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 ofAugust 23, 2020 , our products were sold in over 50,000 retail locations in more than 110 countries, including approximately 3,100 brand-dedicated stores and shop-in-shops. As ofAugust 23, 2020 , we had 1,024 company-operated stores located in 36 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, approximately half of our owned and operated retail stores were closed as of the beginning of the quarter, with the majority reopening by mid-July. See "Impact of COVID-19 on our Business" below. OurEurope andAsia businesses, collectively, contributed 49% of our net revenues and 43% of our regional operating income in the first nine months of 2020, as compared to 48% of our net revenues and 49% of our regional operating income in 28 -------------------------------------------------------------------------------- Table of Contents the same period in 2019. Sales of Levi's brand products represented 87% of our total net sales in the first nine months of both 2020 and 2019. Our wholesale channel generated 60% and 63% of our net revenues in the first nine months of 2020 and 2019, respectively. Our DTC channel generated 40% and 37% of our net revenues in the first nine months of 2020 and 2019, respectively, with sales through our company operated e-commerce sites representing 22% and 13% of DTC channel net revenues in the first nine months of 2020 and 2019 and 9% and 5% of total net revenues in the first nine 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 in 2020. Based on our initial estimates of the adverse impacts from the COVID-19 pandemic on the business,$242.0 million in incremental charges were recorded in the second quarter of fiscal 2020. During the three-month period endedAugust 23, 2020 ,$11.0 million of net reductions in the charges were recognized, consisting of$7.9 million of reductions in adverse fabric purchase commitments and inventory reserves and$6.6 million in recoveries of receivables previously estimated to be not collectible, offset by incremental restructuring and other costs incurred in response to the global pandemic. On a year-to-date basis, the net$231.0 million consisted of$68.4 million of restructuring charges, COVID-19 related inventory costs of$77.9 million and other charges for customer receivables, asset impairments and other related charges of$84.7 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. At the start of the third quarter, approximately half of our owned and operated retail stores were closed, with the majority reopened by mid-July but, in many cases, with reduced operating hours and occupancy levels. Our wholesale customers, including third-party retailers and franchise partners, have also experienced significant business disruptions, including lower traffic and consumer demand, resulting in decreased shipments to these customers. Our e-commerce business grew approximately 52% during the third quarter, as consumer spending continued to shift towards online shopping experiences due to the changing retail landscape as a result of the global pandemic. Our global digital business, which includes our e-commerce site as well as the online business of our wholesale customers, including that of traditional wholesalers as well as pure play (online-only wholesalers) grew to represent approximately 24% of our total net revenues in the third quarter of fiscal 2020, versus approximately 12% of our net revenues in the third quarter of fiscal 2019. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our consumers. We have closed many of our corporate offices and other facilities, and have implemented a work from home policy for many of our corporate employees. As we reopen our company-operated retail stores, we follow internally derived specific health-related criteria with an emphasis on comprehensive safety precautions, including continuous cleaning in our stores and limiting the number of shoppers to allow for social distancing. While many retail stores have reopened and government restrictions have been removed or lightened, the ultimate impact of the COVID-19 pandemic remains highly uncertain, and our business operations and results of operations, including our net revenues, earnings and cash flows, could be adversely impacted for the balance of 2020, and beyond, including as a result of: •Risk of future additional temporary closure of our owned and operated retail stores globally as well as the doors owned by 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 theU.S. or global economy and uncertain global economic outlook or a credit crisis. 29 -------------------------------------------------------------------------------- Table of Contents 2020 Restructuring InApril 2020 , our Board of Directors (the "Board") endorsed a restructuring initiative designed to reduce costs, streamline operations and support agility. OnJuly 7, 2020 , we announced and began to implement this restructuring initiative, which we expect to be substantially complete by the middle of fiscal year 2021. 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 included 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. For the three-month and nine-month periods endedAugust 23, 2020 , we recognized restructuring charges of$1.1 million and$68.4 million , respectively, which are on a separate line item in our consolidated statements of operations. Within the consolidated balance sheet as ofAugust 23, 2020 , we had$58.0 million and$3.5 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. The charges primarily relate to severance benefits, based on separation benefits provided by Company policy or statutory benefit plans. During the three and nine months endedAugust 23, 2020 ,$5.1 million in payments were made and cash payments for charges recognized to date are expected to continue through 2021. We expect 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 inEurope is generally 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 asthe United States ,Mexico ,Western Europe andJapan , and may provide consumers discretionary 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 supply chain 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. 30 -------------------------------------------------------------------------------- Table of Contents •Foreign currencies continue to be volatile. Significant fluctuations of theU.