due to lower employee incentive costs, primarily lower incentive compensation compared to the same three-month and six-month periods in the prior year. Other. Other costs include distribution, information resources and marketing organization costs. Currency translation impacted SG&A other costs favorably by approximately$2 million for the three-month and six-month periods endedMay 24, 2020 . For the three-month and six-month periods endedMay 24, 2020 the decrease in other costs was primarily due to a decrease in distribution expenses attributable to reduced sales volume. In the six-month period endedMay 24, 2020 , the decrease in other costs was partially offset with information technology expenses, which reflect critical investments towards expanding our omni-channel capabilities as well as initial investments in a new enterprise resource planning system. COVID-19 related charges. COVID-19 related charges consist of incremental charges as a result of the COVID-19 business disruptions, including asset impairment and other charges. During the three-month period endedMay 24, 2020 , we recognized$43.0 million in impairment of certain operating lease right-of-use assets and$17.4 million in impairment of property and equipment related to certain retail locations and other corporate assets, resulting from lower revenue and future cash flow projections from the ongoing effects of the COVID-19 pandemic. Additional charges of$27.6 million relate to customer receivables, including provisions and other allowances as a result of changes in their financial condition of$15.1 million and actual and anticipated bankruptcies and other associated claims of$12.5 million . Restructuring For the three-month and six-month periods endedMay 24, 2020 , we recognized restructuring charges of$67.4 million , consisting primarily of severance and other post-employment benefits. See "-Restructuring" above for more information. 36
--------------------------------------------------------------------------------
Table of Contents
Operating income (loss)
The following table shows operating income (loss) 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:
Three Months Ended Six Months Ended
May 24, May 26, May 24, May 26,
% 2020 2019 % 2020 2019
May 24, May 26, Increase % of Net %
of Net
2020 2019 (Decrease) Revenues Revenues 2020 2019 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income
(loss):
Americas $ (37.7 ) $ 101.6 (137.1 )% (13.3 )% 14.7 % $ 86.3 $ 225.3 (61.7 )% 8.4 % 16.0 %
Europe (67.7 ) 58.7 (215.3 )% (52.4 )% 14.7 % 64.7 180.3 (64.1 )% 10.1 % 20.9 %
Asia (28.5 ) 17.0 (267.6 )% (33.2 )% 7.7 % 4.2 60.0 (93.0 )% 1.3 % 12.6 %
Total regional
operating income
(loss) (133.9 ) 177.3 (175.5 )% (26.9 )% * 13.5 % * 155.2 465.6 (66.7 )% 7.7 % * 16.9 % *
Corporate:
Restructuring 67.4 - - % 13.5 % * - % * 67.4 - - % 3.4 % * - % *
Other corporate
staff costs and
expenses 247.0 114.4 115.9 % 49.6 % * 8.7 % * 357.3 201.8 77.1 % 17.8 % * 7.3 % *
Corporate
expenses 314.4 114.4 174.8 % 63.2 % *
8.7 % * 424.7 201.8 110.5 % 21.2 % * 7.3 % *
Total operating
income (loss)
* (90.1 )% *
4.8 % *
(13.5 )% 9.6 %
______________
* Percentage of consolidated net revenues Currency translation unfavorably affected total operating income (loss) by approximately$6 million and$9 million for the three-month and six-month periods endedMay 24, 2020 , respectively. Regional operating income (loss). •Americas . Currency translation had an unfavorable impact of approximately
2020 was due to the adverse impacts of COVID-19, including lower net
revenues partially offset by reductions and elimination of discretionary
and variable expenses.
In the six-month period ended
million and
ended
lower net revenues partially offset by lower SG&A expenses as
discretionary and variable expenses were reduced or eliminated in response
to COVID-19.
In the six-month period endedMay 24, 2020 , the impact of COVID-19 was partially offset by higher net revenues across all channels, net of higher selling costs to support store expansion, in the first quarter. •Asia . Currency translation did not have a significant impact for the three-month and six-month periods endedMay 24, 2020 . The decrease in operating income (loss) three-month and six-month periods endedMay 24 ,
2020 was primarily due to lower net revenues across both channels due to
the adverse impacts of COVID-19. This was partially offset by lower SG&A
expenses as discretionary and variable expenses were reduced in response
to COVID-19.
