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 ofFebruary 23, 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 ofFebruary 23, 2020 , we had 977 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. OurEurope andAsia businesses, collectively, contributed 50% of our net revenues and 57% of our regional operating income in the first three months of both 2020 and 2019. Sales of Levi's brand products represented 88% of our total net sales in the first three months of both 2020 and 2019. 23
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Our wholesale channel generated 58% and 61% of our net revenues in the first three months of 2020 and 2019, respectively. Our DTC channel generated 42% and 39% of our net revenues in the first three months of 2020 and 2019, respectively, with sales through our company operated e-commerce sites representing 16% of DTC channel net revenues in the first three months of both 2020 and 2019 and 7% and 6% of total net revenues in the first three months of 2020 and 2019, respectively. Impact of COVID-19 on Our Business Our global operations expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause operational results to suffer. The recent COVID-19 pandemic has impacted our business operations and results of operations for the first quarter of 2020 as described in more detail under "Results of Operations for Three Months EndedFebruary 23, 2020 , as Compared to Comparable Period in 2019" below, in particular due to decreased foot traffic and mid-quarter store closures in mainlandChina . We expect the evolving COVID-19 pandemic to continue to have an adverse impact on our results of operations, due to further spread of the disease in other regions and potential disruption from any supply chain impacts. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net revenues, earnings and cash flows, will 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, which started in mainlandChina midway through the first fiscal quarter, and which has expanded globally;
• Decreased foot traffic in retail stores;
• Consumer confidence and consumer spending habits, including spending
for the merchandise that we sell and negative trends in consumer
purchasing patterns due to consumers' disposable income, credit
availability and debt levels;
• Decreased discretionary DTC channel spending independent of store closures;
• Decreased wholesale channel spending and increased likelihood of
wholesale customer failure;
• Possible disruption to the supply chain caused by distribution and
other logistical issues;
• Decreased productivity due to travel ban, work-from-home policies or
shelter-in-place orders;
• A slowdown in the
or a credit crisis.
We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs. Such actions include, but are not limited to, reducing our discretionary spending, revisiting our investment strategies, suspending our share buyback program until further notice, and reducing payroll costs, including through employee furloughs and pay cuts. 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: • Other factors that impact consumer discretionary spending continue to
create 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
higher than in our other two regional operating segments. DTC sales
generally have higher gross margins than sales through third parties,
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.
• 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
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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 First Quarter 2020 Results
• Net revenues. Consolidated net revenues increased 5.0% on a reported basis
and 5.8% on a constant-currency basis compared to the first quarter of
2019. The increase was primarily driven by an increase in DTC net
revenues; as the benefit of a Black Friday week was included in the first
quarter of 2020, and expansion and performance of the retail network and
e-commerce, drove further growth. Revenue growth was partially offset by
an estimated
traffic resulting from the COVID-19 outbreak in
• Operating income. Compared to the first quarter of 2019, consolidated
operating income decreased 11.0% and operating margin decreased to 11.9%,
as higher net revenues and gross margin expansion were offset by higher
selling, general and administrative expenses ("SG&A") associated with
expansion of our company-operated retail network, higher advertising and
other administration expenses.
• Net income. Compared to the first quarter of 2019, consolidated net income
increased to
decrease in income tax expense driven by a
benefit attributable to employees exercising stock-based equity awards in
2020, offset by the decrease in operating income described above.
• Adjusted EBIT. Compared to the first quarter of 2019, adjusted EBITdecreased 8.2% as a result of higher SG&A expenses in the 2020 quarter
associated with expansion of our company-operated retail network. As a
result, adjusted EBIT margin was 12.6%, 180 basis points lower than thefirst quarter of 2019 on a reported basis, and 170 basis points lower than
the first quarter of 2019 on a constant-currency basis.
• Adjusted Net Income. Compared to the first quarter of 2019, adjusted net
income increased 7.6%, primarily due to a decrease in income tax expense
driven by a
exercising stock-based equity awards in 2020, offset by the decrease in
operating income described above.