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 otherU.S. policies related to global trade, tariffs and sanctions, 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 Third Quarter 2020 Results •Net revenues. Consolidated net revenues decreased 26.5% on a reported basis and 25.7% on a constant-currency basis compared to the third quarter of 2019. The decrease was primarily due to the impacts of the COVID-19 pandemic which included reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter and in certain markets. •Operating income. We recognized consolidated operating income of$92.3 million , compared to operating income of$171.3 million in the third quarter of 2019. The decrease was primarily due to the adverse impacts of COVID-19, including lower net revenues, partially offset by lower SG&A expenses primarily reflecting the cost-reduction initiatives started in the second quarter. •Adjusted EBIT. Adjusted EBIT was$84.2 million compared to Adjusted EBIT of$176.4 million in the third quarter of 2019, as a result of cost-reduction initiatives and higher gross margin. •Diluted earnings per share. Diluted earnings per share were$0.07 compared to diluted earnings per share of$0.30 in the third quarter of 2019. •Adjusted diluted earnings per share. Adjusted diluted earnings per share were$0.08 compared to adjusted diluted earnings per share of$0.31 in the third quarter of 2019. Our Year-to-Date 2020 Results •Net revenues. Consolidated net revenues decreased 26.9% on a reported basis and 25.7% on a constant-currency basis compared to the first nine months of 2019. The decrease was primarily due to the impact of widespread temporary closures of our company-operated and third-party customer retail locations, particularly in the second quarter of 2020, as a result of the COVID-19 pandemic partially offset by higher net revenues in the first quarter of 2020 as compared to the first quarter of 2019. •Operating loss. We recognized a consolidated operating loss of$177.1 million , compared to operating income of$435.1 million in the first nine months of 2019. The decrease was primarily due to adverse impacts of the COVID-19 pandemic, including the recognition of$68.4 million of net restructuring charges and$162.6 million of net COVID-19 related inventory costs and other charges. •Adjusted EBIT. Adjusted EBIT was$67.7 million for the first nine months of 2020 compared to Adjusted EBIT of$464.3 million for the first nine months of 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic, partially offset by higher net revenues and gross margin expansion in the first quarter of 2020 as compared to the first quarter of 2019. •Diluted loss per share. Diluted loss per share was$0.46 compared to diluted earnings per share of$0.73 in the third quarter of 2019. •Adjusted diluted loss per share. Adjusted diluted loss per share was$0.01 compared to adjusted diluted earnings per share of$0.85 in the third quarter of 2019. 31 -------------------------------------------------------------------------------- Table of Contents 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. 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 and nine-month periods endedAugust 23, 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 by third-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 costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. 32 -------------------------------------------------------------------------------- Table of Contents Results of Operations for Three and Nine Months EndedAugust 23, 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 Nine Months EndedAugust 23 ,August 25 ,August 23 ,August 25 , % 2020 2019 % 2020 2019August 23 ,August 25 , IncreaseAugust 23 ,August 25 , % of Net Increase % of Net % of Net % of Net 2020 2019 (Decrease) 2020 2019 Revenues (Decrease) Revenues Revenues Revenues (Dollars and shares in millions, except per share amounts) Net revenues$ 1,063.1 $ 1,447.1 (26.5) % 100.0 % 100.0 %$ 3,066.8 $ 4,194.5 (26.9) % 100.0 % 100.0 % Cost of goods sold 485.7 680.3 (28.6) % 45.7 % 47.0 % 1,480.4 1,944.5 (23.9) % 48.3 % 46.4 % Gross profit 577.4 766.8 (24.7) % 54.3 % 53.0 % 1,586.4 2,250.0 (29.5) % 51.7 % 53.6 % Selling, general and administrative expenses 484.0 595.5 (18.7) % 45.5 % 41.2 % 1,695.1 1,814.9 (6.6) % 55.3 % 43.3 % Restructuring charges, net 1.1 - - 0.1 % - 68.4 - - 2.2 % - Operating income (loss) 92.3 171.3 (46.1) % 8.7 % 11.8 % (177.1) 435.1 (140.7) % (5.8) % 10.4 % Interest expense (28.4) (15.3) 85.6 % (2.7) % (1.1) % (56.3) (48.0) 17.3 % (1.8) % (1.1) % Underwriter commission paid on behalf of selling stockholders - - - - - - (24.9) (100.0) % - (0.6) % Other expense, net (12.3) (4.4) 179.6 % (1.2) % (0.3) % (8.3) (2.8) 196.4 % (0.3) % (0.1) % Income (loss) before income taxes 51.6 151.6 (66.0) % 4.9 % 10.5 % (241.7) 359.4 (167.3) % (7.9) % 8.6 % Income tax (benefit) expense 24.6 27.4 (10.2) % 2.3 % 1.9 % (57.9) 60.2 (196.2) % (1.9) % 1.4 % Net income (loss) 27.0 124.2 (78.3) % 2.5 % 8.6 % (183.8) 299.2 (161.4) % (6.0) % 7.1 % Net loss attributable to noncontrolling interest - 0.3 (100.0) % - - - 0.1 (100.0) % - - Net income (loss) attributable toLevi Strauss & Co. $ 27.0 $ 124.5 (78.3) % 2.5 % 8.6 %$ (183.8) $ 299.3 (161.4) % (6.0) % 7.1 % Earnings (loss) per common share attributable to common stockholders: Basic$ 0.07 $ 0.32 (78.1) % * *$ (0.46) $ 0.77 (159.7) % * * Diluted$ 0.07 $ 0.30 (76.7) % * *$ (0.46) $ 0.73 (163.0) % * * Weighted-average common shares outstanding: Basic 397.7 394.2 0.9 % * * 397.0 387.3 2.5 % * * Diluted 407.7 413.6 (1.4) % * * 397.0 407.8 (2.6) % * * _____________ * Not meaningful 33
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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 Nine Months Ended
% Increase (Decrease) % Increase (Decrease)
August 23, August 25, As Constant August 23, August 25, As Constant
2020 2019 Reported Currency 2020 2019 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 549.8 $ 770.8 (28.7) % (27.2) % $ 1,578.1 $ 2,180.8 (27.6) % (26.5) %
Europe 390.4 463.3 (15.7) % (16.6) % 1,032.4 1,326.3 (22.2) % (21.0) %
Asia 122.9 213.0 (42.3) % (40.9) % 456.3 687.4 (33.6) % (32.1) %
Total net revenues $ 1,063.1 $ 1,447.1 (26.5) % (25.7) % $ 3,066.8 $ 4,194.5 (26.9) % (25.7) %
Total net revenues decreased on both a reported and constant-currency basis for
the three-month and nine-month periods ended August 23, 2020 , as compared to the
same prior-year periods.