37--------------------------------------------------------------------------------
Table of Contents
Corporate. Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are restructuring charges, COVID-19 related charges and other corporate staff costs. Corporate expenses also include costs associated with our global inventory sourcing organization and COVID-19 related inventory costs which are reported as a component of consolidated gross margin. Currency translation did not have a significant impact on corporate expenses for the three-month and six-month periods endedMay 24, 2020 . The increase in the corporate expenses for the three-month and six-month periods endedMay 24, 2020 , reflected COVID-19 related inventory costs and other charges, partially offset by lower administration expenses primarily related to employee incentives. Interest expense Interest expense was$11.2 million and$27.9 million for the three-month and six-month periods endedMay 24, 2020 , as compared to$15.2 million and$32.7 million for the comparable prior-year periods. The decrease in interest expense was primarily related to a reduction in deferred compensation interest, partially offset by an increase related to additional borrowings from senior notes and credit facility. Our weighted-average interest rate on average borrowings outstanding during the three and six months endedMay 24, 2020 was 4.36% and 4.56%, respectively, as compared to 5.32% and 5.27% during the comparable periods in 2019. Other income (expense), net Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month and six-month periods endedMay 24, 2020 , we recorded income of$1.3 million and$4.0 million , respectively, as compared to income of$3.2 million and$1.6 million for the same prior-year periods. The income in the three-month and six-month periods endedMay 24, 2020 is primarily from investment interest generated from money market funds and short-term investments. Underwriter commission paid on behalf of selling stockholders For the three-month and six-month periods endedMay 26, 2019 , we recorded an expense of$24.9 million , for underwriting discounts and commissions paid by us on behalf of the selling stockholders in connection with our IPO. Income tax expense The effective income tax rate for the three months endedMay 24, 2020 was 20.7% and reflects a$94.6 million income tax benefit recorded on$458.2 million of pre-tax losses. The effective income tax rate for three months endedMay 26, 2019 was (9.3)% and reflects a$2.4 million income tax benefit recorded on$26.1 million of pre-tax income. The increase in the effective tax rate was primarily driven by$9.0 million in discrete tax benefits from a tax rate difference related to the expected carry back of net operating losses to tax years with a higher federal corporate tax rate as allowed under the CARES Act, offset by$15.6 million tax charge for valuation allowances on deferred tax assets that are more likely than not to be realized. There was an$11.1 million tax benefit in the same prior-year period attributable to employees exercising stock-based equity awards. The effective income tax rate for the six months endedMay 24, 2020 was 28.1% and reflects an$82.5 million income tax benefit recorded on$293.4 million of pre-tax losses. The effective income tax rate for the six months endedMay 26, 2019 was 15.8% and reflects a$32.8 million income tax expense recorded on$207.8 million of pre-tax losses. The increase in the effective tax rate was primarily driven by discrete tax benefits of$21.0 million attributable to employees exercising stock-based equity awards in 2020 and$9.0 million related to net operating loss carryback provisions under the CARES Act. These were partially offset by valuation allowance charges in 2020 of$18.0 million on deferred tax assets that are more likely than not to be realized in 2020. 38
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources Liquidity outlook We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. As ofMay 24, 2020 , we had cash and cash equivalents totaling approximately$1.4 billion , short-term investments of$76.1 million and unused availability under our credit facility of$447.7 million , resulting in a total liquidity position of approximately$2 billion . As a result of the COVID-19 pandemic, we have taken and will continue to take action to reduce costs, preserve liquidity and manage our cash flow. Such actions include, but are not limited to reducing discretionary spending, reducing capital expenditures, suspending our share buyback program until further notice, not declaring a dividend in our third fiscal quarter, implementing restructuring plans that will lead to approximately$100 million in annualized savings, reducing payroll costs, including through employee furloughs and pay cuts and working with our vendors to extend credit terms. In an effort to further increase liquidity and strengthen our balance sheet, this quarter we drew down$300 million on our senior secured revolving credit facility and issued an additional$500 million in aggregate principal amount of 5.00% senior notes due 2025. The proceeds will be used for working capital, general corporate or other purposes. OnJune 30, 2020 , subsequent to our quarter end, we repaid the$300 million borrowing under the Credit Facility. While the impact and duration of COVID-19 on our business is currently uncertain, the situation is expected to be temporary. In the longer term, we remain committed to increasing total shareholder returns through our three capital allocation priorities: (1) to invest in opportunities and initiatives to grow our business organically; (2) to return capital to our stockholders in the form of cash dividends, as well as stock repurchases to offset dilution that would otherwise be introduced from stock-based incentive compensation grants; and (3) to pursue acquisitions that support our current strategies. