LEVI STRAUSS & CO. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest toNovember 30 of that year. See "-Financial Information Presentation-Fiscal Year." 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 Annual 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:Americas ,Europe andAsia (which includes theMiddle East andAfrica ). We service our 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, leading third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers (direct-to-consumer "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 ofNovember 29, 2020 , our products were sold in approximately 50,000 retail locations in more than 110 countries, including approximately 3,100 brand-dedicated stores and shop-in-shops. As ofNovember 29, 2020 , we had 1,042 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, many of our company-operated stores and wholesale customer doors were temporarily closed at different points throughout the year, with the majority of the impact occurring in the second quarter, when most of our owned and operated retail stores and wholesale customer doors were closed. During the fourth quarter, a resurgence in COVID-19 37 -------------------------------------------------------------------------------- Table of Contents cases led to the temporary closure of some of our stores, predominantly inEurope . See "Impact of COVID-19 on our Business" below for more information. OurEurope andAsia businesses, collectively, contributed 47% of our net revenues and 36% of our regional operating income in fiscal year 2020, as compared to 47% of our net revenues and 45% of our regional operating income in fiscal year 2019. Sales of Levi's® brand products represented approximately 87% of our net revenues in both fiscal year 2020 and fiscal year 2019. Pants represented 65% of our total units sold in both fiscal year 2020 and fiscal year 2019, and men's products generated 64% of our net revenues in fiscal year 2020 as compared to 67% in fiscal year 2019. Our wholesale channel generated 61% and 64% of our net revenues in fiscal years 2020 and 2019, respectively. Our DTC channel generated 39% and 36% of our net revenues in fiscal years 2020 and 2019, respectively, with our company operated e-commerce representing 21% and 14% of DTC channel net revenues and 8% and 5% of total net revenues in fiscal years 2020 and 2019, respectively. Our Objectives Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth and generate industry-leading shareholder returns. Critical strategies to achieve these objectives include being a brand-led business, putting DTC first, and further diversifying across geographies, categories, genders and channels. We intend to achieve these strategies through operational excellence, financial discipline, and the digital transformation of our business processes and ways of working, including leveraging data and machine learning in our decision making. Impact of COVID-19 on Our Business The COVID-19 pandemic has materially impacted our business and results of operations in fiscal year 2020. During the year endedNovember 29, 2020 , a net$250.0 million in charges were recognized, consisting of$90.4 million of restructuring charges, COVID-19 related inventory costs of$68.5 million , and charges for customer receivables, asset impairments and other related charges of$91.1 million . For more information on the restructuring charges and COVID-19 related inventory costs and other charges, refer to Note 12 and Note 1, respectively, to the consolidated financial statements included in this report. As a result of the widespread impact of COVID-19, substantially all of our company-operated stores were temporarily closed for varying periods of time throughout the year, primarily within the second quarter, with the majority reopened by mid-July, in many cases, with reduced hours and occupancy levels. During the fourth quarter, a resurgence in COVID-19 cases led to the temporary closure of some of our stores, mainly inEurope . As of the end of fiscal year 2020, approximately 87% of our company-operated stores were open for either in-store or curbside service. Our wholesale customers, including third-party retailers and franchise partners, also experienced significant business disruptions this year, including store closures, lower traffic and consumer demand, resulting in decreased shipments to these customers. As consumer spending shifted towards online shopping experiences as a result of the global pandemic, our company-operated e-commerce net revenues grew approximately 29% during the fiscal year 2020. Our global digital business, which includes our e-commerce site as well as the online businesses of our wholesale customers, including that of traditional wholesalers as well as pure play (online-only wholesalers) grew to represent approximately 22% of our total net revenues in fiscal year 2020, versus approximately 13% of our total net revenues in fiscal year 2019. Throughout the pandemic, our top priority has been to protect the health and safety of our employees and our consumers. During fiscal year 2020, we closed many of our corporate offices and other facilities, and implemented a work from home policy for many of our corporate employees that, in most cases, we are still continuing to follow. During the year, as our company-operated retail stores were re-opened, we followed internally derived specific health-related criteria with an emphasis on comprehensive safety precautions, including frequent 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 globally, a resurgence of the pandemic has resulted in temporary store closures, beginning withEurope in the fourth quarter, and becoming more widespread in early fiscal year 2021. The future impact of the COVID-19 pandemic remains highly uncertain, and our business and results of operations, including our net revenues, earnings and cash flows, could continue to be adversely impacted including as a result of: •Risk of future additional temporary closures 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; 38 -------------------------------------------------------------------------------- Table of Contents •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. 2020 Restructuring InApril 2020 , our Board of Directors (the "Board") endorsed a restructuring initiative designed to reduce costs, streamline operations and support agility. InJuly 2020 , we announced and began to implement the restructuring initiative, which we expect to substantially complete by the middle of fiscal year 2021. The adverse impacts of the COVID-19 pandemic on our business necessitated cost reduction actions in advance of our plans to streamline operations. InOctober 2020 , we announced the next step of our restructuring initiative, which included realignment of our top level organization to support our new strategies, which became effective in fiscal year 2021. The next phase of the reorganization, including the streamlining of operations, is expected to be completed in fiscal year 2021. 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 year endedNovember 29, 2020 , we recognized restructuring charges of$90.4 million , which were recorded on a separate line item in our consolidated statements of operations. Within the consolidated balance sheet as ofNovember 29, 2020 , we had$54.7 million and$6.3 million in restructuring liabilities and other long-term liabilities, respectively, and an immaterial amount of pension and postretirement curtailment losses were 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 year endedNovember 29, 2020 ,$24.7 million in payments were made and cash payments for charges recognized to date are expected to continue through 2021. We estimate that we will incur future additional charges related to this restructuring initiative. Other Factors Affecting Our Business We believe the other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, that are impacting our business include the following: •A complex and challenging retail environment for us and our customers, characterized by unpredictable traffic patterns and a general promotional environment. In developed economies, mixed real wage growth and shifting in consumer spending also continue to pressure global discretionary spending. Consumers continue to focus on value pricing and convenience with 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. Sales directly to consumers generally have higher gross margins than sales through third parties, although these sales 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 39 -------------------------------------------------------------------------------- Table of Contents 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. •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, and 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 and tariffs, have resulted in uncertainty surrounding the future state of the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs and, if not mitigated, could have a material adverse effect on our business and results of operations. These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. For more information on the risk factors affecting our business, see "Item 1A - Risk Factors". Seasonality of Sales We typically achieve our largest quarterly revenues in the fourth quarter. In fiscal year 2020, our net revenues in the first, second, third and fourth quarters represented 34%, 11%, 24% and 31%, respectively, of our total net revenues for the year. Due to the COVID-19 pandemic, net revenues were adversely impacted by temporary store closures and reduced traffic and consumer demand, with the majority of the impact occurring in the second quarter when most company-operated and wholesale customer doors were temporarily closed. In the fourth quarter, a resurgence in COVID-19 cases led to the temporary closure of stores, predominantly inEurope . In fiscal year 2019, our net revenues in the first, second, third and fourth quarters represented 25%, 23%, 25% and 27%, respectively, of our total net revenues for the year. We typically achieve a significant amount of revenues from our DTC channel on the Friday followingThanksgiving Day , which is commonly referred to as Black Friday. Due to the timing of our fiscal year-end, a particular fiscal year might include one, two or no Black Fridays, which could impact our net revenues for the fiscal year. Fiscal year 2018 included one Black Friday, fiscal year 2019 did not have a Black Friday, while fiscal year 2020 had two Black Fridays. Fiscal year 2020 benefited from a 53rd week. The level of our working capital reflects the seasonality of our business. We expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fourth quarter selling season but they could also be impacted by other events affecting retail sales, including adverse weather conditions or other macroeconomic events, including pandemics such as COVID-19. 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 Results for the Fourth Quarter of Fiscal Year 2020 •Net revenues. Compared to the fourth quarter of fiscal year 2019, consolidated net revenues decreased 11.6% on a reported basis and 12.3% on a constant-currency basis. The decrease was due to the adverse impact of the COVID-19 pandemic, including temporary store closures, primarily inEurope , as well as overall reduced foot traffic and consumer demand globally, partially offset by the benefit of a 53rd week and Black Friday in fiscal year 2020. 