Americas . On both a reported and constant-currency basis, net revenues in our
Americas region decreased for the three-month and nine-month periods ended
August 23, 2020 , with currency translation affecting net revenues unfavorably by
approximately $16 million and $33 million , respectively.
The decrease in net revenues for the three-month period ended August 23, 2020
was driven by lower revenues across both our wholesale and DTC channels, due to
the continued adverse impact of the COVID-19 pandemic. The decrease in wholesale
revenues was primarily due to the temporary closures of third-party retail
locations, most of which were closed at the start of the quarter but began to
reopen in June. These declines were partially offset by increases in Levi's and
Signature products sold to traditional and digital wholesale customers that
remained open, either through their retail locations, or e-commerce sites.
The decrease in our DTC channel was due to the temporary closures of our
company-operated stores as approximately 25% of the store network were open at
the beginning of the quarter, with most reopening by mid-July, although
operating under reduced hours and occupancy levels. As of August 23, 2020 ,
approximately 92% of our company-operated stores in the region were open and our
store network had 73 more stores in operation versus the third quarter of 2019.
The decrease in net revenues was partially offset by an increase in our
e-commerce revenue due to increased traffic to our site, as consumer spending
continued to shift towards online shopping.
The decrease in net revenues for the nine-month period ended August 23, 2020 was
primarily due to the COVID-19 impacts in the second and third quarters partially
offset by first quarter growth in DTC net revenues and the inclusion of
non-comparable net revenues from the week of Black Friday in the 2020 period.
Europe . Net revenues in Europe decreased on both a reported and
constant-currency basis for the three-month and nine-month periods ended
August 23, 2020 . Currency translation had a favorable impact on net revenues of
approximately $5 million and an unfavorable impact of approximately $20 million
for the three-month and nine-month periods ended August 23, 2020 , respectively.
Net revenues decreased for the three-month period ended August 23, 2020 driven
by lower revenue across both channels as a result of the continued adverse
impact of COVID-19. Wholesale revenue declined due to the impact of the
temporary closure of our wholesale customer's retail locations and lower traffic
even after government lockdown measures ended, partially offset by significant
growth in shipments to digital wholesale customers. The decrease in our DTC
channel revenue was due to the impact of the temporary closures and lower
traffic once our stores reopened under reduced operating hours and occupancy
levels. At the beginning of the quarter, approximately 30% of our
company-operated stores in the region were open, with the majority of stores
reopening by mid to late June. As of August 23, 2020 , approximately 99% of our
company-operated stores in the region were open and our store network had 28
more stores in operation versus the end of the third quarter of 2019. E-commerce
revenue had strong growth during the quarter as a result of increased traffic
and higher conversion, as consumer spending continued to shift towards online
shopping due to the global pandemic.
The decrease in net revenues for the nine-month period ended August 23, 2020 was
primarily due to the COVID-19 impacts in the second and third quarters partially
offset by first quarter growth across channels driven by increased demand
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from our wholesale customers as well as expansion within our company-operated
retail network, and the inclusion of non-comparable revenue from the week of
Black Friday in the 2020 period.
Asia . Net revenues in Asia decreased on both a reported and constant-currency
basis for the three-month and nine-month periods ended August 23, 2020 , with
currency affecting net revenues unfavorably by approximately $5 million and $15
million , respectively.
The decrease in net revenues for the three-month period ended August 23, 2020
was driven by the continued adverse impact from the COVID-19 pandemic across
both channels and most markets. Government imposed lockdowns continued to impact
our wholesale customer retail locations across the region, particularly in India
where several states remained in government mandated lockdown throughout the
third quarter. As a result, our India market declined $51.1 million . Our DTC
channel revenue decreased, despite approximately 85% of our company-operated
stores being open at the start of the quarter, due to lower traffic and
restrictions on operating hours and occupancy. The decline in DTC revenue was
partially offset by growth in e-commerce revenue. As of August 23, 2020 ,
approximately 97% of our company-operated stores in the region were open and our
store network had 35 more stores in operation versus the third quarter of 2019.
The decrease in net revenues for the nine-month period ended August 23, 2020 was
primarily due to the impact from the COVID-19 pandemic in the second and third
quarters partially offset by first quarter growth in our wholesale business.
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 Nine Months Ended
% %
August 23, August 25, Increase August 23, August 25, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions)
Net revenues $ 1,063.1 $ 1,447.1 (26.5) % $ 3,066.8 $ 4,194.5 (26.9) %
Cost of goods sold 485.7 680.3 (28.6) % 1,480.4 1,944.5 (23.9) %
Gross profit $ 577.4 $ 766.8 (24.7) % $ 1,586.4 $ 2,250.0 (29.5) %
Gross margin 54.3 % 53.0 % 51.7 % 53.6 %
Currency translation unfavorably impacted gross profit by approximately $6
million and $33 million for the three-month and nine-month periods ended
August 23, 2020 , respectively.
For the three-month period ended August 23, 2020 , the increase in gross margin
was primarily due to the $7.9 million in reductions in COVID-19 related
inventory charges, largely related to reductions in our estimate of adverse
fabric purchase commitments. Of the 1.3 percentage-point increase, 0.7
percentage-points were attributable to reduction in COVID-19 related charges,
and the remaining 0.6 percentage-points were primarily due to price increases
and a higher proportion of sales in our DTC channel, which has higher margins.
The decrease in gross margin for the nine-month period ended August 23, 2020 was
primarily due to COVID-19 related charges, which included the recognition of
incremental inventory reserves of $48.1 million and adverse fabric purchase
commitments of $29.8 million which decreased gross margin by 2.5 percentage
points. These adverse impacts were partially offset by 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.