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then-existing economic conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our Board may deem relevant. Cash sources We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. We are party to a second amended and restated credit agreement that provides for a senior secured revolving credit facility. Our credit facility is an asset-based facility, in which the borrowing availability is primarily based on the value of ourU.S. Levi's® trademarks and the levels of accounts receivable and inventory inthe United States andCanada . The maximum availability under our credit facility is$850 million , of which$800 million is available to us for revolving loans inU.S. Dollars and$50 million is available to us for revolving loans either inU.S. Dollars or Canadian Dollars. Our unused availability under our senior secured revolving credit facility (the "Credit Facility") was$447.7 million onMay 24, 2020 , as our total availability of$778.2 million , based on collateral levels as defined by the Credit Facility were reduced by a$300.0 million borrowing made inApril 2020 and$30.5 million of letters of credit and other credit usage allocated under the Credit Facility. OnJune 30, 2020 , subsequent to our quarter end, we repaid the$300 million borrowing under the Credit Facility. As ofMay 24, 2020 , we had cash and cash equivalents totaling approximately$1.4 billion and short-term investments of$76.1 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately$2 billion . Cash uses Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our equity incentive plans and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements. InDecember 2019 , we completed an acquisition for all operating assets related to Levi's® and Dockers® brands fromThe Jeans Company ("TJC"), our distributor inChile ,Peru andBolivia , for$52.2 million , plus transaction costs. This includes 78 Levi's® and Dockers® retail stores and one e-commerce site, distribution with the region's leading multi-brand retailers, and the logistical operations in these markets. 39
--------------------------------------------------------------------------------
Table of Contents
InJanuary 2020 , our Board approved a share repurchase program that authorizes the repurchase of up to$100 million of the Company's Class A common stock. During the three months and six months endedMay 24, 2020 , 1.1 million shares and 3.0 million shares were repurchased for$19.2 million and$56.2 million , plus broker's commissions, respectively in the open market. This equates to an average repurchase price of approximately$18.73 per share. Our share buyback program has been suspended until further notice. Cash flows The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows: Six Months EndedMay 24 ,May 26, 2020 2019 (Dollars in millions)
Cash provided by operating activities
(107.6 ) (143.2 )
Cash provided by financing activities 589.6 131.0 Cash and cash equivalents at period end 1,448.2 860.9
Cash flows from operating activities Cash provided by operating activities was$41.4 million for the six-month period endedMay 24, 2020 , as compared to$161.8 million for the comparable period in 2019. The decrease in cash provided by operating activities is primarily due to less cash received on customer receivables, due in part to lower sales, partially offset by lower spending on inventory, and employee incentives and lower variable and discretionary expenditures. Our cash flows from operations in the second quarter of 2020 were significantly impacted by the widespread temporary store closures and other business disruptions caused by COVID-19 pandemic. In an effort to mitigate the impacts of the pandemic and preserve liquidity, we are focused 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 our suppliers. Cash flows from investing activities Cash used for investing activities was$107.6 million for the six-month period endedMay 24, 2020 , as compared to$143.2 million for the comparable period in 2019. The decrease in cash used for investing activities is due to a decrease in short-term investment activities as 2019 included the initial acquisitions of short-term investments, partially offset by an acquisition of operating assets inChile ,Peru andBolivia , and the timing of foreign currency contract settlements. Cash flows from financing activities Cash provided by financing activities was$589.6 million for the six-month period in 2020, as compared to$131.0 million for the comparable period in 2019. Cash provided in 2020 primarily reflects proceeds from senior notes of$502.5 million and short-term credit facilities of$306.0 million , partially offset by payments of$56.2 million for common stock repurchases,$75.6 million for withholding tax on cashless equity award exercises, payment of a$63.6 million cash dividend and payments of$16.1 million for noncontrolling interest buyback. Cash provided in 2019 primarily reflects proceeds from our IPO of$254.3 million , partially offset by the payment of a$55.0 million cash dividend, payments of$19.7 million for underwriting commissions and other direct and incremental offering costs, and payments made for equity award exercises. Indebtedness Of our total debt of$1.8 billion as ofMay 24, 2020 , we had fixed-rate debt of$1.5 billion (83.4% of total debt), net of capitalized debt issuance costs, and variable-rate debt of$300 million (16.6% of total debt). As ofMay 24, 2020 , our required aggregate debt principal payments on our unsecured long-term debt were$1.5 billion in years after 2024. Short-term borrowings of$7.9 million at various foreign subsidiaries and$300.0 million under the Credit Facility are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms. Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in compliance with all of these covenants as ofMay 24, 2020 . 40
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Measures Adjusted Gross Profit, Adjusted Gross Margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) Margin and Adjusted Diluted Earnings (Loss) per Share For the three-month, six-month and twelve-month periods endedMay 24, 2020 and the comparable periods in 2019, we define the following non-GAAP financial measures as follows: • Adjusted gross profit, as gross profit excluding COVID-19 related inventory costs. • Adjusted gross margin, as Adjusted gross profit as a percentage of net revenues;
• Adjusted SG&A, as SG&A less charges related to changes in fair value on
cash-settled stock-based compensation, COVID-19 related charges, and
restructuring and related charges, severance and other, net;
• Adjusted EBIT, as net income (loss) excluding income tax (benefit)
expense, interest expense, other (income) expense, net, underwriter
commission paid on behalf of selling stockholders, impact of changes in
fair value on cash-settled stock-based compensation, COVID-19 related
inventory costs and other charges, and restructuring and related charges,
severance and other, net, and Adjusted EBIT margin as Adjusted EBIT as a
percentage of net revenues;
• Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization
expense;
• Adjusted net income (loss), as net income (loss) excluding underwriter
commission paid on behalf of selling stockholders, charges related to the
impact of changes in fair value on cash-settled stock-based compensation,
COVID-19 related inventory costs and other charges, and restructuring and
related charges, severance and other, net, adjusted to give effect to the
income tax impact of such adjustments, using an effective tax rate equal
to our income tax expense divided by our income before income taxes, each
as reflected in our statement of operations for the relevant period;
• Adjusted net income (loss) margin as Adjusted net income (loss) as a
percentage of net revenues;
• Adjusted diluted earnings (loss) per share as Adjusted net income (loss)
per weighted-average number of diluted common shares outstanding.