• Diluted earnings per share. Compared to the first quarter of 2019, diluted
earnings per share were flat at
an increase in shares outstanding that was primarily a result of our
initial public offering of Class A common stock in
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• Adjusted diluted earnings per share. Compared to the first quarter of
2019, adjusted diluted earnings per share increased from $0.38 to $0.40 due to an increase in adjusted net income partially offset by an increase
in shares outstanding that was primarily a result of our IPO.
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. 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.
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Results of Operations for Three Months EndedFebruary 23, 2020 , as Compared to Comparable Period in 2019 The following table presents, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues: Three Months Ended February 23, February 24, % 2020 2019 February 23, February 24, Increase % of Net % of Net 2020 2019 (Decrease) Revenues Revenues (Dollars and shares in millions, except per share amounts) Net revenues$ 1,506.1 $ 1,434.5 5.0 % 100.0 % 100.0 % Cost of goods sold 666.8 651.7 2.3 % 44.3 % 45.4 % Gross profit 839.3 782.8 7.2 % 55.7 % 54.6 % Selling, general and administrative expenses 660.5 581.9 13.5 % 43.9 % 40.6 % Operating income 178.8 200.9 (11.0 )% 11.9 % 14.0 % Interest expense (16.7 ) (17.5 ) (4.6 )% (1.1 )% (1.2 )% Other income (expense), net 2.7 (1.6 ) * 0.2 % (0.1 )% Income before income taxes 164.8 181.8 (9.4 )% 10.9 % 12.7 % Income tax expense 12.1 35.3 (65.7 )% 0.8 % 2.5 % Net income 152.7 146.5 4.2 % 10.1 % 10.2 % Net loss attributable to noncontrolling interest - 0.1 (100.0 )% - - Net income attributable to Levi Strauss & Co.$ 152.7 $ 146.6 4.2 % 10.1 % 10.2 % Earnings per common share attributable to common stockholders: Basic$ 0.39 $ 0.39 - % * * Diluted$ 0.37 $ 0.37 - % * * Weighted-average common shares outstanding: Basic 396.2 377.1 5.1 % * * Diluted 410.1 393.2 4.3 % * * _____________ * Not meaningful 27
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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
% Increase (Decrease)
February 23, February 24, As Constant
2020 2019 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 745.6 $ 717.3 3.9 % 3.7 %
Europe 512.9 464.7 10.4 % 12.9 %
Asia 247.6 252.5 (1.9 )% (1.2 )%
Total net revenues $ 1,506.1 $ 1,434.5 5.0 % 5.8 %
Total net revenues increased on both a reported and constant-currency basis for
the three-month period ended February 23, 2020 , as compared to the same period
in 2019.
Americas . On both a reported and constant-currency basis, net revenues in our
Americas region increased for the three-month period ended February 23, 2020 ,
with currency translation affecting net revenues favorably by approximately $2
million .
The increase in net revenues for the three-month period ended February 23, 2020
was primarily driven by the inclusion of non-comparable Black Friday week
results in the 2020 period and revenues from our newly acquired South American
distributor. DTC net revenues, which includes both same store and new store
sales, grew as compared to the 2019 period, as we benefited from 78 more stores
at the end of the first quarter of 2020 versus the first quarter of 2019. This
growth was more than offset by a decline in wholesale revenue, primarily within
the U.S. and across our Levi's and Docker's brands, as a result of the continued
softening of the overall wholesale environment, including the impact of
financially troubled retailers and increased door closures since a year ago.
Europe . Net revenues in Europe increased on both a reported and
constant-currency basis for the three-month period ended February 23, 2020 , with
currency translation affecting net revenues unfavorably by approximately $10
million .
Constant-currency net revenues increased for the three-month period ended
February 23, 2020 due to growth in net revenues in both the DTC and wholesale
channels. Revenue growth was broad-based across genders and product categories.