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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 Nine Months Ended
August 23 , August 25 , August 23 , August 25 ,
% 2020 2019 % 2020 2019
August 23 , August 25 , Increase August 23 , August 25 , Increase % of Net % of Net % of Net % of Net
2020 2019 (Decrease) 2020 2019 (Decrease) Revenues Revenues Revenues Revenues
(Dollars in millions)
Selling $ 234.7 $ 268.3 (12.5) % 22.1 % 18.5 % $ 760.3 $ 815.8 (6.8) % 24.8 % 19.4 %
Advertising and promotion 56.4 80.3 (29.8) % 5.3 % 5.5 % 217.8 267.3 (18.5) % 7.1 % 6.4 %
Administration 71.2 101.7 (30.0) % 6.7 % 7.0 % 239.9 307.9 (22.1) % 7.8 % 7.3 %
Other 125.8 145.2 (13.4) % 11.8 % 10.0 % 393.2 423.9 (7.2) % 12.8 % 10.1 %
COVID-19 related charges (4.1) - - (0.4) % - 83.9 - - 2.7 % -
Total SG&A $ 484.0 $ 595.5 (18.7) % 45.5 % 41.2 % $ 1,695.1 $ 1,814.9 (6.6) % 55.3 % 43.3 %
Currency translation impacted SG&A favorably by approximately $4 million and $22
million for the three-month and nine-month periods ended August 23, 2020 ,
respectively.
Selling. Currency translation impacted selling expenses favorably by
approximately $2 million and $12 million for the three-month and nine-month
periods ended August 23, 2020 , respectively. For the three-month and nine-month
periods ended August 23, 2020 , lower selling expenses primarily reflected
decreased costs due to the temporary closure of our company-operated retail
stores as well as cost-savings actions. For the three-month and nine-month
periods ended August 23, 2020 , selling expenses as a percentage of net revenues
increased due to the adverse impact of the COVID-19 pandemic 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 $2 million and $5 million for the
three-month and nine-month periods ended August 23, 2020 , respectively. The
decrease in advertising and promotion expenses for the three-month and
nine-month periods ended August 23, 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 did not have a significant impact on
administration expenses for the three-month period and had a favorable impact of
approximately $2 million for the nine-month period ended August 23, 2020 . The
decrease in administration costs for the three-month and nine-month periods
ended August 23, 2020 is largely due to lower employee incentive costs as well
as cost reductions implemented in response to COVID-19.
Other. Other costs include distribution, information resources and marketing
organization costs. Currency translation did not have a significant impact on
SG&A other costs for the three-month period and had a favorable impact of
approximately $3 million for the nine-month period ended August 23, 2020 ,
respectively.
For the three-month and nine-month periods ended August 23, 2020 the decrease in
other costs was primarily due to lower distribution expenses attributable to
reduced sales volume as well as cost reductions implemented in response to
COVID-19. In the nine-month period ended August 23, 2020 , the decrease in other
costs was partially offset with information technology expenses, which reflect
our strategic investment in 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 COVID-19 related business disruptions, including asset
impairment and other charges. During the three-month period ended August 23,
2020 , we recognized a net reduction of $4.1 million in COVID-19 related charges,
primarily due to recoveries of receivables previously estimated to be not
collectible, offset by incremental costs incurred in response to the global
pandemic.
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During the nine-month period ended August 23, 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 $21.0 million relate to customer receivables, including provisions
and other allowances as a result of changes in their financial condition of
$8.5 million and actual and anticipated bankruptcies and other associated claims
of $12.5 million . The remainder relates to incremental costs incurred in
response to the global pandemic.
Restructuring charges, net
For the three-month and nine-month periods ended August 23, 2020 , we recognized
restructuring charges of $1.1 million and $68.4 million , respectively,
consisting primarily of severance and other post-employment benefits. See "-
Overview - 2020 Restructuring" above for more information.
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 Nine Months Ended
August 23 , August 25 , August 23 , August 25 ,
% 2020 2019 % 2020 2019
August 23 , August 25 , Increase August 23 , August 25 , Increase % of Net % of Net % of Net % of Net
2020 2019 (Decrease) 2020 2019 (Decrease) Revenues Revenues Revenues Revenues
(Dollars in millions)
Operating income (loss):
Americas $ 92.3 $ 151.6 (39.1) % 16.8 % 19.7 % $ 178.6 $ 376.9 (52.6) % 11.3 % 17.3 %
Europe 87.6 102.9 (14.9) % 22.4 % 22.2 % 152.3 283.2 (46.2) % 14.8 % 21.4 %
Asia (23.3) 17.4 (233.9) % (19.0) % 8.2 % (19.1) 77.4 (124.7) % (4.2) % 11.3 %
Total regional operating income
(loss) 156.6 271.9 (42.4) % 14.7 % * 18.8 % * 311.8 737.5 (57.7) % 10.2 % * 17.6 % *
Corporate:
Restructuring charges, net 1.1 - - 0.1 % * - * 68.4 - - 2.2 % * - *
Other corporate staff costs and
expenses 63.2 100.6 (37.2) % 5.9 % * 7.0 % * 420.5 302.4 39.1 % 13.7 % * 7.2 % *
Corporate expenses 64.3 100.6 (36.1) % 6.0 % * 7.0 % * 488.9 302.4 61.7 % 15.9 % * 7.2 % *
Total operating income (loss) $ 92.3 $ 171.3 (46.1) % 8.7 % * 11.8 % * $ (177.1) $ 435.1 (140.7) % (5.8) % * 10.4 % *
Operating margin 8.7 % 11.8 % (5.8) % 10.4 %
______________
* Percentage of consolidated net revenues
Currency translation unfavorably affected total operating income (loss) by
approximately $2 million and $11 million for the three-month and nine-month
periods ended August 23, 2020 , respectively.