We believe Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, Adjusted net income (loss), Adjusted net income (loss) margin and Adjusted diluted earnings (loss) per share are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance. Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, Adjusted net income (loss), Adjusted net income (loss) margin and Adjusted diluted earnings (loss) per share have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include: • Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect
income tax payments that reduce cash available to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect
interest expense, or the cash requirements necessary to service interest
or principal payments on our indebtedness, which reduces cash available
to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other
expense (income) net, which has primarily consisted of realized andunrealized gains and losses on our forward foreign exchange contracts and
transaction gains and losses on our foreign exchange balances, although
these items affect the amount and timing of cash available to us when
these gains and losses are realized;
• all of these non-GAAP financial measures exclude underwriter commission
paid on behalf of selling stockholders in connection with our IPO that
reduces cash available to us;
• all of these non-GAAP financial measures exclude the expense resulting
from the impact of changes in fair value on our cash-settled stock-based
compensation awards, even though, prior to March 2019 , such awards were
required to be settled in cash;
41--------------------------------------------------------------------------------
Table of Contents
• all of these non-GAAP financial measures exclude COVID-19 related
inventory costs and other charges, and restructuring and related charges,
severance and other, net which can affect our current and future cash
requirements;
• the expenses and other items that we exclude in our calculations of all
of these non-GAAP financial measures may differ from the expenses and
other items, if any, that other companies may exclude from all of these
non-GAAP financial measures or similarly titled measures;
• Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation
of property and equipment and, although these are non-cash expenses, the
assets being depreciated may need to be replaced in the future; and
• Adjusted net income (loss), Adjusted net income (loss) margin and
Adjusted diluted earnings (loss) per share do not include all of the
effects of income taxes and changes in income taxes reflected in net
income.
Because of these limitations, all of these non-GAAP financial measures should be
considered along with net income and other operating and financial performance
measures prepared and presented in accordance with GAAP.
The following table presents a reconciliation of gross profit, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
Gross Profit for each of the periods presented.
Adjusted Gross Profit:
Three Months Ended Six Months Ended
May 24, 2020 May 26, 2019 May 24, 2020 May 26, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Gross profit $ 169.7 $ 700.4 $ 1,009.0 $ 1,483.2
Non-GAAP measure:
Gross profit $ 169.7 $ 700.4 $ 1,009.0 $ 1,483.2
COVID-19 related inventory costs (1) 86.6 - 86.6 -
Adjusted gross profit $ 256.3 $ 700.4 $ 1,095.6 $ 1,483.2
Adjusted gross margin 51.5 % 53.3 % 54.7 % 54.0 %
_____________
(1) Represents costs incurred in connection with COVID-19, including
million of incremental inventory reserves and the recognition of adverse
fabric purchase commitments of $35.9 million .
42--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of SG&A, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
SG&A for each of the periods presented.
Adjusted SG&A:
Three Months Ended Six Months Ended
May 24, 2020 May 26, 2019 May 24, 2020 May 26, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Selling, general and administrative
expenses $ 550.6 $ 637.5 Non-GAAP measure: Selling, general and administrative expenses$ 550.6 $ 637.5 $ 1,211.1 $ 1,219.4 Impact of changes in fair value on cash-settled stock-based compensation(1) 0.7 (15.0 ) (4.2 ) (20.3 ) COVID-19 related charges(2) (88.0 ) - (88.0 ) - Restructuring related charges, severance and other, net(3) (1.1 ) (3.7 ) (6.7 ) (3.8 ) Adjusted SG&A$ 462.2 $ 618.8 $ 1,112.2 $ 1,195.3 _____________
(1) Includes the impact of changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2) Represents costs incurred in connection with the COVID-19 pandemic, primarily
consisting of
right-of-use assets and
related to certain retail locations and other corporate assets, and
million of charges related to customer receivables.
(3) Restructuring related charges, severance and other, net include transaction
and deal related costs, including IPO-related, initial acquisition and
integration costs and amortization of acquired intangible assets.
43--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of net income (loss), the most
directly comparable financial measure calculated in accordance with GAAP, to
Adjusted EBIT and Adjusted EBITDA for each of the periods presented.
