LEVI STRAUSS & CO. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report and with our audited financial statements and related notes in our Annual Report on Form 10-K for the year endedNovember 29, 2020 , filed with theSecurities and Exchange Commission onJanuary 27, 2021 . We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday in November that is closest toNovember 30 of that year. See "-Financial Information Presentation." Non-GAAP Financial Measures To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), we use certain non-GAAP financial measures throughout this Quarterly Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management's view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP. Overview We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began inSan Francisco, California , in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi's®, Dockers®, Signature byLevi Strauss & Co. and Denizen brands. Our business is operated through three geographic regions that comprise our three reporting segments:Americas ,Europe andAsia (which includes theMiddle East andAfrica ). We service consumers through our global infrastructure, developing, sourcing, and marketing our products around the world. Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi's® brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi's® as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized, and original. This approach has enabled the Levi's® brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers® brand helped drive "Casual Friday" in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature byLevi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices. We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers ("direct-to-consumer" or "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As ofFebruary 28, 2021 , our products were sold in approximately 50,000 retail locations in more than 110 countries, including approximately 3,000 brand-dedicated stores and shop-in-shops. As ofFebruary 28, 2021 , we had 1,031 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 continued sporadic outbreaks in COVID-19 cases, approximately 15% of our owned and operated retail stores were temporarily closed as of the beginning of the quarter, and remained closed throughout the quarter. See "Impact of COVID-19 on our Business" below. 23 -------------------------------------------------------------------------------- Table of Co ntents OurEurope andAsia businesses, collectively, contributed 51% of our net revenues and 52% of our regional operating income in the first three months of 2021, as compared to 50% of our net revenues and 57% of our regional operating income in the same period in 2020. Sales of Levi's® brand products represented 89% and 88% of our total net sales in the first three months of 2021 and 2020, respectively. Our wholesale channel generated 64% and 58% of our net revenues in the first three months of 2021 and 2020, respectively. Our DTC channel generated 36% and 42% of our net revenues in the first three months of 2021 and 2020, respectively, with sales through our company operated e-commerce sites representing 27% and 16% of DTC channel net revenues in the first three months of 2021 and 2020, and 10% and 7% of total net revenues in the first three months of 2021 and 2020, respectively. Our global digital business, which includes our e-commerce site as well as the online business of our wholesale customers, including that of traditional wholesalers as well as pure play (online-only wholesalers) grew to represent approximately 26% of our total net revenues in the first quarter of fiscal 2021, versus approximately 16% of our net revenues in the first quarter of fiscal 2020. Impact of COVID-19 on Our Business In fiscal year 2020, the COVID-19 pandemic materially impacted our business and results of operations. In the first quarter of fiscal year 2020, the initial impact of the COVID-19 pandemic was minimal, as temporary store closures were primarily withinChina . During the second quarter of fiscal year 2020, theWorld Health Organization declared COVID-19 a global pandemic and government authorities around the world imposed lockdowns and restrictions. As a result, substantially all company-operated stores and third-party retail locations were temporarily closed, and$242.0 million in incremental charges were recognized, primarily consisting of$67.4 million of restructuring charges, COVID-19 related inventory costs of$86.6 million , and charges for customer receivables, asset impairments and other related charges of$88.0 million . During the second half of fiscal year 2020, as global management of the COVID-19 pandemic evolved and government restrictions were removed or lightened, company-operated and third-party retail locations reopened and substantially all stores were open by the end of the third quarter. In the fourth quarter of fiscal year 2020, a global resurgence in COVID-19 cases led to the temporary closure of some of our stores, yet our overall operations improved from when initial estimates were made resulting in the reduction to some of the inventory and receivable related charges initially recognized in the second quarter. In the fourth quarter, we recognized additional restructuring charges as a result of the continuation of our restructuring initiative. As a result,$250.0 million in total charges were recognized during fiscal year 2020, 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 . The COVID-19 pandemic continued to impact our business in the first quarter of 2021, primarily through reduced traffic and closures of company-operated and third-party retail locations for portions of the quarter in certain markets, including approximately one-third of our store network inEurope . As of the end of the first quarter of fiscal 2021, approximately 85% of company-operated stores were open for either in-store or curbside service. 