40 -------------------------------------------------------------------------------- Table of Contents •Operating income. We recognized consolidated operating income of$92.0 million , compared to operating income of$131.6 million in the fourth quarter of fiscal year 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic, including the recognition of$22.0 million of net restructuring charges. •Net income. We recognized net income of$56.7 million , compared to net income of$95.3 million in the fourth quarter of fiscal year 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic. •Adjusted EBIT. Adjusted EBIT was$113.4 million , compared to Adjusted EBIT of$146.3 million in the fourth quarter of fiscal year 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic. •Diluted earnings per share. Diluted earnings per share were$0.14 compared to diluted earnings per share of$0.23 in the fourth quarter of fiscal year 2019. •Adjusted diluted earnings per share. Adjusted diluted earnings per share were$0.20 compared to adjusted diluted earnings per share of$0.26 in the fourth quarter of fiscal year 2019. •Cash from operations. Cash from operations increased to$228.7 million , as compared to$206.7 million in fiscal year 2019, reflecting our continuing focus on financial discipline, cost controls, cash and working capital. For more information on Adjusted EBIT and adjusted diluted earnings per share, measures not prepared in accordance withUnited States generally accepted accounting principles, and reconciliations of such measures to net income (loss) and diluted earnings (loss) per share, see "-Non-GAAP Financial Measures". Our Fiscal Year 2020 Results •Net revenues. Compared to fiscal year 2019, consolidated net revenues decreased 22.7% on a reported basis and 22.0% on a constant-currency basis. The decrease was due to the adverse impact of the COVID-19 pandemic, including as the result of widespread temporary store closures, reduced traffic and consumer demand, partially offset by higher net revenues prior to the pandemic and the benefit of a 53rd week and two Black Fridays in fiscal year 2020. •Operating loss. We recognized a consolidated operating loss of$85.1 million , compared to operating income of$566.7 million in fiscal year 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic, including the recognition of$90.4 million of net restructuring charges and$159.6 million of net COVID-19 related inventory costs and other charges. •Net loss. We recognized a consolidated net loss of$127.1 million , compared to net income of$395.0 million in fiscal year 2019. The decrease was primarily due to the adverse impacts of the COVID-19 pandemic, including the recognition of$250.0 million in net restructuring and COVID-19 related charges in 2020 as compared to fiscal year 2019. •Adjusted EBIT. Adjusted EBIT was$181.1 million compared to Adjusted EBIT of$610.6 million in fiscal year 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 portion of fiscal year 2020 prior to the pandemic as compared to fiscal year 2019. •Diluted loss per share. Diluted loss per share was$0.32 compared to diluted earnings per share of$0.97 in fiscal year 2019. •Adjusted diluted earnings per share. Adjusted diluted earnings per share were$0.21 compared to adjusted diluted earnings per share of$1.12 in fiscal year 2019. •Cash from operations. Cash from operations increased to$469.6 million , as compared to$412.2 million in fiscal year 2019, despite incurring a net loss of$127.1 million in fiscal year 2020 reflecting our continuing focus on financial discipline, cost controls, cash and working capital. For more information on Adjusted EBIT and adjusted diluted earnings per share, measures not prepared in accordance withUnited States generally accepted accounting principles, and reconciliations of such measures to net income (loss) and diluted earnings (loss) per share, see "-Non-GAAP Financial Measures". 41 -------------------------------------------------------------------------------- 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 that is closest toNovember 30 of that year. Certain of our foreign subsidiaries have fiscal years endingNovember 30 . Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Fiscal years 2019 and 2018 were 52-week years ending onNovember 24, 2019 andNovember 25, 2018 , respectively. Fiscal year 2020 was a 53-week year ending onNovember 29, 2020 . Each quarter of fiscal years 2020, 2019 and 2018 consisted of 13 weeks. The fourth quarter of 2020 consisted of 14 weeks. Segments. We manage our business according to three operating segments:Americas ,Europe andAsia . 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 selling, general and administrative expenses, 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. 42 -------------------------------------------------------------------------------- Table of Contents Results of Operations Fiscal Year 2020 compared to Fiscal Year 2019 The following table summarizes, 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: Year Ended November 29, November 24, % 2020 2019 November 29, November 24, Increase % of Net % of Net 2020 2019 (Decrease) Revenues Revenues (Dollars in millions, except per share amounts) Net revenues$ 4,452.6 $ 5,763.1 (22.7) % 100.0 % 100.0 % Cost of goods sold 2,099.7 2,661.7 (21.1) % 47.2 % 46.2 % Gross profit 2,352.9 3,101.4 (24.1) % 52.8 % 53.8 % Selling, general and administrative expenses 2,347.6 2,534.7 (7.4) % 52.7 % 44.0 % Restructuring charges, net 90.4 - * 2.0 % - % Operating (loss) income (85.1) 566.7 (115.0) % (1.9) % 9.8 % Interest expense (82.2) (66.2) 24.2 % (1.8) % (1.1) % Underwriter commission paid on behalf of selling stockholders - (24.9) * - % (0.4) % Other (expense) income, net (22.4) 2.0 * (0.5) % - % (Loss) income before income taxes (189.7) 477.6 (139.7) % (4.3) % 8.3 % Income tax (benefit) expense (62.6) 82.6 (175.8) % (1.4) % 1.4 % Net (loss) income (127.1) 395.0 (132.2) % (2.9) % 6.9 % Net income attributable to noncontrolling interest - (0.4) * - % - % Net (loss) income attributable to Levi Strauss & Co.$ (127.1) $ 394.6 (132.2) % (2.9) % 6.8 % (Loss) earnings per common share attributable to common stockholders: Basic$ (0.32) $ 1.01 (131.7) % * * Diluted$ (0.32) $ 0.97 (133.0) % * * Weighted-average common shares outstanding: Basic 397.3 389.1 2.1 % * * Diluted 397.3 408.4 (2.7) % * * _____________ * Not meaningful 43
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Net revenues
The following table presents net revenues by regional operating segment for the
periods indicated, and the changes in net revenues by operating segment on both
reported and constant-currency bases from period to period:
Year Ended
% Increase (Decrease)
November 29, November 24, As Constant
2020 2019 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 2,345.4 $ 3,057.0 (23.3) % (22.2) %
Europe 1,435.6 1,768.1 (18.8) % (18.7) %
Asia 671.7 938.0 (28.4) % (27.5) %
Total net revenues $ 4,452.7 $ 5,763.1 (22.7) % (22.0) %
As compared to the same period in the prior year, total net revenues were
affected unfavorably by approximately $56 million in foreign currency exchange
rates.
Americas . On both a reported basis and constant-currency basis, net revenues in
our Americas region decreased for fiscal year 2020. Currency translation had an
unfavorable impact on net revenues of approximately $43 million for the year.
The decrease in net revenues was due to the adverse impact of the COVID-19
pandemic on both our wholesale and DTC channels throughout the year.
The decrease in wholesale revenues was primarily due to the temporary closures
of third-party retail locations, most of which were closed for the duration of
the second quarter, as well as decreased demand throughout the remainder of the
year as locations reopened. These declines were partially offset by increases in
Levi's® and Signature products sold to traditional and digital wholesale
customers deemed essential, allowing them to remain open throughout the year,
either through their retail locations, or e-commerce sites.
The decrease in DTC channel revenue was due to the temporary closures of our
company-operated stores as the majority of our store network was closed during
the second and part-way through the third quarter as a result of the COVID-19
pandemic. As stores reopened, they were impacted by decreased traffic throughout
the remainder of the year, many operating under reduced hours and occupancy
levels. This was partially offset by incremental revenues from our newly
acquired South American distributor, first quarter revenue growth in our DTC
channel and the inclusion of non-comparable net revenues from two Black Fridays
and a 53rd week in fiscal year 2020 when compared to fiscal year 2019. As of
November 29, 2020 , approximately 94% of our company-operated stores in the
region were open and our store network had 77 more stores in operation as
compared to November 24, 2019 . E-commerce revenue also had strong growth during
the year due to increased traffic and higher conversion, as consumer spending
continued to shift towards online shopping, as well as from the benefit of two
Black Fridays and a 53rd week in fiscal year 2020 when compared to fiscal year
2019.
Europe . Net revenues in Europe decreased on both reported and constant-currency
bases. Currency translation did not have a significant impact on net revenues in
the region for fiscal year 2020. The decrease in net revenues was driven by the
adverse impact COVID-19 had across both our wholesale and DTC channels
throughout the year.
Wholesale revenue declined due to the temporary closure of our wholesale
customers' retail locations, most of which were closed for the duration of the
second quarter and some again in the fourth quarter due to a resurgence of
COVID-19, as well as decreased demand when locations were open after the
pandemic began. These declines were partially offset by growth in our digital
wholesale customer revenues as well as first quarter growth from our traditional
wholesale customers.
The decrease in DTC channel revenue was due to the temporary closures of our
company-operated stores as the majority of our store network was closed during
the second quarter, with some stores closed again in the fourth quarter due to a
resurgence of COVID-19. When stores were able to open after the first wave of
the pandemic, they were impacted by lower traffic, many operating under reduced
hours and store occupancy levels. This decline was partially offset with first
quarter growth within our company operated retail network and the inclusion of
non-comparable net revenues from two Black Fridays and a 53rd week in fiscal
year 2020 as compared to fiscal year 2019. As of November 29, 2020 ,
approximately 67% of our company-operated stores in the region were open and our
store network had 32 more stores in operation as compared to November 24, 2019 .
E-commerce revenue grew during the year as a result of increased traffic, as
consumer spending continued to shift towards online shopping, as well as from
the benefit of two Black Fridays and a 53rd week in fiscal year 2020 when
compared to fiscal year 2019.
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Asia . Net revenues in Asia decreased on both reported and constant-currency
bases, with currency translation affecting net revenues unfavorably by
approximately $12 million . The decrease in net revenues was driven by the
adverse impact COVID-19 had across our wholesale and DTC channels throughout the
year.
Wholesale revenue declined due to temporary store closures impacting wholesale
customer retail locations across the region, starting in the second quarter and
at various times throughout the remainder of the year, offsetting first quarter
growth.