Adjusted EBIT and Adjusted EBITDA:
Three Months Ended Six Months Ended Twelve Months Ended
May 24, 2020 May 26, 2019 May 24, 2020 May 26, 2019 May 24, 2020 May 26, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Net income (loss) $ (363.6 ) $ 28.5 $ (210.9 ) $ 175.0 $ 9.1 $ 401.9
Non-GAAP measure:
Net income (loss) $ (363.6 ) $ 28.5 $
(210.9 )
(94.6 ) (2.5 ) (82.5 ) 32.8 (32.7 ) 81.3
Interest expense 11.2 15.2 27.9 32.7 61.4 58.0
Other (income) expense, net (1.3 ) (3.2 ) (4.0 ) (1.6 ) (4.4 ) (14.0 )
Underwriter commission paid on
behalf of selling stockholders - 24.9 - 24.9 - 24.9
Impact of changes in fair value
on cash-settled stock-based
compensation(1) (0.7 ) 15.0 4.2 20.3 18.0 52.1
COVID-19 related inventory costs
and other charges (2) 174.6 - 174.6 - 174.6 -
Restructuring and restructuring
related charges, severance and
other, net(3) 68.5 3.7 74.1 3.8 80.1 7.9
Adjusted EBIT $ (205.9 ) $ 81.6 $
(16.6 )
30.1 68.4 58.7 133.6 114.2
Adjusted EBITDA $ (172.2 ) $ 111.7 $ 51.8 $ 346.6 $ 439.7 $ 726.3
Adjusted EBIT margin (41.4 )% 6.2 % (0.8 )% 10.5 %
_____________(1) Includes the impact of changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2) Represents inventory costs and other charges incurred in connection with
the COVID-19 pandemic, primarily consisting
inventory reserves,
assets and property and equipment related, respectively, and
charges related to customer receivables.
(3) Other charges included in restructuring and restructuring related charges,
severance and other, net include transaction and deal related costs,
including IPO-related, initial acquisition and integration costs and
amortization of acquired intangible assets.
(4) Depreciation and amortization amount net of amortization of acquired
intangible assets included in Restructuring and related charges, severance
and other, net.
44--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of net income (loss), the most
directly comparable financial measure calculated in accordance with GAAP, to
Adjusted net income (loss) for each of the periods presented and the calculation
of Adjusted diluted earnings (loss) per share for each of the periods presented.
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share:
Three Months Ended Six Months Ended
May 24, 2020 May 26, 2019 May 24, 2020 May 26, 2019
(Dollars inmillions, except per share amounts)
(Unaudited)
Most comparable GAAP measure: Net income (loss)$ (363.6 ) $ 28.5 $ (210.9 ) $ 175.0 Non-GAAP measure: Net income (loss)$ (363.6 ) $ 28.5 $ (210.9 ) $ 175.0 Underwriter commission paid on behalf of selling stockholders - 24.9 - 24.9 Impact of changes in fair value on cash-settled stock-based compensation(1) (0.7 ) 15.0 4.2 20.3 COVID-19 related inventory costs and other charges(2) 174.6 - 174.6 - Restructuring and restructuring related charges, severance and other, net(3) 68.5 3.7 74.1 3.8 Tax impact of adjustments (70.3 ) (2.8 ) (71.1 ) (3.8 ) Adjusted net income (loss)$ (191.5 ) $ 69.3
Adjusted net income (loss) margin (38.5 )% 5.3 % (1.5 )% 8.0 % Weighted-average common shares outstanding - diluted 397.5 409.3 396.8 401.4
Adjusted diluted earnings (loss) per share
$ (0.07 ) $ 0.55 ' _____________
(1) Includes the impact of changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2) Represents inventory costs and other charges incurred in connection with
the COVID-19 pandemic, primarily consisting
inventory reserves,
assets and property and equipment related, respectively, and
charges related to customer receivables.
(3) Other charges included in restructuring and restructuring related charges,
severance and other, net include transaction and deal related costs,
including IPO-related, initial acquisition and integration costs and
amortization of acquired intangible assets.
Net Debt and Leverage Ratio:
We define net debt, a non-GAAP financial measure, as total debt, excluding
capital leases, less cash and cash equivalents and short-term investments in
marketable securities. We define leverage ratio, a non-GAAP financial measure,
as the ratio of total debt to the last 12 months Adjusted EBITDA. Our management
believes net debt and leverage ratio are important measures to monitor our
financial flexibility and evaluate the strength of our balance sheet. Net debt
and leverage ratio have limitations as analytical tools and may vary from
similarly titled measures used by other companies. Net debt and leverage ratio
should not be considered in isolation or as a substitute for an analysis of our
results prepared and presented in accordance with GAAP.
45--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of total debt, excluding capital
leases, the most directly comparable financial measure calculated in accordance
with GAAP, to net debt for each of the periods presented.