Additionally, growth in DTC revenue was driven by growth and expansion of our
retail network and outlets, including the benefit of a Black Friday week, as we
benefited from 25 more stores in operation at the end of the first quarter of
2020 versus the first quarter of 2019.
Asia . Net revenues in Asia decreased on both a reported and constant-currency
basis for the three-month period ended February 23, 2020 , with currency
affecting net revenues unfavorably by approximately $2 million .
Excluding the effects of currency, the decrease in net revenues for the
three-month periods ended February 23, 2020 was due to an estimated $20.0
million adverse impact of the recent COVID-19 outbreak that impacted our China
business as well as neighboring countries, as we had to temporarily close many
of our stores midway through the quarter. This more than offset growth in our
wholesale business as well as the expansion within our company-operated retail
network, as we benefited from 42 more stores at the end of the first quarter of
2020 versus the first quarter of 2019.
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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
February 23, February 24, %
2020 2019 Increase
(Dollars in millions)
Net revenues $ 1,506.1 $ 1,434.5 5.0 %
Cost of goods sold 666.8 651.7 2.3 %
Gross profit $ 839.3 $ 782.8 7.2 %
Gross margin 55.7 % 54.6 %
Currency translation unfavorably impacted gross profit by approximately $6
million for the three-month period ended February 23, 2020 . For the three-month
period ended February 23, 2020 , gross margin increased primarily due to price
increases implemented in the second half of the prior year across all three
regions and both channels coupled with revenue growth within our
company-operated retail network, including the benefit of a Black Friday week in
the current year.
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
February 23, February 24,
2020 2019
February 23, February 24, % % of Net % of Net
2020 2019 Increase Revenues Revenues
(Dollars in millions)
Selling $ 307.7 $ 278.4 10.5 % 20.4 % 19.4 %
Advertising and promotion 89.1 72.5 22.9 % 5.9 % 5.1 %
Administration 115.7 94.4 22.6 % 7.7 % 6.6 %
Other 148.0 136.6 8.3 % 9.8 % 9.5 %
Total SG&A $ 660.5 $ 581.9 13.5 % 43.9 % 40.6 %
Currency impacted SG&A favorably by approximately $3 million for the three-month
period ended February 23, 2020 .
Selling. Currency translation impacted selling expenses favorably by
approximately $2 million for the three-month period ended February 23, 2020 .
Higher selling expenses primarily reflected costs associated with the growth and
expansion of our DTC business, including increased investment in new
company-operated stores. We had 145 more company-operated stores at the end of
the first quarter of 2020 than we did at the end of the first quarter of 2019.
Advertising and promotion. Currency translation did not have a significant
impact on advertising and promotion expenses for the three-month period ended
February 23, 2020 . Advertising and promotion expenses increased due to more
media spend in the first quarter of 2020 to support growth as well as from
bringing spend forward into the first part of the year in an effort to smooth
out advertising spend.
Administration. Administration expenses include functional administrative and
organization costs. Currency translation did not have a significant impact on
administration expenses for the three-month period ended February 23, 2020 .
Administration costs increased primarily reflecting higher stock-based incentive
compensation including the change in timing for
recording employer payroll taxes for new equity-settled awards as compared to
the same three-month period in the prior year.
Other. Other costs includes distribution, information resources and marketing
organization costs. Currency translation did not have a significant impact on
other costs for the three-month period ended February 23, 2020 . For the
three-month period ended February 23, 2020 the increase in other costs was
primarily due to an increase in 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.