DTC channel revenue decreased due to the temporary store closures that started
in China and neighboring countries midway through the first quarter, and then
spread throughout various parts of the region for varying periods of time during
the year as sporadic COVID-19 outbreaks and partial and full lockdowns impacted
the region. As stores reopened, sales were impacted by lower foot traffic and
restrictions on operating hours and store occupancy levels. The decline in DTC
revenue was partially offset by growth in e-commerce revenue in fiscal year 2020
as compared to fiscal year 2019. As of November 29, 2020 , approximately 99% of
our company-operated stores in the region were open and our store network had 28
more stores in operation as compared to November 24, 2019 .
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:
Year Ended
%
November 29, November 24, Increase
2020 2019 (Decrease)
(Dollars in millions)
Net revenues $ 4,452.6 $ 5,763.1 (22.7) %
Cost of goods sold 2,099.7 2,661.7 (21.1) %
Gross profit $ 2,352.9 $ 3,101.4 (24.1) %
Gross margin 52.8 % 53.8 %
Currency translation unfavorably impacted gross profit by approximately $23
million . The decrease in gross margin was mainly due to COVID-19 related
charges, which primarily included the recognition of incremental inventory
reserves of $42.3 million and adverse fabric purchase commitments of $26.2
million which decreased gross margin by 1.6 percentage points. These adverse
impacts were partially offset by price increases implemented in the second half
of the prior year.
Selling, general and administrative expenses
The following table shows selling, general and administrative ("SG&A") expenses
for the periods indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
Year Ended
November 29, November 24,
% 2020 2019
November 29, November 24, Increase % of Net % of Net
2020 2019 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 1,040.4 $ 1,116.8 (6.8) % 23.4 % 19.4 %
Advertising and promotion 331.4 399.3 (17.0) % 7.4 % 6.9 %
Administration 343.2 426.0 (19.4) % 7.7 % 7.4 %
Other 542.3 592.6 (8.5) % 12.2 % 10.3 %
COVID-19 related charges 90.3 - 100.0 % 2.0 % - %
Total SG&A expenses $ 2,347.6 $ 2,534.7 (7.4) % 52.7 % 44.0 %
Currency translation affected SG&A expenses favorably by approximately $15
million as compared to the prior year.
Selling. Currency translation impacted selling expenses favorably by
approximately $9 million for the year ended November 29, 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 initiated during
the second quarter. Selling expenses as a percentage of net
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revenues increased due to the adverse impact of the COVID-19 pandemic on net
revenues, offset in part by cost-savings actions implemented during the year.
Advertising and promotion. Currency translation impacted advertising and
promotion expense favorably by approximately $3 million for the year ended
November 29, 2020 . The decrease in advertising and promotion expenses 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 fiscal year 2020. The decrease in administration
expenses is largely due to lower employee and incentive costs, which included
the impact of cost-savings actions implemented in response to COVID-19.
Other. Other costs include distribution, information resources, and marketing
organization costs. Currency translation impacted other SG&A expenses favorably
by approximately $2 million for fiscal year 2020. The decrease in other costs
was primarily due to lower distribution expenses attributable to reduced sales
volume as well as cost-savings actions implemented in response to COVID-19.
COVID-19 related charges. During the year ended November 29, 2020 , we
recognized $44.3 million in impairment of certain operating lease right-of-use
assets and $21.7 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 $17.7 million relate to customer
receivables, including provisions and other allowances as a result of changes in
their financial condition of $5.2 million and actual and anticipated
bankruptcies and other associated claims of $12.5 million . The remainder relates
to other incremental costs incurred in response to the global pandemic.
Restructuring charges, net
During the year ended November 29, 2020 , we recognized restructuring charges of
$90.4 million , 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 regional operating 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 corresponding
region net revenues or consolidated net revenues:
Year Ended
November 29, November 24,
% 2020 2019
November 29, November 24, Increase % of Net % of Net
2020 2019 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income (loss):
Americas $ 332.2 $ 545.1 (39.1) % 14.2 % 17.8 %
Europe 206.4 353.1 (41.5) % 14.4 % 20.0 %
Asia (21.8) 85.8 (125.4) % (3.2) % 9.1 %
Total regional operating income 516.8 984.0 (47.5) % 11.6 % * 17.1 % *
Corporate:
Restructuring charges, net 90.4 - - % 2.0 % * - % *
Other corporate staff costs and expenses 511.5 417.3 22.6 % 11.5 % * 7.2 % *
Total corporate expenses 601.9 417.3 44.2 % 13.5 % * 7.2 % *
Total operating income (loss) $ (85.1) $ 566.7 (115.0) % (1.9) % * 9.8 % *
Operating margin (1.9) % 9.8 %
______________
* Percentage of consolidated net revenues
Currency translation affected total operating income in fiscal year 2020
unfavorably by approximately
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Regional operating income.
•Americas. Currency translation unfavorably affected operating income in the
region by approximately $8 million as compared to the prior year. The decrease
in operating income 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.
•Europe. Currency translation did not have a significant impact on operating
income in the region for fiscal year 2020. The decrease in operating income 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, net of higher selling costs
to support store expansion.
•Asia. Currency translation did not have a significant impact on operating
income in the region for fiscal year 2020. The decrease in operating income 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.
The increase in corporate expenses for the year ended November 29, 2020 was
primarily due to net restructuring charges, COVID-19 related net inventory costs
and other 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 throughout the remainder of the year.
Interest expense
Interest expense was $82.2 million for the year ended November 29, 2020 , as
compared to $66.2 million in the prior year. The increase in interest expense
was primarily related to additional borrowings from senior notes.
Our weighted-average interest rate on average borrowings outstanding for fiscal
year 2020 was 4.75%, as compared to 5.31% for fiscal year 2019.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management
activities and transactions. For the years ended November 29, 2020 and
November 24, 2019 , we recorded net other expense of $22.4 million and other
income of $2.0 million , respectively. The expense in fiscal year 2020 primarily
consists of $14.7 million in pension settlement losses as well as foreign
currency transaction losses, partially offset by the interest income generated
from money market funds and short-term investments. The income in fiscal year
2019 primarily reflected net gains on our foreign exchange derivatives and
investment interest generated from money market funds, partially offset by net
losses on our foreign currency denominated balances.
Income tax expense
Income tax (benefit) expense was $(62.6) million for the year ended November 29,
2020 , compared to $82.6 million for the prior year. Our effective income tax
rate was 33.0% for the year ended November 29, 2020 , compared to 17.3% for the
prior year. The increase in the effective tax rate in fiscal year 2020 as
compared to fiscal year 2019 was driven by a significant decrease in income
before income taxes and tax rate reconciling items as a percentage to income
before income taxes. The increase in the effective tax rate was primarily
attributable to a $26.1 million benefit from stock-based compensation exercises,
which includes state income taxes, and a $4.6 million benefit resulting from the
carryback of U.S. net operating losses to tax years with a higher federal income
tax rate as allowed under the CARES Act, offset with a $18.3 million tax charge
for valuation allowance against deferred tax assets.
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Fiscal Year 2019 compared to Fiscal Year 2018
The following table summarizes, 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:
Year Ended
November 24, November 25,
% 2019 2018
November 24, November 25, Increase % of Net % of Net
2019 2018 (Decrease) Revenues Revenues
(Dollars in millions, except per share amounts)
Net revenues $ 5,763.1 $ 5,575.4 3.4 % 100.0 % 100.0 %
Cost of goods sold 2,661.7 2,577.4 3.3 % 46.2 % 46.2 %
Gross profit 3,101.4 2,998.0 3.4 % 53.8 % 53.8 %
Selling, general and administrative expenses 2,534.7 2,457.6 3.1 % 44.0 % 44.1 %
Operating income 566.7 540.4 4.9 % 9.8 % 9.7 %
Interest expense (66.2) (55.3) 19.7 % (1.1) % (1.0) %
Underwriter commission paid on behalf of
selling stockholders (24.9) - * (0.4) % - %
Other income, net 2.0 14.9 (86.6) % - % 0.3 %
Income before income taxes 477.6 500.0 (4.5) % 8.3 % 9.0 %
Income tax expense 82.6 214.8 (61.5) % 1.4 % 3.9 %
Net income 395.0 285.2 38.5 % 6.9 % 5.1 %
Net income attributable to noncontrolling
interest (0.4) (2.1) (81.0) % - % - %
Net income attributable to Levi Strauss & Co. $ 394.6 $ 283.1 39.4 % 6.8 % 5.1 %
Earnings per common share attributable to
common stockholders:
Basic $ 1.01 $ 0.75 34.7 % * *
Diluted $ 0.97 $ 0.73 32.9 % * *
Weighted-average common shares outstanding:
Basic 389.1 377.1 3.2 % * *
Diluted 408.4 388.6 5.1 % * *
_____________
* Not meaningful
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Net revenues
The following table presents net revenues by regional operating segment for the
periods indicated and the changes in net revenues by operating segment on both
reported and constant-currency bases from period to period:
Year Ended
% Increase (Decrease)
November 24, November 25, As Constant
2019 2018 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 3,057.0 $ 3,042.7 0.5 % 0.8 %
Europe 1,768.1 1,646.2 7.4 % 13.3 %
Asia 938.0 886.5 5.8 % 9.5 %
Total net revenues $ 5,763.1 $ 5,575.4 3.4 % 5.8 %
As compared to the same period in the prior year, total net revenues were
affected unfavorably by approximately $126 million in foreign currency exchange
rates.