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. As we have reopened our company-operated retail stores, we have 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 as necessary to allow for social distancing. While many retail stores have reopened and government restrictions have in many locations been removed or lightened, 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; •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; 24 -------------------------------------------------------------------------------- Table of Co ntents •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 Initiative InApril 2020 , we announced and began to implement a restructuring initiative designed to reduce costs, streamline operations and support agility. The restructuring initiative is expected to continue to be implemented through to the end of fiscal year 2021, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline operations. The initiative included the elimination of approximately 15% of our global non-retail and non-manufacturing positions and is expected to result in approximately$100 million in annual cost savings. For the three-month period endedFebruary 28, 2021 , we recognized a net reduction in restructuring charges of$0.8 million , which were recorded in selling, general and administrative expenses ("SG&A") in our consolidated statements of income. Within the consolidated balance sheets as ofFebruary 28, 2021 , we had$45.3 million and$3.1 million in restructuring liabilities and other long-term liabilities, respectively. The charges primarily relate to severance benefits, based on separation benefits provided by Company policy or statutory benefit plans. During the three-month period endedFebruary 28, 2021 ,$12.1 million in payments were made and cash payments for charges recognized to date are expected to continue through 2021. We expect that we will incur future additional charges related to this restructuring initiative. Other Factors Affecting Our Business We believe the other key business and marketplace factors, independent of the health and economic impact of the COVID-19 pandemic, that are impacting our business include the following: •A complex and challenging retail environment for us and our customers, characterized by unpredictable traffic patterns and a general promotional environment. In developed economies, mixed real wage growth and shifting consumer spending also continue to pressure global discretionary spending. Consumers continue to focus on value pricing and convenience with the off-price retail channel remaining strong and increased expectations for real-time delivery. •The diversification of our business model across regions, channels, brands, and categories affects our gross margin. For example, if our sales in higher gross margin business regions, channels, brands and categories grow at a faster rate than in our lower gross margin business regions, channels, brands and categories, we would expect a favorable impact to aggregate gross margin over time. Gross margin inEurope is generally higher than in our other two regional operating segments. DTC sales generally have higher gross margins than sales through third parties, although DTC sales also typically have higher selling expenses. Value brands, which are focused on the value-conscious consumer, generally generate lower gross margin. Enhancements to our existing product offerings, or our expansion into new products categories, may also impact our future gross margin. •More competitors are seeking growth globally, thereby increasing competition across regions. Some of these competitors are entering markets where we already have a mature business such asthe United States ,Mexico ,Western Europe andJapan , and may provide consumers discretionary purchase alternatives or lower-priced apparel offerings. •Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from e-commerce shopping, pricing transparency enabled by the proliferation of online technologies, and vertically-integrated specialty stores. Retailers, including our top customers, have in the past and may in the future decide to consolidate, undergo restructurings or rationalize their stores, which could result in a reduction in the number of stores that carry our products. •Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and e-commerce distribution and consumer-facing technologies, which has increased competition in the retail market. •Competition for, and price volatility of, resources throughout the supply chain have increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include the proliferation of lower-cost sourcing alternatives, resulting in reduced barriers to entry for new competitors, and the impact of fluctuating prices of labor and raw materials as well as the consolidation of suppliers. Trends such as these can bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices. 25 -------------------------------------------------------------------------------- Table of Co ntents •Foreign currencies continue to be volatile. Significant fluctuations of theU.S. Dollar against various foreign currencies, including the Euro, British Pound and Mexican Peso, will impact our financial results, affecting translation, revenue, operating margins and net income. •The current environment has introduced greater uncertainty with respect to potential tax and trade