May 24, 2020 November 24, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Total debt, excluding capital leases $ 1,806.9 $ 1,014.4
Non-GAAP measure: Total debt, excluding capital leases$ 1,806.9 $
1,014.4
Cash and cash equivalents (1,448.2 ) (934.2 ) Short-term investments in marketable securities (76.1 ) (80.7 ) Net debt$ 282.6 $ (0.5 ) The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to leverage ratio for each of the periods presented. May 24, 2020 May 26, 2019 (Dollars in millions) (Unaudited)
Total debt, excluding capital leases
4.1 1.4
_____________
(1) Last Twelve Months Adjusted EBITDA is reconciled from net income (loss) which
is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted
EBITDA table for more information.
Adjusted Free Cash Flow:
We define Adjusted free cash flow, a non-GAAP financial measure, as net cash
flow from operating activities less purchases of property, plant and equipment,
plus proceeds (less payments) on settlement of forward foreign exchange
contracts not designated for hedge accounting, less repurchases of common stock,
including shares surrendered for tax withholdings on equity award exercises, and
cash dividends to stockholders. We believe Adjusted free cash flow is an
important liquidity measure of the cash that is available after capital
expenditures for operational expenses and investment in our business. We believe
Adjusted free cash flow is useful to investors because it measures our ability
to generate or use cash. Once our business needs and obligations are met, cash
can be used to maintain a strong balance sheet and invest in future growth.
Our use of Adjusted free cash flow has limitations as an analytical tool and
should not be considered in isolation or as a substitute for an analysis of our
results under GAAP. First, Adjusted free cash flow is not a substitute for net
cash flow from operating activities. Second, other companies may calculate
Adjusted free cash flow or similarly titled non-GAAP financial measures
differently or may use other measures to evaluate their performance, all of
which could reduce the usefulness of Adjusted free cash flow as a tool for
comparison. Additionally, the utility of Adjusted free cash flow is further
limited as it does not reflect our future contractual commitments and does not
represent the total increase or decrease in our cash balance for a given period.
Because of these and other limitations, Adjusted free cash flow should be
considered along with net cash flow from operating activities and other
comparable financial measures prepared and presented in accordance with GAAP.
46--------------------------------------------------------------------------------
Table of Contents
The following table presents a reconciliation of net cash flow from operating
activities, the most directly comparable financial measure calculated in
accordance with GAAP, to Adjusted free cash flow for each of the periods
presented.
Six Months Ended
May 24, 2020 May 26, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Net cash provided by operating activities $ 41.4 Non-GAAP measure: Net cash provided by operating activities$ 41.4 $ 161.8 Underwriter commission paid on behalf of selling stockholders -
24.9
Purchases of property, plant and equipment (75.2 ) (77.0 ) Proceeds on settlement of forward foreign exchange 15.1
13.1
contracts not designated for hedge accounting Repurchase of common stock (56.2 ) (3.1 ) Repurchase of shares surrendered for tax withholdings on (75.6 ) (25.5 ) equity awards Dividend to stockholders (63.6 ) (55.0 ) Adjusted free cash flow$ (214.1 ) $ 39.2 Constant-currency: We report our operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of our results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates we use to translate our operating results for all countries where the functional currency is not theU.S. Dollar intoU.S. Dollars. Because we are a global company, foreign currency exchange rates used for translation may have a significant effect on our reported results. In general, our reported financial results are affected positively by a weakerU.S. Dollar and are affected negatively by a strongerU.S. Dollar as compared to the foreign currencies in which we conduct our business. References to our operating results on a constant-currency basis mean our operating results without the impact of foreign currency translation fluctuations. We believe disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of our results by increasing the transparency of our underlying performance by excluding the impact of fluctuating foreign currency exchange rates. However, constant-currency results are non-GAAP financial measures and are not meant to be considered in isolation or as a substitute for comparable measures prepared in accordance with GAAP. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Constant-currency results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. Our constant-currency results do not eliminate the transaction currency impact, which primarily include the realized and unrealized gains and losses recognized from the measurement and remeasurement of purchases and sales of products in a currency other than the functional currency. Additionally, gross margin is impacted by gains and losses related to the procurement of inventory, primarily products sourced in EUR and USD, by our global sourcing organization on behalf of our foreign subsidiaries. 47
--------------------------------------------------------------------------------
Table of Contents
The table below sets forth the calculation of net revenues for each of our
regional operating segments on a constant-currency basis for comparison periods
applicable to the three-month and six-month periods ended
Three Months Ended Six Months Ended
% %
May 24, May 26, Increase May 24, May 26, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions)
(Unaudited)
Total revenues
As reported $ 497.6 $ 1,312.9 (62.1 )% $ 2,003.7 $ 2,747.4 (27.1 )%
Impact of foreign currency
exchange rates - (40.6 ) * - (51.5 ) *
Constant-currency net revenues $ 497.6 $ 1,272.3 (60.9 )% $ 2,003.7 $ 2,695.9 (25.7 )%
Americas
As reported $ 282.7 $ 692.7 (59.2 )% $ 1,028.3 $ 1,410.0 (27.1 )%
Impact of foreign currency
exchange rates - (18.3 ) * - (16.8 ) *
Constant-currency net revenues -
Americas $ 282.7 $ 674.4 (58.1 )% $ 1,028.3 $ 1,393.2 (26.2 )%
Europe
As reported $ 129.1 $ 398.3 (67.6 )% $ 642.0 $ 863.0 (25.6 )%
Impact of foreign currency
exchange rates - (13.9 ) * - (24.3 ) *
Constant-currency net revenues -
Europe $ 129.1 $ 384.4 (66.4 )% $ 642.0 $ 838.7 (23.5 )%
Asia
As reported $ 85.8 $ 221.9 (61.3 )% $ 333.4 $ 474.4 (29.7 )%
Impact of foreign currency
exchange rates - (8.4 ) * - (10.4 ) *
Constant-currency net revenues -
Asia $ 85.8 $ 213.5 (59.8 )% $ 333.4 $ 464.0 (28.1 )%
_____________
* Not meaningful
Constant-Currency Adjusted EBIT:
The table below sets forth the calculation of Adjusted EBIT on a
constant-currency basis for comparison period applicable to the three-month and
six-month periods ended May 24, 2020 .