Americas . On both a reported basis and constant-currency basis, net revenues in
our Americas region increased slightly for fiscal year 2019. Currency
translation had an unfavorable impact on net revenues of approximately $10
million for the year.
Constant-currency net revenues increased as a result of higher DTC revenues, in
the U.S. and international markets, specifically Mexico , despite lacking Black
Friday sales due to the timing of our 2019 fiscal year-end. The increase in
sales was due to the expansion of our company-operated retail network, as we had
14 more stores in operation as of November 24, 2019 as compared to November 25,
2018 and increased traffic to our e-commerce business. Total wholesale revenues
were down, driven from a decline in U.S. wholesale revenues, as a result of the
softening in the overall wholesale environment, including the impact of
financially troubled retailers and increased door closures since a year ago. The
decline was also due to the 2018 relaunch of our Docker's Signature Khaki, as we
stocked our customers' floors with the new product, driving increased sales in
the prior year.
Europe . Net revenues in Europe increased on both reported and constant-currency
bases, with currency translation affecting net revenues unfavorably by
approximately $86 million .
Constant-currency net revenues increased for fiscal year 2019 as a result of
strong performance across both DTC and wholesale channels. The growth in DTC is
mainly driven from strong performance within our company-operated retail
network, particularly outlets, as well as expansion, as we had 24 more stores in
operation as of November 24, 2019 as compared to November 25, 2018 , despite
lacking Black Friday sales due to the timing of our 2019 fiscal year-end. The
growth in our wholesale channel is broad based, across all markets and product
categories.
Asia . Net revenues in Asia increased on both reported and constant-currency
bases, with currency translation affecting net revenues unfavorably by
approximately $30 million .
On a constant-currency basis, the increase in net revenues was due to growth
across both wholesale and DTC channels. The growth in wholesale, which includes
franchised stores was across multiple markets, in particular India . The growth
in DTC was primarily due to store expansion, as there were 43 more stores as of
November 24, 2019 as compared to November 25, 2018 as well as growth within our
e-commerce business.
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Gross profit
The following table shows consolidated gross profit and gross margin for the
periods indicated and the changes in these items from period to period:
Year Ended
November 24, November 25, %
2019 2018 Increase
(Dollars in millions)
Net revenues $ 5,763.1 $ 5,575.4 3.4 %
Cost of goods sold 2,661.7 2,577.4 3.3 %
Gross profit $ 3,101.4 $ 2,998.0 3.4 %
Gross margin 53.8 % 53.8 %
Currency translation unfavorably impacted gross profit by approximately $72
million in fiscal year 2019 as compared to prior year. Excluding the impact of
currency translation, gross margin increased slightly due to sales in higher
gross margin businesses offset primarily by transactional currency impact.
Selling, general and administrative expenses
The following table shows our SG&A expenses for the periods indicated, the
changes in these items from period to period and these items expressed as a
percentage of net revenues:
Year Ended
November 24, November 25,
% 2019 2018
November 24, November 25, Increase % of Net % of Net
2019 2018 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 1,116.8 $ 1,043.1 7.1 % 19.4 % 18.7 %
Advertising and promotion 399.3 400.3 (0.2) % 6.9 % 7.2 %
Administration 426.0 484.5 (12.1) % 7.4 % 8.7 %
Other 592.6 529.7 11.9 % 10.3 % 9.5 %
Total SG&A expenses $ 2,534.7 $ 2,457.6 3.1 % 44.0 % 44.1 %
Currency translation affected SG&A expenses favorably by approximately $50
million as compared to the prior year.
Selling. Currency translation impacted selling expenses favorably by
approximately $29 million for the year ended November 24, 2019 . Higher selling
expenses primarily reflected costs associated with the expansion and performance
of our DTC business, including increased investment in new and existing
company-operated stores. We had 81 more company-operated stores as of November
24, 2019 than as of November 25, 2018 .
Advertising and promotion. Currency translation impacted advertising and
promotion expense favorably by approximately $8 million for the year ended
November 24, 2019 . Advertising and promotion expenses as a percent of net
revenues decreased due to planned reductions in advertising spend.
Administration. Administration expenses include functional administrative and
organization costs. Currency translation impacted administration expenses
favorably by approximately $6 million for the fiscal year 2019. Administration
expenses decreased due to lower annual incentive compensation costs as well as
lower stock-based compensation costs, which reflect the cancel of cash-settled
awards and concurrent replacement with similar equity-settled awards in relation
to the IPO, as well as lower overall stock price volatility for fiscal year
2019.
Other. Other SG&A expenses include distribution, information resources, and
marketing organization costs. Currency translation impacted other SG&A expenses
favorably by approximately $7 million for fiscal year 2019. The increase in
other SG&A costs was primarily due to an increase in information technology
expenses, which reflect critical investments towards expanding our omni-channel
capabilities as well as initial investments towards a new enterprise resource
planning system. Distribution costs also increased to support increased volume,
mainly within Europe and Asia .
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Operating income
The following table shows operating income by regional operating 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 corresponding
region net revenues:
Year Ended
November 24, November 25,
% 2019 2018
November 24, November 25, Increase % of Net % of Net
2019 2018 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income:
Americas $ 545.1 $ 551.4 (1.1) % 17.8 % 18.1 %
Europe 353.1 292.9 20.6 % 20.0 % 17.8 %
Asia 85.8 86.6 (0.9) % 9.1 % 9.8 %
Total regional operating income 984.0 930.9 5.7 % 17.1 % * 16.7 % *
Corporate expenses 417.3 390.4 6.9 % 7.2 % * 7.0 % *
Total operating income $ 566.7 $ 540.5 4.8 % 9.8 % * 9.7 % *
Operating margin 9.8 % 9.7 %
______________
* Percentage of consolidated net revenues
Currency translation affected total operating income unfavorably by
approximately $22 million in fiscal year 2019 as compared to the prior year.
Regional operating income.
•Americas. Currency translation did not have a significant impact on operating
income in the region for fiscal year 2019. The decrease in operating income was
primarily due to an increase in net revenues and gross margin offset by higher
SG&A selling expense, mainly to support growth across our DTC channel.
•Europe. Currency translation unfavorably affected operating income in the
region by approximately $17 million in fiscal year 2019 as compared to the prior
year. Excluding the effects of currency, the increase in operating income was
due to higher net revenues across all channels and increased gross margin,
partially offset by higher SG&A selling, distribution, and advertising and
promotion costs to support revenue growth.
•Asia. Currency translation unfavorably affected operating income in the region
by approximately $5 million in the region for fiscal year 2019. Excluding the
effects of currency, the increase in operating income for fiscal year 2019 was
due to higher net revenues across all channels, offset by higher SG&A selling
expense to support growth across our retail channel.
Corporate. Corporate expenses represent costs that management does not attribute
to any of our regional operating segments. Included in corporate expenses are
other corporate staff costs and costs associated with our global inventory
sourcing organization, which are reported as a component of consolidated gross
margin. The increase in corporate expenses for 2019 was primarily due to an
increase in foreign currency transaction losses related to our global sourcing
organizations procurement of inventory on behalf of our foreign subsidiaries.
Interest expense
Interest expense was $66.2 million for the year ended November 24, 2019 , as
compared to $55.3 million in the prior year. The increase in interest expense
was primarily related to higher interest on deferred compensation as a result of
changes in market conditions, and higher interest incurred on lease financing
obligations for build to suit locations.
Our weighted-average interest rate on average borrowings outstanding for fiscal
year 2019 was 5.31%, as compared to 5.01% for fiscal year 2018.
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Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management
activities and transactions. For the year ended November 24, 2019 and November
25, 2018 , we recorded net other income of $2.0 million and $14.9 million ,
respectively. The income in fiscal year 2019 primarily reflected investment
interest generated from money market funds and short-term investments, partially
offset by net periodic pension cost and net losses on our foreign currency
denominated balances. The income in fiscal year 2018 primarily reflected net
gains on our foreign exchange derivatives and investment interest generated from
money market funds, partially offset by net losses on our foreign currency
denominated balances.
Underwriter commission paid on behalf of selling stockholders
For the year ended November 24, 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
Income tax expense was $82.6 million for the year ended November 24, 2019 ,
compared to $214.8 million for the prior year. Our effective income tax rate was
17.3% for the year ended November 24, 2019 , compared to 45.0% for the prior
year. The decrease in the effective tax rate in fiscal year 2019 as compared to
fiscal year 2018 was primarily driven by a $143.4 million one-time tax charge in
fiscal year 2018 related to the enactment of the Tax Act. This charge was
comprised of $95.6 million re-measurement of deferred tax assets and liabilities
and $37.5 million one-time U.S. transition tax on undistributed foreign earnings
and $10.3 million charge related to foreign and state tax costs associated with
the future remittance of undistributed earnings of foreign subsidiaries.