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Operating income
The following table shows operating income by reporting segment and corporate
expenses for the periods indicated, the changes in these items from period to
period and these items expressed as a percentage of net revenues:
Three Months Ended
February 23, February 24,
% 2020 2019
February 23, February 24, Increase % of Net % of Net
2020 2019 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income:
Americas $ 124.0 $ 123.7 0.2 % 16.6 % 17.2 %
Europe 132.4 121.6 8.9 % 25.8 % 26.2 %
Asia 32.7 43.0 (24.0 )% 13.2 % 17.0 %
Total regional operating income 289.1 288.3 0.3 % 19.2 % * 20.1 % *
Corporate expenses 110.3 87.4 26.2 % 7.3 % * 6.1 % *
Total operating income $ 178.8 $ 200.9 (11.0 )% 11.9 % * 14.0 % *
Operating margin 11.9 % 14.0 %
______________
* Percentage of consolidated net revenues
Currency translation unfavorably affected total operating income by
approximately $3 million for the three-month period ended February 23, 2020 .
Regional operating income.
• Americas . Currency translation did not have a significant impact for the
three-month period ended February 23, 2020 . Operating income for the
three-month period ended February 23, 2020 was flat as compared to the
comparable period in the prior year primarily due to an increase in netrevenues and gross margin offset by higher SG&A, mainly to support growth
across our DTC channel. The decrease in operating income as a percent of
net revenues is due to increased spending on advertising and promotion
during the quarter.
•
million for the three-month period ended
in operating income was due to higher net revenues across all channels,
partially offset by higher selling costs to support store expansion.
• Asia . Currency translation did not have a significant impact for the
three-month period ended
income was primarily due to an approximate
from store closures and reduced traffic resulting from the recent COVID-19
outbreak as well as higher selling expenses incurred to support retail
expansion and phasing of advertising and promotion spend versus the prior
year.
Corporate. Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are other corporate staff costs and costs associated with our global inventory sourcing organization, 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 period endedFebruary 23, 2020 . The increase in the corporate expenses for the three-month period endedFebruary 23, 2020 was primarily due to an increase in administration expenses related primarily to stock-based compensation as well as an increase in information technology expenses to expand and support our technology infrastructure. Interest expense Interest expense was$16.7 million for the three-month periods endedFebruary 23, 2020 , as compared to$17.5 million for the same prior-year period. The decrease in interest expense was primarily related to a reduction in short-term borrowings. Our weighted-average interest rate on average borrowings outstanding during the three months endedFebruary 23, 2020 was 4.88%, as compared to 5.22% during the comparable period in 2019. 30
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Other income (expense), net Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month periods endedFebruary 23, 2020 , we recorded income of$2.7 million , as compared to expense of$1.6 million for the same prior-year period. The income in the three-month period endedFebruary 23, 2020 is primarily from investment interest generated from money market funds and short term investments. Income tax expense The effective income tax rate was 7.4% for the three months endedFebruary 23, 2020 , compared to 19.4% for the same prior-year period. The decrease in the effective tax rate was primarily driven by a 12.8% ($21.0 million ) discrete tax benefit attributable to employees exercising stock-based equity awards in 2020. 31
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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 ofFebruary 23, 2020 , we had cash and cash equivalents totaling approximately$873.6 million , short-term investments of$84.0 million and unused availability under the credit facility of$819.5 million , resulting in a total liquidity position of approximately$1.8 billion . We are also taking preemptive action to preserve our liquidity and manage our cash flow, such as reducing our discretionary spending, revisiting our investment strategies, suspending our share buyback program until further notice, and reducing payroll costs, including through employee furloughs and pay cuts. In April, 2020, as a precautionary measure to maximize our liquidity and to increase our available cash on hand, we drew down$300 million on our senior secured revolving credit facility. The proceeds will be available to be used for working capital, general corporate or other purposes. 