Three Months Ended Six Months Ended
% %
May 24, May 26, Increase May 24, May 26, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions)
(Unaudited)
Adjusted EBIT(1) $ (205.9 ) $ 81.6 (352.3 )% $ (16.6 ) $ 287.9 (105.8 )%
Impact of foreign currency
exchange rates - (5.9 ) * - (8.7 ) *
Constant-currency Adjusted EBIT $ (205.9 ) $ 75.7 (372.0 )% $ (16.6 ) $ 279.2 (105.9 )%
Constant-currency Adjusted EBIT
margin(2) (41.4 )% 5.9 % (0.8 )% 10.4 %
_____________(1) Adjusted EBIT is reconciled from net income (loss) which is the most
comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for
more information.
(2) We define constant-currency Adjusted EBIT margin as constant-currency
Adjusted EBIT as a percentage of constant-currency net revenues.
* Not meaningful
48--------------------------------------------------------------------------------
Table of Contents
Constant-Currency Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share: The table below sets forth the calculation of Adjusted net income (loss) and Adjusted diluted earnings (loss) per share on a constant-currency basis for comparison periods applicable to the three-month and six-month periods endedMay 24, 2020 . Three Months Ended Six Months Ended % % May 24, May 26, Increase May 24, May 26, Increase 2020 2019 (Decrease) 2020 2019 (Decrease) (Dollars in millions, except per share amounts) (Unaudited) Adjusted net income (loss) (1)$ (191.5 ) $ 69.3 (376.3 )%$ (29.1 ) $ 220.2 (113.2 )% Impact of foreign currency exchange rates - (4.5 ) * - (7.1 ) * Constant-currency Adjusted net income (loss)$ (191.5 ) $ 64.8 (395.5 )%$ (29.1 ) $ 213.1 (113.7 )% Constant-currency Adjusted net income (loss) margin(2) (38.5 )% 5.1 % (1.5 )% 7.9 % Adjusted diluted earnings (loss) per share$ (0.48 ) $ 0.17 (382.4 )%$ (0.07 ) $ 0.55 (112.7 )% Impact of foreign currency exchange rates - (0.01 ) * - (0.02 ) * Constant-currency Adjusted diluted earnings (loss) per share$ (0.48 ) $ 0.16 (400.0 )%$ (0.07 ) $ 0.53 (113.2 )%
_____________
(1) Adjusted net income (loss) is reconciled from net income (loss) which is the
most comparable GAAP measure. Refer to Adjusted net income (loss) table for
more information.
(2) We define constant-currency Adjusted net income (loss) margin as
constant-currency Adjusted net income (loss) as a percentage of
constant-currency net revenues.