We historically provided for U.S. income taxes on the undistributed earnings of
foreign subsidiaries unless they were considered indefinitely reinvested outside
the United States . We have reevaluated this historic indefinite reinvestment
assertion as a result of the enactment of the Tax Act and determined that any
historical undistributed earnings through November 25, 2018 of foreign
subsidiaries are no longer considered to be indefinitely reinvested as well as
most of the additional undistributed earnings generated through November 24,
2019 . The deferred tax liability related to foreign and state tax costs
associated with the future remittance of these undistributed earnings of foreign
subsidiaries was $9.7 million . For the year ended November 24, 2019 , management
asserted indefinite reinvestment on a small portion of foreign earnings
generated in fiscal year 2019. If such earnings were to repatriate back to the
U.S. , the related foreign withholding and state tax costs could be approximately
$1 million .
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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 November 29, 2020 , we had
cash and cash equivalents totaling approximately $1.5 billion , short-term
investments of $96.5 million and unused availability under our credit facility
of $713.5 million , resulting in a total liquidity position of approximately $2.3
billion .
We are actively managing the impacts of COVID-19 on our operations and
liquidity. For the year ended November 29, 2020 , cash from operations increased
to $469.6 million as compared to $412.2 million in the prior year, despite
incurring a net loss of $127.1 million in fiscal year 2020. 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, and
implementing our restructuring plan that we expect will lead to approximately
$100 million in annualized savings. In April 2020 , in an effort to further
increase liquidity and strengthen our balance sheet, we issued an additional
$500.0 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 of directors and will depend on then-existing
conditions, including our results of operations, payout ratio, capital
requirements, financial condition, prospects, contractual arrangements, any
limitations on payment of dividends present in our current and future debt
agreements and other factors that our board of directors may deem relevant.
Cash sources
We have historically relied primarily on cash flows from operations, borrowings
under credit facilities, issuances of notes and other forms of debt financing.
We regularly explore financing and debt reduction alternatives, including new
credit agreements, unsecured and secured note issuances, equity financing,
equipment and real estate financing, securitizations and asset sales.
We are party to the Second Amended and Restated Credit Agreement that provides
for a senior secured revolving credit facility. The 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 . The maximum availability under the facility is
$850.0 million , of which $800.0 million is available to us for revolving loans
in U.S. Dollars and $50.0 million is available to us for revolving loans either
in U.S. Dollars or Canadian Dollars.
As of November 29, 2020 , we did not have any borrowings under the credit
facility, unused availability under the facility was $713.5 million , and our
total availability of $743.8 million , based on collateral levels as defined by
the agreement, was reduced by $30.3 million of other credit-related instruments.
As of November 29, 2020 , we had cash and cash equivalents totaling approximately
$1.5 billion and short-term investments of $96.5 million resulting in a total
liquidity position (unused availability and cash and cash equivalents and
short-term investments) of approximately $2.3 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 2016 Equity Incentive Plan, as amended to
date ("2016 Plan") 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. Upon completion of our IPO in
March 2019 , our 2016 Plan was replaced with our 2019 Equity Incentive Plan
("2019 Plan"). Under the 2016 Plan, holders of shares could require us to
repurchase such shares at the then-current market value pursuant to a
contractual put right. Under the 2019 Plan and as a result of the IPO, this
contractual put right was terminated. However, upon vesting or exercise of an
award, we will continue to net settle shares in order to pay withholding taxes
on behalf of our employees.
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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.
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 year 2020, we suspended our share buyback program. Given the
continued uncertainty of the duration and impact of the COVID-19 pandemic, we
plan to keep our share buyback program on hold until further notice.
In January 2021 , the Board declared a cash dividend of $0.04 per share to
holders of record of its Class A and Class B common stock at the close of
business on February 10, 2021 , for a total quarterly dividend of approximately
$16 million . Total dividends are expected to be approximately $64 million for
fiscal year 2021 and to be paid out quarterly. We will consider increases in
dividend payments for future quarters if the business continues to improve.
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The following table provides information about our significant cash contractual
obligations and commitments as of November 29, 2020 :
Payments due or projected by fiscal period
Total 2021 2022 2023 2024 2025 Thereafter
(Dollars in millions)
Contractual and Long-term
Liabilities:
Short-term and long-term debt
obligations $ 1,579 $ 18 $ - $ - $ - $ 995 $ 566
Interest(1) 352 80 74 69 69 32 28
Future minimum payments(2) 1,153 261 225 181 143 110 233
Inventory purchase commitments(3) 491 491 - - - - -
Purchase obligations(4) 296 64 44 32 28 19 109
Postretirement obligations(5) 57 8 8 7 7 6 21
Pension obligations(6) 157 15 15 15 16 16 80
Long-term employee related
benefits(7) 110 15 6 7 4 4 74
Total $ 4,195 $ 952 $ 372 $ 311 $ 267 $ 1,182 $ 1,111
______________
(1)Interest obligations are computed using constant interest rates until
maturity.
(2)Amounts reflect contractual obligations relating to our existing leased
facilities as of November 29, 2020 , and therefore do not reflect our planned
future openings of company-operated retail stores. For more information, see
"Item 2 - Properties."
(3)Inventory purchase commitments represent agreements to purchase fixed or
minimum quantities of goods, including fabric commitments, at determinable
prices.
(4)Amounts reflect estimated commitments of $163 million for sponsorship, naming
rights and related benefits with respect to the Levi's® Stadium, and $133
million for human resources, advertising, information technology and other
professional services.
(5)The amounts presented in the table represent an estimate for the next ten
years of our projected payments, based on information provided by our plans'
actuaries, and have not been reduced by estimated Medicare subsidy receipts, the
amounts of which are not material. Our policy is to fund postretirement benefits
as claims and premiums are paid. For more information, see Note 9 to our audited
consolidated financial statements included in this report.
(6)The amounts presented in the table represent an estimate of our projected
contributions to the plans for the next ten years based on information provided
by our plans' actuaries. For U.S. qualified plans, these estimates can exceed
the projected annual minimum required contributions in an effort to level out
potential future funding requirements and provide annual funding flexibility.
The 2021 contribution amounts will be recalculated at the end of the plans'
fiscal years, which for our U.S. pension plan is at the beginning of our third
fiscal quarter. Accordingly, actual contributions may differ materially from
those presented here, based on factors such as changes in discount rates and the
valuation of pension assets. For more information, see Note 9 to our audited
consolidated financial statements included in this report.
(7)Long-term employee-related benefits primarily relate to the current and
non-current portion of deferred compensation arrangements and workers'
compensation. We estimated these payments based on prior experience and
forecasted activity for these items. For more information, see Note 10 to our
audited consolidated financial statements included in this report.
The above table does not include amounts related to our uncertain tax positions
of $32.3 million . We do not anticipate a material effect on our liquidity as a
result of payments in future periods of liabilities for uncertain tax positions.
Based on the fair value of the Company's stock and the number of shares
outstanding as of November 29, 2020 , future payments related to shares
surrendered for employee tax withholding on the exercise or vesting of
outstanding equity awards could range up to approximately $80 million , which
could become payable in 2021.
Information in the above table reflects our estimates of future cash payments.
These estimates and projections are based upon assumptions that are inherently
subject to significant economic, competitive, legislative and other
uncertainties and contingencies, many of which are beyond our control.
Accordingly, our actual expenditures and liabilities may be materially higher or
lower than the estimates and projections reflected in the above table. The
inclusion of these projections and estimates should not be regarded as a
representation by us that the estimates will prove to be correct.
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Cash flows
The following table summarizes, for the periods indicated, selected items in our
consolidated statements of cash flows:
Year Ended
November 29, November 24, November 25,
2020 2019 2018
(Dollars in millions)
Cash provided by operating activities $ 469.6 $ 412.2 $ 420.4
Cash used for investing activities (188.6) (243.3) (179.4)
Cash provided by (used for) financing activities 286.0 55.0 (148.6)
Cash and cash equivalents as of fiscal year end 1,497.2 934.2 713.1
Fiscal Year 2020 as compared to Fiscal Year 2019
Cash flows from operating activities
Cash provided by operating activities was $469.6 million for fiscal year 2020,
as compared to $412.2 million for fiscal year 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 fiscal year 2020, caused by the COVID-19 pandemic.
Cash flows from investing activities
Cash used for investing activities was $188.6 million for fiscal year 2020, as
compared to $243.3 million for fiscal year 2019. The decrease in cash used for
investing activities is due to lower net payments to acquire short-term
investments, partially offset by payments incurred for business acquisition
during fiscal year 2020.
Cash flows from financing activities
Cash provided by financing activities was $286.0 million for fiscal year 2020,
as compared to $55.0 million for fiscal year 2019. Cash provided in fiscal year
2020 primarily reflects proceeds from senior notes of $502.5 million , partially
offset by payments of $56.2 million for common stock repurchases, $90.6 million
for withholding tax on cashless equity award exercises, payment of a $63.6
million cash dividend. Cash provided in fiscal year 2019 primarily reflects
proceeds from our IPO of $254.3 million , partially offset by the payments of
$113.9 million for cash dividends, $44.0 million for equity award exercises.
Fiscal Year 2019 as compared to Fiscal Year 2018
Cash flows from operating activities
Cash provided by operating activities was $412.2 million for fiscal year 2019,
as compared to $420.4 million for fiscal year 2018. The decrease primarily
reflects higher payments for SG&A expenses and inventory to support our growth,
higher payments for employee stock-based incentive compensation, and a payment
made for underwriting commissions on behalf of selling stockholders in
connection with our IPO in March 2019 , partially offset by an increase in cash
received from customers as well as less contributions to our pension plans.