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 of directors and will depend on then-existing 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 of directors 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 ("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. As ofFebruary 23, 2020 , we did not have any borrowings under the credit facility, unused availability under the credit facility was$819.5 million , and our total availability of$850 million , based on collateral levels as defined by the agreement, was reduced by$30.5 million of other credit-related instruments. As ofFebruary 23, 2020 , we had cash and cash equivalents totaling approximately$873.6 million and short-term investments of$84.0 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately$1.8 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 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. InJanuary 2020 , our board of directors declared a cash dividend of$0.08 per share to holders of record of our Class A and Class B common stock at the close of business onFebruary 12, 2020 and approved a share repurchase program that authorizes the repurchase of up to$100 million of our Class A common stock. During the three months endedFebruary 23, 2020 , a$31.9 million dividend was paid to shareholders and 1.9 million shares were repurchased for$37.0 million , plus broker's commissions, in the open market. 32
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Subsequent toFebruary 23, 2020 , the Company repurchased 1.1 million shares for$19.2 million , plus broker's commissions, in the open market, bringing year-to-date shares repurchased to 3.0 million for a total of$56.2 million , equating to an average repurchase price of approximately$18.73 per share. The Company has suspended its share buyback program until further notice. InApril 2020 , our board of directors declared a cash dividend of$0.08 per share to holders of record of our Class A and Class B common stock at the close of business onApril 24, 2020 , which is expected to be paid on or aboutMay 8, 2020 . Cash flows The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows: Three Months EndedFebruary 23 ,February 24, 2020 2019 (Dollars in millions)
Cash provided by operating activities
(119.3 ) (80.2 )
Cash used for financing activities (138.0 ) (67.7 )
Cash and cash equivalents at period end 873.6 621.9
Cash flows from operating activities
Cash provided by operating activities was $197.9 million for the three-month
period ended February 23, 2020 , as compared to $55.8 million for the comparable
period in 2019. The increase primarily reflects higher cash received from
customers as well as lower payments for employee incentive compensation,
partially offset by higher payments for SG&A expenses to support our growth.
Cash flows from investing activities
Cash used for investing activities was $119.3 million for the three-month period
ended February 23, 2020 , as compared to $80.2 million for the comparable period
in 2019. The increase in cash used for investing activities is due to an
acquisition of operating assets in Chile , Peru and Bolivia , the timing of
foreign currency contract settlements, and an increase in payments for capital
expenditures, partially offset by a decrease in short-term investment activities
as 2019 included the initial acquisitions of short-term investments.
Cash flows from financing activities
Cash used for financing activities was $138.0 million for the three-month period
in 2020, as compared to $67.7 million for the comparable period in 2019. Cash
used in 2020 primarily reflects payments of $30.1 million for common stock
repurchases, $75.2 million for withholding tax on cashless equity award
exercises, payment of a $31.9 million cash dividend and payments of $14.8
million for noncontrolling interest buyback. Cash used in 2019 primarily
reflects the payment of a $55.0 million cash dividend.
Indebtedness
Of our total debt of $1.0 billion as of February 23, 2020 , we had fixed-rate
debt of $1.0 billion (98.8% of total debt), net of capitalized debt issuance
costs, and variable-rate debt of $12.5 million (1.2% of total debt). As of
February 23, 2020 , our required aggregate debt principal payments on our
unsecured long-term debt were $1.0 billion in years after 2024. Short-term
borrowings of $19.3 million at various foreign subsidiaries were 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 of February 23, 2020 .
Non-GAAP Financial Measures
Adjusted SG&A, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted
Net Income, Adjusted Net Income Margin and Adjusted Diluted Earnings per Share
For the three months ended February 23, 2020 and the comparable period in 2019,
we define the following non-GAAP financial measures as follows:
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• Adjusted SG&A, as SG&A less changes in fair value on cash-settled
stock-based compensation, and restructuring and related charges,
severance and other, net;
• Adjusted EBIT, as net income excluding income tax expense, interest
expense, other (income) expense, net, impact of changes in fair value on
cash-settled stock-based compensation, 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, as net income excluding impact of changes in fair
value on cash-settled stock-based compensation and restructuring andrelated 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 margin as Adjusted net income as a percentage of net
revenues;
• Adjusted diluted earnings per share as Adjusted net income per
weighted-average number of diluted common shares outstanding.
For the 12 months ended February 23, 2020 and the comparable period in 2019,
Adjusted EBIT also excludes underwriter commission paid on behalf of selling
stockholders and other costs incurred in connection with our IPO.