Regional operating income (loss).
•Americas. Currency translation had an unfavorable impact of approximately $2
million and $5 million for the three-month and nine-month periods ended
August 23, 2020 , respectively. The decrease in operating income for the
three-month period ended August 23, 2020 was due to the adverse impacts of
COVID-19, including lower net revenues partially offset by lower SG&A expenses
as discretionary and variable expenses were reduced or eliminated in response to
COVID-19.
The decrease in operating income for the nine-month period ended August 23,
2020 , was primarily due to lower net revenues in the second and third quarters
from the adverse impact of COVID-19 partially offset by increased net revenues
and gross margin in the first quarter.
•Europe. Currency translation did not have a significant impact for the
three-month period and had an unfavorable
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impact of approximately $4 million for the nine-month period ended August 23,
2020 . The decrease in operating income for the three-month period ended
August 23, 2020 was due to the adverse impacts of COVID-19, including lower net
revenues partially offset by lower SG&A expenses as discretionary and variable
expenses were reduced or eliminated in response to COVID-19.
The decrease in operating income for the nine-month period ended August 23,
2020 , was primarily due to lower net revenues in the second and third quarters
from the adverse impact of COVID-19 partially offset by higher net revenues
across all channels in the first quarter, net of higher selling costs to support
store expansion.
•Asia. Currency translation did not have a significant impact for the
three-month period and had an unfavorable impact of approximately $2 million for
the nine-month period ended August 23, 2020 . The decrease in operating income
for the three-month and nine-month periods ended August 23, 2020 was primarily
due to the adverse impacts of COVID-19, including lower net revenues partially
offset by lower SG&A expenses as discretionary and variable expenses were
reduced or eliminated in response to COVID-19.
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 nine-month
periods ended August 23, 2020 .
The decrease in corporate expenses for the three-month period ended August 23,
2020 was primarily due to the $7.9 million in reductions in COVID-19 related
inventory charges, primarily related to reductions in our estimate of adverse
fabric purchase commitments, as well as a net reduction of $4.1 million in
COVID-19 related charges. The decrease in expenses is also from a decline in
foreign currency transaction losses as well as lower purchasing costs related to
our global sourcing organizations procurement of inventory on behalf of our
foreign subsidiaries.
The increase in corporate expenses for the nine-month period ended August 23,
2020 , primarily reflected COVID-19 related net inventory costs and other
charges, net restructuring charges, and impairment of certain store right-of-use
and other store assets, initially recognized during the second quarter and
updated based on changes in facts and circumstances in the third quarter of
fiscal year 2020.
Interest expense
Interest expense was $28.4 million and $56.3 million for the three-month and
nine-month periods ended August 23, 2020 , as compared to $15.3 million and $48.0
million for the comparable prior-year periods. The increase in interest expense
was primarily related to additional borrowings from senior notes and credit
facility.
Our weighted-average interest rate on average borrowings outstanding during the
three and nine months ended August 23, 2020 was 4.78% and 4.65%, respectively,
as compared to 5.30% and 5.28% during the comparable periods in 2019.
Other expense, net
For the three-month and nine-month periods ended August 23, 2020 , we recorded
expense of $12.3 million and $8.3 million , respectively, as compared to expense
of $4.4 million and $2.8 million for the same prior-year periods. Other expense,
net, primarily consists of foreign exchange management losses and foreign
currency transaction losses, partially offset by the interest income generated
from money market funds and short-term investments.
Underwriter commission paid on behalf of selling stockholders
For the nine-month period ended August 25, 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 ended August 23, 2020 was
47.6% and reflects a $24.6 million income tax expense recorded on $51.6 million
of pre-tax income. The effective income tax rate for the three months ended
August 25, 2019 was 18.0% and reflects a $27.4 million income tax expense
recorded on $151.6 million of pre-tax income. The increase in the effective tax
rate in the quarter was the result of a decline in the annual effective tax rate
which was driven by a $7.1 million reduction in the tax benefit for losses
carried back under the CARES Act. The tax benefit related to the CARES Act was
initially recorded in the second quarter and such amount was updated during the
three months ended August 23, 2020 .
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The effective income tax rate for the nine months ended August 23, 2020 was
24.0% and reflects a $57.9 million income tax benefit recorded on $241.7 million
of pre-tax losses. The effective income tax rate for the nine months ended
August 25, 2019 was 16.7% and reflects a $60.2 million income tax expense
recorded on $359.4 million of pre-tax income. The increase in the effective tax
rate was primarily driven by discrete tax benefits of $22.0 million attributable
to employees exercising stock-based equity awards in 2020 and $1.9 million
related to net operating loss carryback provisions under the CARES Act. These
were partially offset by valuation allowance charges in 2020 of $17.7 million on
deferred tax assets that are not more likely than not to be realized.
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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 of August 23, 2020 , we had
cash and cash equivalents totaling approximately $1.4 billion , short-term
investments of $72.3 million and unused availability under our credit facility
of $608.0 million , resulting in a total liquidity position of approximately $2
billion .
We are actively managing the impacts of COVID-19 on our operations and
liquidity. For the nine-month period ended August 23, 2020 , we generated cash
from operations of $240.9 million , despite incurring a net loss of $210.9
million in the second quarter. We have taken and will continue to take action to
reduce costs, enhance our liquidity and maintain our financial flexibility. Such
actions include, but are not limited to reducing discretionary spending,
reducing capital expenditures, suspending our share buyback program and not
declaring dividends until further notice, implementing restructuring plans that
we expect will lead to approximately $100 million in annualized savings,
reducing payroll costs, including through employee furloughs and temporary pay
cuts and working with our vendors to extend credit terms. In April 2020 , in an
effort to further increase liquidity and strengthen our balance sheet, we issued
an additional $500 million in aggregate principal amount of 5.00% senior notes
due 2025. The proceeds are being used for working capital, general corporate or
other purposes.