Cash flows from investing activities
Cash used for investing activities was $243.3 million for fiscal year 2019, as
compared to $179.4 million for fiscal year 2018. The increase in cash used for
investing activities is due to an increase in payments for capital expenditures
and higher net payments to acquire short-term investments, partially offset by
proceeds from settlement of forward foreign exchange contracts during fiscal
year 2019.
Cash flows from financing activities
Cash used for financing activities was $55.0 million for fiscal year 2019, as
compared to $148.6 million for fiscal year 2018. Cash provided in fiscal year
2019 primarily reflects proceeds from our IPO of $254.3 million , partially
offset by the payments of $113.9 million for cash dividends, $44.0 million for
equity award exercises, $23.3 million for net repayments of short-term credit
facility and borrowings, and payments of $19.7 million for underwriting
commissions and other direct and incremental offering costs. Cash used in fiscal
year 2018 primarily reflects the payment of $90.0 million for cash dividends and
$56.0 million for equity award exercises.
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Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co. , the parent
and U.S. operating company. Of our total debt of $1.6 billion as of November 29,
2020 , 99.5% was fixed-rate debt, net of capitalized debt issuance costs, and
0.5% was variable-rate debt. As of November 29, 2020 , our required aggregate
debt principal payments of $1.6 billion begin in 2025. Short-term borrowings of
$17.6 million at various foreign subsidiaries were expected to be either paid
over the next 12 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 November 29, 2020 .
Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin, Adjusted SG&A, Adjusted EBIT,
Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income
Margin, and Adjusted Diluted Earnings per Share
We define Adjusted gross profit, as gross profit excluding COVID-19 related
inventory costs. We define Adjusted gross margin, as Adjusted gross profit as a
percentage of net revenues. We define Adjusted SG&A as SG&A excluding changes in
fair value on cash-settled stock-based compensation, COVID-19 related charges,
and restructuring related charges, severance and other, net. We define 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. We define
Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues. We define
Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization
expense. We define Adjusted net income 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, pension settlement losses, and
re-measurement of our deferred tax assets and liabilities based on the lower
rates as a result of the Tax Act, adjusted to give effect to the income tax
impact of such adjustments. To calculate the income tax impact of such
adjustments on a year-to-date basis, we utilize an effective tax rate equal to
our income tax expense excluding material discrete costs and benefits, with any
impacts of changes in effective tax rate being recognized in the current period.
In fiscal year 2018 we excluded from income tax expense the effect of the $95.6
million re-measurement described above. We define Adjusted net income margin as
Adjusted net income as a percentage of net revenues. We define Adjusted diluted
earnings per share as Adjusted net income 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, Adjusted net income margin and Adjusted diluted earnings
per share are useful to investors because they help identify underlying trends
in our business that could otherwise be masked by certain expenses that we
include in calculating net income (loss) 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, Adjusted net income
margin and Adjusted diluted earnings per share have limitations as analytical
tools and should not be considered in isolation or as a substitute for an
analysis of our results prepared and presented in accordance with GAAP. Some of
these limitations include:
•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect income
tax payments that reduce cash available to us;
•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect interest
expense, or the cash requirements necessary to service interest or principal
payments on our indebtedness, which reduces cash available to us;
•Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other (income)
expense net, which includes pension settlement losses as well as 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;
•Adjusted net income, Adjusted net income margin and Adjusted diluted earnings
per share exclude pension settlement losses;
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•all of these non-GAAP financial measures exclude underwriter commission paid on
behalf of selling stockholders in connection with our IPO that reduces cash
available to us;
•all of these non-GAAP financial measures exclude other costs associated with
our IPO;
•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;
•all of these non-GAAP financial measures exclude certain other SG&A items,
which include severance, transaction and deal related costs, including
acquisition and integration costs which can affect our current and future cash
requirements;
•the expenses and other items that we exclude in our calculations of all of
these non-GAAP financial measures may differ from the expenses and other items,
if any, that other companies may exclude from all of these non-GAAP financial
measures or similarly titled measures;
•Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of
property and equipment and, although these are non-cash expenses, the assets
being depreciated may need to be replaced in the future; and
•Adjusted net income, Adjusted net income margin and Adjusted diluted earnings
per share do not include all of the effects of income taxes and changes in
income taxes reflected in net income (loss).
Because of these limitations, all of these non-GAAP financial measures should be
considered along with net income (loss) and other operating and financial
performance measures prepared and presented in accordance with GAAP.
Adjusted Gross Profit:
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.
Year Ended
November 29, November 24, November 25,
2020 2019 2018
(Dollars in millions)Most comparable GAAP measure: Gross profit$ 2,352.9 $ 3,101.4 $ 2,998.0 Non-GAAP measure: Gross profit 2,352.9 3,101.4 2,998.0 COVID-19 related inventory costs(1) 69.3 - - Adjusted gross profit$ 2,422.2 $ 3,101.4 $ 2,998.0 Adjusted gross margin 54.4 % 53.8 % 53.8 %
_____________
(1) Represents costs incurred in connection with COVID-19, including
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Adjusted SG&A:
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.
Year Ended
November 29, November 24, November 25,
2020 2019 2018
(Dollars in millions)
Most comparable GAAP measure:
Selling, general and administrative expenses $ 2,347.6 Non-GAAP measure: Selling, general and administrative expenses 2,347.6 2,534.7 2,457.6 Impact of changes in fair value on cash-settled stock-based compensation(1) (7.1) (34.1) (44.0) COVID-19 related charges(2) (90.3) - - Restructuring related charges, severance and other, net(3) (9.1) (9.8) (5.2) Adjusted SG&A$ 2,241.1 $ 2,490.8 $ 2,408.4 _____________ (1)Includes the impact of the 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)The charges incurred in connection with COVID-19 during the year endedNovember 29, 2020 primarily consist of$44.3 million in impairment of certain operating lease right-of-use assets and$21.7 million in impairment of property and equipment related to certain retail locations and other corporate assets,$17.7 million of charges related to customer receivables and other incremental costs incurred in connection with COVID-19. (3)Restructuring related charges, severance and other, net include transaction and deal related costs, including IPO-related, initial acquisition and integration costs and amortization of acquired intangible assets. 59 -------------------------------------------------------------------------------- Table of Contents Adjusted EBIT and Adjusted EBITDA: The following table presents a reconciliation of net income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented. Year Ended November 29, November 24, November 25, 2020 2019 2018 (Dollars in millions) Most comparable GAAP measure: Net income (loss)$ (127.1) $ 395.0 $ 285.2 Non-GAAP measure: Net income (loss) (127.1) 395.0 285.2 Income tax (benefit) expense (62.6) 82.6 214.8 Interest expense 82.2 66.2 55.3 Other (income) expense, net(1) 22.4 (2.0) (14.9) Underwriter commission paid on behalf of selling stockholders - 24.9 - Impact of changes in fair value on cash-settled stock-based compensation(2) 7.1 34.1 44.0 COVID-19 related inventory costs and other charges(3) 159.6 - - Restructuring and restructuring related charges, severance and other, net(4) 99.5 9.8 5.2 Adjusted EBIT$ 181.1 $ 610.6 $ 589.6 Depreciation and amortization(5) 136.6 123.9 120.2 Adjusted EBITDA$ 317.7 $ 734.5 $ 709.8 Adjusted EBIT margin 4.1 % 10.6 % 10.6 % _____________ (1)Includes$14.7 million in pension settlement losses related to the voluntary lump-sum, cash-out program offered to vested deferredU.S. pension plan participants during the year endedNovember 29, 2020 . See Note 9 for further information. (2)Includes the impact of the 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. (3)The inventory costs and other charges recognized during the year endedNovember 29, 2020 primarily consist of$42.3 million of incremental inventory reserves,$26.2 million of adverse fabric purchase commitments,$44.3 million and$21.7 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$17.7 million of charges related to customer receivables. The remainder relates to other incremental costs incurred in response to the global pandemic. (4)Other charges included in restructuring and restructuring related charges, severance and other, net include transaction and deal related costs, including IPO-related, initial acquisition and integration costs and amortization of acquired intangible assets. (5)Depreciation and amortization amount net of amortization of acquired intangible assets included in Restructuring and related charges, severance and other, net. 60 -------------------------------------------------------------------------------- Table of Contents Adjusted Net Income and Adjusted Diluted Earnings per Share: The following table presents a reconciliation of net income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted net income for each of the periods presented and the calculation of Adjusted diluted earnings per share for each of the periods presented. Year Ended November 29, November 24, November 25, 2020 2019 2018 (Dollars in millions, except per share amounts) Most comparable GAAP measure: Net income (loss)$ (127.1) $ 395.0 $ 285.2 Non-GAAP measure: Net income (loss) (127.1) 395.0 285.2 Underwriter commission paid on behalf of selling stockholders - 24.9 - Impact of changes in fair value on cash-settled stock-based compensation(1) 7.1 34.1 44.0
COVID-19 related inventory costs and other charges(2) 159.6
- -
Restructuring and restructuring related charges,
severance and other, net(3) 99.5 9.8 5.2
Remeasurement of deferred tax assets and liabilities - - 95.6
Pension settlement losses(4) 14.7 - -
Tax impact of adjustments(5) (70.2) (7.6) (11.7)
Adjusted net income $ 83.6 $ 456.2 $ 418.3
Adjusted net income margin 1.9 % 7.9 % 7.5 %
Adjusted diluted earnings per share $ 0.21 _____________
(1)Includes the impact of the 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)The inventory costs and other charges recognized during the year endedNovember 29, 2020 primarily consist of$42.3 million of incremental inventory reserves,$26.2 million of adverse fabric purchase commitments,$44.3 million and$21.7 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$17.7 million of charges related to customer receivables. The remainder relates to other incremental costs incurred in response to the global pandemic. (3)Other charges included in restructuring and restructuring related charges, severance and other, net include transaction and deal related costs, including IPO-related, initial acquisition and integration costs and amortization of acquired intangible assets. (4)Pension settlement losses relate to the voluntary lump-sum, cash-out program offered to vested deferredU.S. pension plan participants. See Note 9 for further information. (5)Tax impact calculated using the annual effective tax rate, excluding discrete costs and benefits. Please refer to Note 19 for more information on the effective tax rate. Net Debt and Leverage Ratio: We define net debt, as total debt, excluding capital leases, less cash and cash equivalents. We define leverage ratio, as the ratio of total debt to the last 12 months Adjusted EBITDA. Our management believes that net debt and leverage ratio are important measures to monitor our financial flexibility and evaluate the strength of our balance sheet. Net debt and leverage ratio have limitations as analytical tools and may vary from similarly titled measures used by other companies. Net debt and leverage ratio should not be considered in isolation or as substitutes for an analysis of our results prepared and presented in accordance with GAAP. 61 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to net debt for each of the periods presented.November 29 ,November 24, 2020 2019 (Dollars in millions)
Most comparable GAAP measure: Total debt, excluding capital leases$ 1,564.3 $ 1,014.4 Non-GAAP measure: Total debt, excluding capital leases$ 1,564.3 $ 1,014.4 Cash and cash equivalents (1,497.2) (934.2) Short-term investments in marketable securities (96.5) (80.7) Net debt$ (29.4) $ (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. November 29, November 24, 2020 2019 (Dollars in millions)
Total debt, excluding capital leases
4.9 1.4
Adjusted Free Cash Flow:
We define Adjusted free cash flow, as net cash flow from operating activities
plus underwriter commission paid on behalf of selling stockholders, less
purchases of property, plant and equipment, plus proceeds (less payments) on
settlement of forward foreign exchange contracts not designated for hedge
accounting, less payment of debt extinguishment costs, less repurchases of
common stock, including shares surrendered for tax withholding 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.