* Not meaningful
49--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations As ofMay 24, 2020 , there had been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 2019 Annual Report on Form 10-K, except those changes resulting from borrowing$300 million under our senior secured revolving credit facility and issuing an additional$500 million in aggregate principal amount of 5.00% senior notes due 2025. See Note 4 to the consolidated financial statements included in this report for more information. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies from those disclosed in our 2019 Annual Report on Form 10-K, except for changes related to the adoption of the FASB issued ASU 2016-02, Leases (Topic 842), as described in Note 1 and Note 8 to the consolidated financial statements included in this report. Recently Issued Accounting Standards See Note 1 to our unaudited consolidated financial statements included in this Quarterly Report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements. 50
--------------------------------------------------------------------------------
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Quarterly Report, including (without limitation) statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including debt reduction, currency values and financial impact, foreign exchange counterparty exposures, the impact of pending legal proceedings, adequate liquidity levels, dividends and/or statements preceded by, followed by or that include the words "believe", "will", "so we can", "when", "anticipate", "intend", "estimate", "expect", "project", "could", "plans", "seeks" and similar expressions. These forward-looking statements speak only as of the date stated, and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under "Risk Factors" in Part II, Item 1A on this Quarterly Report and in our other filings with theSecurities and Exchange Commission , could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation: • changes in general economic and financial conditions, and the resulting
impact on the level of discretionary consumer spending for apparel and
pricing trend fluctuations, and our ability to plan for and respond to the
impact of those changes;
• the potential impact of COVID-19 on both our projected customer demand and
supply chain, as well as our consolidated financial position, consolidated
results of operations, and consolidated cash flows in fiscal 2020;
• the risk of future non-cash asset impairment charges, including to
goodwill, operating right-of-use assets and/or other store assets;
• expected impact from benefits related to the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") enacted in
• the impact of the
• our ability to effectively manage any global productivity and outsourcing
actions as planned, which are intended to increase productivity and
efficiency in our global operations, take advantage of lower-cost
service-delivery models in our distribution network and streamline ourprocurement practices to maximize efficiency in our global operations,
without business disruption or mitigation to such disruptions;
• consequences of impacts to the businesses of our wholesale customers,
including significant store closures or a significant decline in a
wholesale customer's financial condition leading to restructuring actions,
bankruptcies, liquidations or other unfavorable events for our wholesale
customers, caused by factors such as inability to secure financing,
decreased discretionary consumer spending, inconsistent foot and online
traffic patterns and an increase in promotional activity as a result of
decreased foot and online traffic, pricing fluctuations, general economic
and financial conditions and changing consumer preferences;
• our and our wholesale customers' decisions to modify strategies and adjust
product mix and pricing, and our ability to manage any resulting product
transition costs, including liquidating inventory or increasing
promotional activity;
• our ability to purchase products through our independent contractmanufacturers that are made with quality raw materials and our ability to
mitigate the variability of costs related to manufacturing, sourcing, and
raw materials supply and to manage consumer response to such mitigating
actions;
• our ability to gauge and adapt to changing
environments and fashion trends and changing consumer preferences in
product, price-points, as well as in-store and digital shopping
experiences;
• our ability to respond to price, innovation and other competitivepressures in the global apparel industry, on and from our key customers
and in our key markets;
• our ability to increase the number of dedicated stores for our products,
including through opening and profitably operating company-operated
stores;
• consequences of foreign currency exchange and interest rate fluctuations;
51
--------------------------------------------------------------------------------
Table of Contents
• our ability to successfully prevent or mitigate the impacts of data
security breaches;
• our ability to attract and retain key executives and other key employees;
• our ability to protect our trademarks and other intellectual property;
• the impact of the variables that affect the net periodic benefit cost and
future funding requirements of our postretirement benefits and pension
plans;
• our dependence on key distribution channels, customers and suppliers;
• our ability to utilize our tax credits and net operating loss carryforwards;
• ongoing or future litigation matters and disputes and regulatory developments;
• the impact of the recently passed Tax Act in
related changes to our deferred tax assets and liabilities, tax
obligations and effective tax rate in future periods, as well as the
charge recorded in fiscal 2018;
• changes in or application of trade and tax laws, potential increases in
import tariffs or taxes and the potential withdrawal from or renegotiation
or replacement of the North America Free Trade Agreement ("NAFTA"); and
• political, social and economic instability, or natural disasters, in
countries where we or our customers do business.
We have based the forward-looking statements contained in this Quarterly Report
primarily on our current expectations and projections about future events and
trends that we believe may affect our business, financial condition, results of
operations, prospects, business strategy and financial needs. The outcome of the
events described in these forward-looking statements is subject to risks,
uncertainties, assumptions and other factors described under "Risk Factors" and
elsewhere in this Quarterly Report. These risks are not exhaustive. Other
sections of this Quarterly Report include additional factors that could
adversely affect our business and financial performance. Moreover, we operate in
a very competitive and rapidly changing environment. New risks and uncertainties
emerge from time to time, and it is not possible for us to predict all risks and
uncertainties that could have an impact on the forward-looking statements
contained in this Quarterly Report. We cannot assure you that the results,
events and circumstances reflected in the forward-looking statements will be
achieved or occur, and actual results, events or circumstances could differ
materially from those described in the forward-looking statements.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Quarterly Report, and while
we believe such information forms a reasonable basis for such statements, such
information may be limited or incomplete, and our statements should not be read
to indicate that we have conducted an exhaustive inquiry into, or review of, all
potentially available relevant information. These statements are inherently
uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this Quarterly Report relate only to
events as of the date on which such statements are made. We undertake no
obligation to update any forward-looking statements after the date of this
Quarterly Report or to conform such statements to actual results or revised
expectations, except as required by law.
52--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