While the impact and duration of COVID-19 on our business remains 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. The maximum availability under our
credit facility is $850 million , of which $800 million is available to us for
revolving loans in U.S. Dollars and $50 million is available to us for revolving
loans either in U.S. Dollars or Canadian Dollars. This credit facility is an
asset-based facility, in which the borrowing availability is primarily based on
the value of our U.S. Levi's® trademarks and the levels of accounts receivable
and inventory in the United States and Canada .
Our unused availability under our senior secured revolving credit facility (the
"Credit Facility") was $608.0 million on August 23, 2020 , as our total
availability of $638.5 million , based on collateral levels as defined by the
Credit Facility were reduced by $30.5 million of letters of credit and other
credit usage allocated under the Credit Facility.
As of August 23, 2020 , we had cash and cash equivalents totaling approximately
$1.4 billion and short-term investments of $72.3 million resulting in a total
liquidity position (unused availability and cash and cash equivalents and
short-term investments) of approximately $2.0 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.
In December 2019 , we completed an acquisition for all operating assets related
to Levi's® and Dockers® brands from The Jeans Company ("TJC"), our distributor
in Chile , Peru and Bolivia , 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.
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In January 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 six months ended May 24, 2020 , 3 million shares were repurchased for
$56.2 million , plus broker's commissions, in the open market. This equates to an
average repurchase price of approximately $18.73 per share. As of the second
quarter of fiscal 2020, we have suspended our share buyback program until
further notice.
Cash flows
The following table summarizes, for the periods indicated, selected items in our
consolidated statements of cash flows:
Nine Months Ended
August 23, August 25,
2020 2019
(Dollars in millions)
Cash provided by operating activities $ 240.9 $ 205.5
Cash used for investing activities (117.7) (198.4)
Cash provided by financing activities 302.5 146.8
Cash and cash equivalents at period end 1,353.0 863.8
Cash flows from operating activities
Cash provided by operating activities was $240.9 million for the nine-month
period ended August 23, 2020 , as compared to $205.5 million for the comparable
period in 2019. The increase in cash provided by operating activities is
primarily due to lower spending on inventory, employee incentives and variable
and discretionary expenditures, partially offset by less cash received on
customer receivables, due in part to lower sales. Our cash flows from operations
were significantly impacted by the widespread temporary store closures and other
business disruptions, particularly in the second quarter of 2020, caused by the
COVID-19 pandemic.
Cash flows from investing activities
Cash used for investing activities was $117.7 million for the nine-month period
ended August 23, 2020 , as compared to $198.4 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, a reduction of capital expenditures, and the timing of
foreign currency contract settlements, partially offset by an acquisition of
operating assets in Chile , Peru , Bolivia and Singapore .
Cash flows from financing activities
Cash provided by financing activities was $302.5 million for the nine-month
period in 2020, as compared to $146.8 million for the comparable period in 2019.
Cash provided in 2020 primarily reflects proceeds from senior notes of $502.5
million and net short-term borrowings of $16.7 million , partially offset by
payments of $56.2 million for common stock repurchases, $79.8 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 $1.6 billion as of August 23, 2020 , $1.6 billion was
fixed-rate and unsecured (99.5% of total debt), net of capitalized debt issuance
costs, and variable-rate debt of $8.5 million (0.5% of total debt). As of
August 23, 2020 , our aggregate debt principal payments of $1.6 billion begin in
2025. Short-term borrowings of $23.9 million at various foreign subsidiaries 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 of August 23, 2020 .
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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, nine-month and twelve-month periods ended August 23, 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 year to
date income tax expense divided by our year to date income before income taxes,
each as reflected in our statement of operations for the relevant period with
any impacts of changes in effective tax rate being recognized in the current
three-month 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 and unrealized 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;
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•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 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 Nine Months Ended
August 23, August 25, August 23, August 25,
2020 2019 2020 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Gross profit $ 577.4 $ 766.8 $ 1,586.4 $ 2,250.0
Non-GAAP measure:
Gross profit $ 577.4 $ 766.8 $ 1,586.4 $ 2,250.0
COVID-19 related inventory costs (1) (7.9) - 78.7 -
Adjusted gross profit $ 569.5 $ 766.8 $ 1,665.1 $ 2,250.0
Adjusted gross margin 53.6 % 53.0 % 54.3 % 53.6 %
_____________
(1) Represents costs incurred in connection with COVID-19, including $7.9
million in reductions in COVID-19 related inventory charges recognized during
the three-month period ended August 23, 2020 , primarily due to reductions in our
estimate of adverse fabric purchase commitments, initially recorded in the
second quarter of 2020. During the nine-month period ended August 23, 2020 , the
charges include $48.1 million of incremental inventory reserves and $29.8
million of adverse fabric purchase commitments.
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The following table presents a reconciliation of SG&A, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted
SG&A for each of the periods presented.