Year Ended
November 29, November 24, November 25,
2020 2019 2018
(Dollars in millions)
Most comparable GAAP measure:
Net cash provided by operating activities $ 469.6 $ 412.2 $ 420.4
Net cash used for investing activities (188.6) (243.3) (179.4)
Net cash provided by (used for) financing activities 286.0 55.0 (148.6)
Non-GAAP measure:
Net cash provided by operating activities $ 469.6 $ 412.2 $ 420.4
Underwriter commission paid on behalf of selling
stockholders - 24.9 -
Purchases of property, plant and equipment (130.4) (175.4) (159.4)
Proceeds (Payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
12.5 12.2 (20.0)
Repurchase of common stock (56.2) (3.1) (27.0)
Shares surrendered for tax withholdings on equity award (90.6)
(40.9) (29.0)
exercises
Dividend to stockholders (63.6) (113.9) (90.0)
Adjusted free cash flow $ 141.3 $ 116.0 $ 95.0
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 and of forward foreign exchange
contracts. Additionally, gross margin and Adjusted gross margin are 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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Constant-Currency Net Revenues:
The table below sets forth the calculation of net revenues for each of our
regional operating segments on a constant-currency basis for each of the periods
presented.
Year Ended
% Decrease
November 29, (Over Prior November 24, % Increase (Over November 25,
2020 Year) 2019 Prior Year) 2018
(Dollars in millions)
Total revenues
As reported $ 4,452.6 (22.7) % $ 5,763.1 3.4 % $ 5,575.4
Impact of foreign currency exchange
rates - * (55.9) * (126.2)
Constant-currency net revenues $ 4,452.6 (22.0) % $ 5,707.2 5.8 % $ 5,449.2
Americas
As reported $ 2,345.4 (23.3) % $ 3,057.0 0.5 % $ 3,042.7
Impact of foreign currency exchange
rates - * (43.1) * (10.4)
Constant-currency net revenues -
Americas $ 2,345.4 (22.2) % $ 3,013.9 0.8 % $ 3,032.3
Europe
As reported $ 1,435.6 (18.8) % $ 1,768.1 7.4 % $ 1,646.2
Impact of foreign currency exchange
rates - * (1.3) * (85.9)
Constant-currency net revenues -
Europe $ 1,435.6 (18.7) % $ 1,766.8 13.3 % $ 1,560.3
Asia
As reported $ 671.7 (28.4) % $ 938.0 5.8 % $ 886.5
Impact of foreign currency exchange
rates - * (11.5) * (29.9)
Constant-currency net revenues - Asia $ 671.7 (27.5) % $ 926.5 9.5 % $ 856.6
_____________
* Not meaningful
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Constant-Currency Adjusted EBIT:
The table below sets forth the calculation of Adjusted EBIT on a
constant-currency basis for each of the periods presented.
Year Ended
% Decrease
November 29, (Over Prior November 24, % Increase (Over November 25,
2020 Year) 2019 Prior Year) 2018
(Dollars in millions)
Adjusted EBIT(1) $ 181.1 (70.3) % $ 610.6 3.6 % $ 589.6
Impact of foreign currency exchange
rates - * (8.1) * (21.5)
Constant-currency Adjusted EBIT $ 181.1 (69.9) % $ 602.5 7.5 % $ 568.1
Constant-currency Adjusted EBIT
margin(2) 4.1 % 10.6 % 10.4 %
_____________
(1)Adjusted EBIT is reconciled from net income (loss) which is the most
comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for
more information.
(2)We define constant-currency Adjusted EBIT margin as constant-currency
Adjusted EBIT as a percentage of constant-currency net revenues.
* Not meaningful
Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share:
The table below sets forth the calculation of Adjusted net income and Adjusted
diluted earnings per share on a constant-currency basis for each of the periods
presented.
Year Ended
% Decrease
November 29, (Over Prior November 24, % Increase (Over November 25,
2020 Year) 2019 Prior Year) 2018
(Dollars in millions, except per share amounts)
Adjusted net income(1) $ 83.6 (81.7) % $ 456.2 9.1 % $ 418.3
Impact of foreign currency exchange
rates - * (5.9) * (18.0)
Constant-currency Adjusted net income $ 83.6 (81.4) % $ 450.3 14.0 % $ 400.3
Constant-currency Adjusted net income
margin(2) 1.9 % 7.9 % 7.3 %
Adjusted diluted earnings per share $ 0.21 (81.3) % $ 1.12 3.7 % $ 1.08
Impact of foreign currency exchange
rates - * (0.02) * (0.05)
Constant-currency adjusted diluted
earnings per share $ 0.21 (80.9) % $ 1.10 8.7 % $ 1.03
_____________
(1)Adjusted net income is reconciled from net income (loss) which is the most
comparable GAAP measure. Refer to Adjusted net income table for more
information.
(2)We define constant-currency Adjusted net income margin as constant-currency
Adjusted net income as a percentage of constant-currency net revenues.
* Not meaningful
Effects of Inflation
We believe that inflation in the regions where most of our sales occur has not
had a significant effect on our net revenues or profitability.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
Off-balance sheet arrangements and other. We have minimum inventory purchase
commitments, including fabric commitments, with suppliers that secure a portion
of material needs for future seasons. For more information, see Note 13 to the
consolidated audited financial statements included in this Annual Report. We
participate in a multiemployer pension plan;
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however, our exposure to risks arising from participation in the plan and the
extent to which we can be liable to the plan for other participating employers'
obligations are not material. We have no other material non-cancelable
guarantees or commitments, and no material special-purpose entities or other
off-balance sheet debt obligations.
Indemnification agreements. In the ordinary course of our business, we enter
into agreements containing indemnification provisions under which we agree to
indemnify the other party for specified claims and losses. For example, our
trademark license agreements, real estate leases, consulting agreements,
logistics outsourcing agreements, securities purchase agreements and credit
agreements typically contain such provisions. This type of indemnification
provision obligates us to pay certain amounts associated with claims brought
against the other party as the result of trademark infringement, negligence or
willful misconduct of our employees, breach of contract by us including
inaccuracy of representations and warranties, specified lawsuits in which we and
the other party are co-defendants, product claims and other matters. These
amounts generally are not readily quantifiable; the maximum possible liability
or amount of potential payments that could arise out of an indemnification claim
depends entirely on the specific facts and circumstances associated with the
claim. We have insurance coverage that minimizes the potential exposure to
certain of such claims. We also believe that the likelihood of material payment
obligations under these agreements to third parties is remote.
Critical Accounting Policies, Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the related notes. An accounting
policy is deemed to be critical if it requires a critical accounting estimate to
be made based on assumptions about matters that are highly uncertain at the time
the estimate is made. Critical accounting estimates refers to those assumptions
and approximations that may have a material impact on the amounts reported in
the consolidated financial statements and the related notes due to the level of
subjectivity involved in developing the estimate.