We believe Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA,
Adjusted net income, Adjusted net income margin and Adjusted diluted earnings
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 SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, Adjusted
net income, Adjusted net income margin and Adjusted diluted earnings 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 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;
• all of these non-GAAP financial measures exclude restructuring andrelated 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, Adjusted net income margin and Adjusted diluted
earnings 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 SG&A, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
SG&A for each of the periods presented.
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Adjusted SG&A:
Three Months Ended
February 23, 2020 February 24, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Selling, general and administrative expenses $ 660.5 $ 581.9
Non-GAAP measure:
Selling, general and administrative expenses $ 660.5 $ 581.9
Impact of changes in fair value on cash-settled stock-based compensation(1)
(4.9 ) (5.3 )
Restructuring and related charges, severance and other,
net(2) (5.6 ) (0.1 )
Adjusted SG&A $ 650.0 $ 576.5
_____________(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) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including initial acquisition and
integration costs and amortization of acquired intangible assets.
The following table presents a reconciliation of net income, 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 Twelve Months Ended
February 23, 2020 February 24, 2019 February 23, 2020 February 24, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure: Net income $ 152.7 $ 146.5 $ 401.2 $ 450.4 Non-GAAP measure: Net income $ 152.7 $ 146.5 $ 401.2 $ 450.4 Income tax expense 12.1 35.3 59.4 82.5 Interest expense 16.7 17.5 65.4 57.3 Other (income) expense, net (2.7 ) 1.6 (6.3 ) (23.7 ) Underwriter commission paid on behalf of selling stockholders - - 24.9 - Charges related to the transition to being a public company - - 3.5 0.1 Impact of changes in fair value on cash-settled stock-based compensation(1) 4.9 5.3 33.7 44.3 Restructuring and related charges, severance and other, net(2) 5.6 0.1 11.8 4.9 Adjusted EBIT $ 189.3 $ 206.3 $ 593.6 $ 615.8 Depreciation and amortization(3) 34.7 28.6 130.0 116.0 Adjusted EBITDA $ 224.0 $ 234.9 $ 723.6 $ 731.8 Adjusted EBIT margin 12.6 % 14.4 % _____________
(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.
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(2) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including initial acquisition and
integration costs and amortization of acquired intangible assets.
(3) Depreciation and amortization amount net of amortization of acquired
intangible assets included in Restructuring and related charges, severance
and other, net.
The following table presents a reconciliation of net income, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted net
income for each of the periods presented and the calculation of Adjusted diluted
earnings per share for each of the periods presented.
Adjusted Net Income and Adjusted Diluted Earnings per Share:
Three Months Ended
February 23, 2020 February 24, 2019
(Dollars in millions, except per share
amounts)
(Unaudited)
Most comparable GAAP measure:
Net income $ 152.7 $ 146.5
Non-GAAP measure:
Net income $ 152.7 $ 146.5 Impact of changes in fair value on cash-settled stock-based compensation(1)
4.9 5.3
Restructuring and related charges, severance and other, net(2)
5.6 0.1
Tax impact of adjustments (0.8 ) (1.0 )
Adjusted net income $ 162.4 $ 150.9
Adjusted net income margin 10.8 % 10.5 % Adjusted diluted earnings per share $
0.40 $ 0.38
_____________
(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) Restructuring and related charges, severance and other, net include
transaction and deal related costs, including 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.
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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.
February 23, 2020 November 24, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Total debt, excluding capital leases $ 1,013.7 $ 1,014.4
Non-GAAP measure:
Total debt, excluding capital leases $ 1,013.7 $ 1,014.4
Cash and cash equivalents (873.6 ) (934.2 )
Short-term investments in marketable securities (84.0 ) (80.7 )
Net debt $ 56.1 $ (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.