Adjusted SG&A:
Three Months Ended Nine Months Ended
August 23, August 25, August 23, August 25,
2020 2019 2020 2019
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure: Selling, general and administrative expenses$ 484.0 $
595.5
Non-GAAP measure: Selling, general and administrative expenses$ 484.0 $
595.5
Impact of changes in fair value on cash-settled stock-based compensation(1) (1.8) (5.1) (6.0) (25.4) COVID-19 related charges(2) 4.1 - (83.9) - Restructuring related charges, severance and other, net(3) (1.1) - (7.8) (3.8) Adjusted SG&A$ 485.2 $ 590.4 $ 1,597.4 $ 1,785.7 _____________ (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) For the three-month period endedAugust 23, 2020 , the net reduction of$4.1 million in COVID-19 related charges recognized mainly represents the recoveries of receivables previously estimated to be not collectible, offset by incremental costs incurred in response to the global pandemic. The charges incurred in connection with COVID-19 during the nine-month period endedAugust 23, 2020 primarily consist of$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, and$21.0 million of charges related to customer receivables. (3) Restructuring related charges, severance and other, net include transaction and deal related costs, including IPO-related, initial acquisition and integration costs and amortization of acquired intangible assets. 44 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of net income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented. Adjusted EBIT and Adjusted EBITDA: Three Months Ended Nine Months Ended Twelve Months Ended August 23, August 25, August 23, August 25, August 23, August 25, 2020 2019 2020 2019 2020 2019 (Dollars in millions) (Unaudited) Most comparable GAAP measure: Net income (loss)$ 27.0 $ 124.2 $ (183.8) $ 299.2 $ (88.0) $ 396.5 Non-GAAP measure: Net income (loss)$ 27.0 $ 124.2
24.6 27.4 (57.9) 60.2 (35.5) 98.4
Interest expense 28.4 15.3 56.3 48.0 74.5 57.7
Other (income) expense, net 12.3 4.4 8.3 2.8 3.5 (13.5)
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) 1.8 5.1 6.0 25.4 14.7 46.2
COVID-19 related inventory costs and
other charges (2) (12.0) - 162.6 - 162.6 -
Restructuring and restructuring
related charges, severance and other,
net(3) 2.1 - 76.2 3.8 82.2 5.0
Adjusted EBIT $ 84.2 $ 176.4
32.6 31.6 101.0 90.3 134.6 118.4
Adjusted EBITDA $ 116.8 $ 208.0 $ 168.7 $ 554.6 $ 348.6 $ 733.6
Adjusted EBIT margin 7.9 % 12.2 % 2.2 % 11.1 %
_____________
(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) For the three-month period ended August 23, 2020 , the net reduction of
$12.0 million in COVID-19 related inventory costs and other charges recognized
mainly represents reductions in COVID-19 related inventory charges, as a result
of reductions in our estimate of adverse fabric purchase commitments, the
recoveries of receivables previously estimated to be not collectible, offset by
incremental costs incurred in response to the global pandemic. The inventory
costs and other charges recognized during the nine-month period ended August 23,
2020 primarily consist of $48.1 million of incremental inventory reserves, $29.8
million of adverse fabric purchase commitments, $43.0 million and $17.4 million
in impairment of operating lease right-of-use assets and property and equipment
related to certain retail locations and other corporate assets, respectively,
and $21.0 million of charges related to customer receivables.
(3) Other charges included in restructuring and restructuring related charges,
severance and other, net include transaction and deal related costs, including
IPO-related, initial acquisition and integration costs and amortization of
acquired intangible assets.
(4) Depreciation and amortization amount net of amortization of acquired
intangible assets included in Restructuring and related charges, severance and
other, net.
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The following table presents a reconciliation of net income (loss), the most
directly comparable financial measure calculated in accordance with GAAP, to
Adjusted net income (loss) for each of the periods presented and the calculation
of Adjusted diluted earnings (loss) per share for each of the periods presented.
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) per Share:
Three Months Ended Nine Months Ended
August 23, August 25, August 23, August 25,
2020 2019 2020 2019
(Dollarsin millions, except per share amounts)
(Unaudited)
Most comparable GAAP measure: Net income (loss)$ 27.0 $ 124.2 $ (183.8) $ 299.2 Non-GAAP measure: Net income (loss)$ 27.0 $ 124.2 $ (183.8) $ 299.2 Underwriter commission paid on behalf of selling stockholders - - - 24.9 Impact of changes in fair value on cash-settled stock-based compensation(1) 1.8 5.1 6.0 25.4 COVID-19 related inventory costs and other charges(2) (12.0) - 162.6 - Restructuring and restructuring related charges, severance and other, net(3) 2.1 - 76.2 3.8 Tax impact of adjustments(4) 12.4 (1.1) (58.7) (4.9) Adjusted net income$ 31.3 $
128.2
Adjusted net income margin 2.9 % 8.9 % 0.1 % 8.3 % Adjusted diluted earnings per share$ 0.08 $
0.31
_____________
(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) For the three-month period endedAugust 23, 2020 , the net reduction of$12.0 million in COVID-19 related inventory costs and other charges recognized mainly represents reductions in COVID-19 related inventory charges, as a result of reductions in our estimate of adverse fabric purchase commitments, the recoveries of receivables previously estimated to be not collectible, offset by incremental costs incurred in response to the global pandemic. The inventory costs and other charges recognized during the nine-month period endedAugust 23, 2020 primarily consist of$48.1 million of incremental inventory reserves,$29.8 million of adverse fabric purchase commitments,$43.0 million and$17.4 million in impairment of operating lease right-of-use assets and property and equipment related to certain retail locations and other corporate assets, respectively, and$21.0 million of 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) Tax impact for the three-month period endedAugust 23, 2020 includes the impact of the decrease in annual effective tax rate. Please refer to Note 13 for more information on the effective tax rate. 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. 46 -------------------------------------------------------------------------------- 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.August 23 ,November 24, 2020 2019 (Dollars in millions) (Unaudited)
Most comparable GAAP measure:
Total debt, excluding capital leases $ 1,567.2 $ 1,014.4
Non-GAAP measure:
Total debt, excluding capital leases $ 1,567.2 $ 1,014.4
Cash and cash equivalents (1,353.0) (934.2)
Short-term investments in marketable securities (72.3)
(80.7)
Net debt $ 141.9 $ (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.