We believe that the following discussion addresses our critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Changes in such estimates, based on newly available information, or different
assumptions or conditions, may affect amounts reported in future periods.
We summarize our critical accounting policies below.
Revenue recognition. Revenue transactions generally comprise of a single
performance obligation which consists of the sale of products to customers
either through wholesale or direct-to-consumer channels. Net revenues are
recognized when the Company's performance obligations are satisfied upon
transfer of control of promised goods. A customer is deemed to have control once
they are able to direct the use and receive substantially all of the benefits of
the product. This includes a present obligation to payment, the transfer of
legal title, physical possession, the risks and rewards of ownership, and
customer acceptance. Revenue is recorded net of an allowance for estimated
returns, discounts and retailer promotions and other similar incentives.
We recognize allowances for estimated returns in the period in which the related
sale is recorded. We recognize allowances for estimated discounts, retailer
promotions and other similar incentives at the later of the period in which the
related sale is recorded or the period in which the sales incentive is offered
to the customer. We estimate non-volume based allowances based on historical
rates as well as customer and product-specific circumstances. The determination
of sales allowances is considered a critical accounting estimate. Actual
allowances may differ from estimates due to changes in sales volume based on
retailer or consumer demand and changes in customer and product-specific
circumstances.
Inventory valuation. We value inventories at the lower of cost or net realizable
value. Inventory cost is generally determined using the first-in first-out
method. We include product costs, labor and related overhead, sourcing costs,
inbound freight, internal transfers, and the cost of operating our manufacturing
facilities, including the related depreciation expense, in the cost of
inventories. We estimate quantities of slow-moving and obsolete inventory by
reviewing on-hand quantities, outstanding purchase obligations and forecasted
sales. The determination of inventory reserves is considered a critical
accounting estimate. In determining inventory net realizable value, substantial
consideration is given to the expected product selling price. We estimate
expected selling prices based on our historical recovery rates for sale of
slow-moving and obsolete inventory and other factors, such as market conditions,
expected channel of disposition, and current consumer preferences. Estimates may
differ from actual results due to changes in resale or market value, avenues of
disposition, consumer and retailer preferences and economic conditions.
Impairment. We review goodwill and indefinite-lived intangible assets for
impairment annually in the fourth quarter of our fiscal year, or more frequently
as warranted by events or changes in circumstances which indicate that the
carrying amount
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may not be recoverable. We may first assess qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit or
indefinite-lived intangible asset is less than its carrying amount. If, based on
the results of the qualitative assessment or based on the passage of time since
the performance of the previous quantitative test, it is concluded that it is
not more likely than not that the fair value of a reporting unit or
indefinite-lived asset exceeds its carrying value, a quantitative test is
performed. Under the quantitative test, we compare the carrying value of the
reporting unit or indefinite-lived intangible asset to its fair value, which we
estimate using a discounted cash flow analysis or by comparison to the market
values of similar assets. If the carrying value exceeds its fair value, we
record an impairment charge equal to the excess of the carrying value over the
related fair value. The assumptions used in such valuations such as projected
future cash flows, discount rates, growth rates, and determination of
appropriate market comparables and recent transactions, are subject to
volatility and may differ from actual results. As of November 29, 2020 , we
performed our annual goodwill impairment assessment over material reporting
units. The fair values of the reporting units were estimated using the income
approach or a weighted average of the income and market approaches. The annual
assessment concluded that the fair values of the reporting units were in excess
of their respective carrying values. We do not anticipate any material
impairment charges in the near-term.
The market approach is based on earnings multiples of selected guideline public
companies, while the income approach is based on estimated discounted future
cash flows. The approaches, which are determined using Level 3 inputs within the
fair value hierarchy, incorporated a number of significant assumptions and
judgments including, but not limited to, estimated future cash flows, multiples
of earnings of similar public companies, discount rates, income tax rates and
terminal growth rates.
As of November 29, 2020 , we performed a quantitative impairment assessment over
material indefinite-lived intangible assets, primarily the U.S. Levi's® trade
name. To estimate the fair value of the trade name, we used the relief from
royalty method under the income approach. The assessment concluded that the fair
value of the trade name exceeded its carrying value. We do not anticipate any
material impairment charges in the near-term.
We review other long-lived assets, including ROU assets, for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset or
an asset group may not be recoverable. In evaluating long-lived assets for
recoverability, we estimate the future cash flows at the individual store level
that are expected to result from the use of each store's assets. Impairment
losses are measured and recorded for the excess of an asset's carrying value
over its fair value.
To determine the fair value of long-lived assets, included ROU assets, we
utilize the valuation technique or techniques deemed most appropriate based on
the nature of the asset or asset group, which may include the use of quoted
market prices, prices for similar assets or other valuation techniques such as
discounted future cash flows or earnings.
The determination of fair value is considered a critical accounting estimate
because the valuation techniques mentioned use significant estimates and
assumptions, including projected future cash flows, discount rates and growth
rates.
Income tax. Significant judgment is required in determining our worldwide income
tax provision. The determination of our income tax provision is considered a
critical accounting estimate. In the ordinary course of a global business, there
are many transactions and calculations where the ultimate tax outcome is
uncertain. Some of these uncertainties arise from examinations in various
jurisdictions and assumptions and estimates used in evaluating the need for a
valuation allowance.
We are subject to income taxes in both the United States and numerous foreign
jurisdictions. We compute our provision for income taxes using the asset and
liability method, under which deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using the currently enacted tax rates that are expected to apply to
taxable income for the years in which those tax assets and liabilities are
expected to be realized or settled. Significant judgments are required in order
to determine the realizability of these deferred tax assets. In assessing the
need for a valuation allowance, we evaluate all significant available positive
and negative evidence, including historical operating results, estimates of
future taxable income and the existence of prudent and feasible tax planning
strategies. Changes in the expectations regarding the realization of deferred
tax assets could materially impact income tax expense in future periods.
We continuously review issues raised in connection with all ongoing examinations
and open tax years to evaluate the adequacy of our tax liabilities. We evaluate
uncertain tax positions under a two-step approach. The first step is to evaluate
the uncertain tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained upon examination based on its technical merits. The second
step is, for those positions that meet the recognition criteria, to measure the
tax benefit as the largest amount that is more than fifty percent likely of
being realized. We believe our recorded tax liabilities are adequate to cover
all open tax years based on our assessment. This assessment relies on estimates
and assumptions and involves significant judgments about future events. To the
extent that our view as to the outcome of these matters changes, we will adjust
income tax expense in the period in which such determination is made. We
classify interest and penalties related to income taxes as income tax expense.
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Pension and postretirement benefits. We have several non-contributory defined
benefit retirement plans covering eligible employees. We also provide certain
health care benefits for U.S. employees who meet age, participation and length
of service requirements at retirement. In addition, we sponsor other retirement
or post-employment plans for our foreign employees in accordance with local
government programs and requirements. We retain the right to amend, curtail or
discontinue any aspect of the plans, subject to local regulations. Any of these
actions, either individually or in combination, could have a material impact on
our consolidated financial statements and on our future financial performance.
We recognize either an asset or liability for any plan's funded status in our
consolidated balance sheets. We measure changes in funded status using actuarial
models which utilize an attribution approach that generally spreads individual
events either over the estimated service lives of the remaining employees in the
plan, or, for plans where participants will not earn additional benefits by
rendering future service, over the plan participants' estimated remaining lives.
The attribution approach assumes that employees render service over their
service lives on a relatively smooth basis and as such, presumes that the
statement of operations effects of pension or postretirement benefit plans
should follow the same pattern. Our policy is to fund our pension plans based
upon actuarial recommendations and in accordance with applicable laws, income
tax regulations and credit agreements.
Net pension and postretirement benefit income or expense is generally determined
using assumptions which include expected long-term rates of return on plan
assets, discount rates, compensation rate increases and medical trend and
mortality rates. We use a mix of actual historical rates, expected rates and
external data to determine the assumptions used in the actuarial models. For
example, we utilized a yield curve constructed from a portfolio of high-quality
corporate bonds with various maturities to determine the appropriate discount
rate to use for our U.S. benefit plans. Under this model, each year's expected
future benefit payments are discounted to their present value at the appropriate
yield curve rate, thereby generating the overall discount rate. We utilized
country-specific third-party bond indices to determine appropriate discount
rates to use for benefit plans of our foreign subsidiaries.
The actuarial assumptions selected for determining the projected pension benefit
liabilities and annual pension expense is considered a critical accounting
estimate. Changes in actuarial assumptions and estimates, either individually or
in combination, could have a material impact on our consolidated financial
statements and on our future financial performance. For example, as of
November 29, 2020 , a 25 basis point change in the discount rate would yield an
approximately three percent change in the projected benefit obligation and an
approximately three percent change in the annual service cost of our pension
plans. A 25 basis point change in the discount rate would not have a significant
impact on the postretirement benefit plan.
Recently Issued Accounting Standards
See Note 1 to our audited consolidated financial statements included in this
report for recently issued accounting standards, including the expected dates of
adoption and expected impact to our consolidated financial statements upon
adoption.
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