February 23, 2020 February 24, 2019
(Dollars in millions)
(Unaudited)
Total debt, excluding capital leases $ 1,013.7 $ 1,041.1
Last Twelve Months Adjusted EBITDA(1) $ 723.6 $ 731.8
Leverage ratio 1.4 1.4
_____________
(1) Last Twelve Months Adjusted EBITDA is reconciled from net income 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.
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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 period
presented.
Three Months Ended
February 23, 2020 February 24, 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Net cash provided by operating activities $ 197.9 $ 55.8
Non-GAAP measure:
Net cash provided by operating activities $ 197.9 $ 55.8
Purchases of property, plant and equipment (44.4 ) (36.1 )
(Payments) proceeds on settlement of forward foreign (19.3 ) 55.8
exchange contracts not designated for hedge accounting Repurchase of common stock
(30.1 ) (3.1 )
Repurchase of shares surrendered for tax withholdings on (75.2 ) (0.8 )
equity award exercises
Dividend to stockholders (31.9 ) (55.0 )
Adjusted free cash flow $ (3.0 ) $ 16.6
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 the U.S. Dollar into U.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 weaker U.S. Dollar and are affected
negatively by a stronger U.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.
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The table below sets forth the calculation of net revenues for each of our
regional operating segments on a constant-currency basis for comparison period
applicable to the three-month period ended
Three Months Ended
February 23, February 24, %
2020 2019 Increase (Decrease)
(Dollars in millions)
(Unaudited)
Total revenues
As reported $ 1,506.1 $ 1,434.5 5.0 %
Impact of foreign currency exchange rates - (10.9 ) *
Constant-currency net revenues $ 1,506.1 $ 1,423.6 5.8 %
Americas
As reported $ 745.6 $ 717.3 3.9 %
Impact of foreign currency exchange rates - 1.5 *
Constant-currency net revenues -
718.8 3.7 % Europe As reported$ 512.9 $ 464.7 10.4 % Impact of foreign currency exchange rates - (10.4 ) * Constant-currency net revenues - Europe$ 512.9 $ 454.3 12.9 % Asia As reported$ 247.6 $ 252.5 (1.9 )% Impact of foreign currency exchange rates - (2.0 ) * Constant-currency net revenues - Asia$ 247.6 $ 250.5 (1.2 )% _____________ * Not meaningful 39
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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
period ended
Three Months Ended
February 23, February 24, %
2020 2019 Increase
(Dollars in millions)
(Unaudited)
Adjusted EBIT(1) $ 189.3 $ 206.3 (8.2 )%
Impact of foreign currency exchange rates - (2.9 ) *
Constant-currency Adjusted EBIT$ 189.3 $ 203.4
(6.9 )%
Constant-currency Adjusted EBIT margin(2) 12.6 % 14.3 %
_____________
(1) Adjusted EBIT is reconciled from net income 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 Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share: The table below sets forth the calculation of Adjusted net income and Adjusted diluted earnings per share on a constant-currency basis for comparison period applicable to the three-month period endedFebruary 23, 2020 . Three Months Ended February 23, February 24, % 2020 2019 Increase (Dollars in
millions, except per share amounts)
(Unaudited)
Adjusted net income(1) $ 162.4 $ 150.9 7.6 % Impact of foreign currency exchange rates - (2.6 ) * Constant-currency Adjusted net income $ 162.4 $ 148.3 9.5 % Constant-currency Adjusted net income margin(2) 10.8 % 10.4 % Adjusted diluted earnings per share $ 0.40 $ 0.38 5.3 % Impact of foreign currency exchange rates - (0.01 ) * Constant-currency Adjusted diluted earnings per share $ 0.40 $ 0.37 8.1 %
_____________
(1) Adjusted net income is reconciled from net income which is the most
comparable GAAP measure. Refer to Adjusted net income table for more
information.
(2) We define constant-currency Adjusted net income margin as constant-currency
Adjusted net income as a percentage of constant-currency net revenues.
* Not meaningful
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Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
There have 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.
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 7.
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.
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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 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 traffic patterns
and an increase in promotional activity as a result of decreased 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;
• 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;
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• 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.
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