August 23, August 25,
2020 2019
(Dollars in millions)
(Unaudited)
Total debt, excluding capital leases
4.5 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.
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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 periods
presented.
Three Months Ended Nine Months Ended
August 23, August 25, August 23, August 25,
2020 2019 2020 2019
(Dollars in millions) (Dollars in millions)
(Unaudited) (Unaudited)
Most comparable GAAP measure:
Net cash provided by operating activities $ 199.5 $ 43.7 $ 240.9 $ 205.5
Net cash used for investing activities (10.1) (55.2) (117.7) (198.4)
Net cash (used for) provided by financing
activities (287.1) 15.8 302.5 $ 146.8
Non-GAAP measure:
Net cash provided by operating activities $ 199.5 $ 43.7 $ 240.9 $ 205.5
Underwriter commission paid on behalf of
selling stockholders - - - 24.9
Purchases of property, plant and equipment (14.3) (51.0) (89.5) (128.0)
Proceeds on settlement of forward foreign
exchange contracts not designated for hedge
accounting 2.5 (3.8) 17.6 9.3
Repurchase of common stock - - (56.2) (3.1)
Repurchase of shares surrendered for tax
withholdings on equity awards (4.3) - (79.9) (25.5)
Dividend to stockholders - - (63.6) (55.0)
Adjusted free cash flow $ 183.4 $ (11.1) $ (30.7) $ 28.1
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 periods
applicable to the three-month and nine-month periods ended August 23, 2020 :
Three Months Ended Nine Months Ended
% %
August 23, August 25, Increase August 23, August 25, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions)
(Unaudited)
Total revenues
As reported $ 1,063.1 $ 1,447.1 (26.5) % $ 3,066.8 $ 4,194.5 (26.9) %
Impact of foreign currency exchange
rates - (16.2) * - (67.7) *
Constant-currency net revenues$ 1,063.1 $ 1,430.9 (25.7) %$ 3,066.8 $ 4,126.8 (25.7) % Americas As reported$ 549.8 $ 770.8 (28.7) %$ 1,578.1 $ 2,180.8 (27.6) % Impact of foreign currency exchange rates - (16.0) * - (32.8)
*
Constant-currency net revenues - Americas$ 549.8 $ 754.8 (27.2) %$ 1,578.1 $ 2,148.0 (26.5) % Europe As reported$ 390.4 $ 463.3 (15.7) %$ 1,032.4 $ 1,326.3 (22.2) % Impact of foreign currency exchange rates - 4.7 * - (19.6)
*
Constant-currency net revenues -
(16.6) %$ 1,032.4 $ 1,306.7 (21.0) % Asia As reported$ 122.9 $ 213.0 (42.3) %$ 456.3 $ 687.4 (33.6) % Impact of foreign currency exchange rates - (4.9) * - (15.3)
*
Constant-currency net revenues -
(40.9) %$ 456.3 $ 672.1 (32.1) % _____________ * 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 nine-month periods endedAugust 23, 2020 . Three Months Ended Nine Months Ended % % August 23, August 25, Increase August 23, August 25, Increase 2020 2019 (Decrease) 2020 2019 (Decrease) (Dollars in millions) (Unaudited) Adjusted EBIT(1)$ 84.2 $ 176.4 (52.3) %$ 67.7 $ 464.3 (85.4) % Impact of foreign currency exchange rates - (1.7) * - (10.5)
*
Constant-currency Adjusted EBIT
(51.8) %$ 67.7 $ 453.8 (85.1) % Constant-currency Adjusted EBIT margin(2) 7.9 % 12.2 % 2.2 % 11.0 % _____________ (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 49 -------------------------------------------------------------------------------- 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 nine-month periods endedAugust 23, 2020 . Three Months Ended Nine Months Ended % % August 23, August 25, Increase August 23, August 25, Increase 2020 2019 (Decrease) 2020 2019 (Decrease)
(Dollars in millions, except per share amounts)
(Unaudited)
Adjusted net income (loss) (1)
(75.6) %$ 2.3 $ 348.4 (99.3) % Impact of foreign currency exchange rates - (0.3) * - (7.3)
*
Constant-currency Adjusted net income (loss)$ 31.3 $ 127.9 (75.5) %$ 2.3 $ 341.1 (99.3) % Constant-currency Adjusted net income (loss) margin(2) 2.9 % 8.9 % 0.1 % 8.3 % Adjusted diluted earnings (loss) per share$ 0.08 $ 0.31 (74.2) %$ 0.01 $ 0.85 (98.8) % Impact of foreign currency exchange rates - - * - (0.02)
*
Constant-currency Adjusted diluted earnings (loss) per share$ 0.08 $ 0.31 (74.2) %$ 0.01 $ 0.83 (98.8) % _____________ (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 50 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations As ofAugust 23, 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 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. 51 -------------------------------------------------------------------------------- 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 inMarch 2020 ; •the impact of theUnited Kingdom's withdrawal from theEuropean Union ; •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 our procurement 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 contract manufacturers 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 changingU.S. and international retail 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 competitive pressures 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; 52 -------------------------------------------------------------------------------- Table of Contents •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; •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; •changes in or application of trade and tax laws, potential increases in import tariffs or taxes, the implementation of trade restrictions or sanctions, and the potential withdrawal from or renegotiation or replacement of theNorth 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. 53
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