regulations. The current domestic and international political environment, including changes to otherU.S. policies related to global trade, tariffs and sanctions, have resulted in uncertainty surrounding the future state of the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs, and, if not mitigated, could have a material adverse effect on our business and results of operations. These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies. Effects of Inflation We do not believe that inflation has had a material effect on our results of operations for the three-month period endedFebruary 28, 2021 andFebruary 23, 2020 ? however, our business could be affected by inflation in the future which we plan to mitigate through a combination of pricing actions and operating efficiencies, although these actions could have an adverse impact on demand. Our First Quarter 2021 Results •Net revenues. Consolidated net revenues decreased 13.3% on a reported basis and 15.6% on a constant-currency basis compared to the first quarter of fiscal 2020. The decrease was driven by the adverse impacts of the COVID-19 pandemic, which included reduced traffic and the varying closure of company-operated and third-party retail locations in certain markets. Additionally, fiscal 2021 did not include the benefit of a Black Friday as compared to the first quarter of fiscal 2020. •Operating income. Compared to the first quarter of 2020, consolidated operating income was essentially flat with a decrease of 1% and operating margin increased to 13.6% as lower net revenues, a result of the continued adverse impact of COVID-19, were more than offset by higher gross margin and lower SG&A expenses primarily reflecting the cost-reduction initiatives started in the second quarter of fiscal year 2020. •Net income. Compared to the first quarter of 2020, net income decreased to$142.5 million from$152.7 million , due to higher interest expense from the issuance of the additional$500.0 million in senior notes during the quarter. •Adjusted EBIT. Compared to the first quarter of 2020, adjusted EBIT decreased 8% to$174.0 million from$189.3 million , as a result of the continued adverse impacts of the COVID-19 pandemic, mostly offset by higher adjusted gross margin and lower SG&A expenses. Adjusted EBIT margin was 13.3%, 70 basis points higher than the first quarter of 2020 on a reported basis and 30 basis points higher on a constant-currency basis. •Adjusted Net Income. Compared to the first quarter of 2020, adjusted net income decreased to$140.3 million from$162.4 million , due to higher interest expense from the issuance of the additional$500.0 million in senior notes during the quarter. •Diluted earnings per share. Compared to the first quarter of 2020, diluted earnings per share decreased from$0.37 to$0.35 due to the decrease in net income described above. •Adjusted diluted earnings per share. Compared to the first quarter of 2020, adjusted diluted earnings per share decreased from$0.40 to$0.34 , primarily due to the decrease in adjusted net income described above. Financial Information Presentation Fiscal year. We use a 52- or 53- week fiscal year, with each fiscal year ending on the Sunday in November that is closest toNovember 30 of that year. Certain of our foreign subsidiaries have fiscal years endingNovember 30 . Each fiscal year generally consists of four 13-week quarters. Each quarter of fiscal years 2021 and 2020 consists of 13 weeks, with the exception of the fourth quarter of 2020, which consisted of 14 weeks. Due to the uncertainty surrounding the continued impact of the COVID-19 pandemic, our results of operations for the three-month period endedFebruary 28, 2021 andFebruary 23, 2020 are not necessarily indicative of those for a full fiscal year. 26 -------------------------------------------------------------------------------- Table of Co ntents Segments. We manage our business according to three regional segments: theAmericas ,Europe andAsia . OurAsia segment includes theMiddle East andAfrica . Classification. Our classification of certain significant revenues and expenses reflects the following: •Net revenues comprise net sales and licensing revenues. Net sales include sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores and shop-in-shops located within department stores and other third-party locations, as well as company-operated e-commerce sites. Net revenues include discounts, allowances for estimated returns and incentives. Licensing revenues, which include revenues from the use of our trademarks in connection with the manufacturing, advertising and distribution of trademarked products by third-party licensees, are earned and recognized as products are sold by licensees based on royalty rates as set forth in the applicable licensing agreements. •Cost of goods sold primarily comprises product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. On both a reported and constant-currency basis, cost of goods sold reflects the transactional currency impact resulting from the purchase of products in a currency other than the functional currency. •Selling expenses include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our e-commerce operations. •We reflect substantially all distribution costs in SG&A, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. 27 -------------------------------------------------------------------------------- Table of Co ntents Results of Operations for Three Months EndedFebruary 28, 2021 , as Compared to Comparable Period in 2020 The following table presents, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues: Three Months Ended February 28, February 23, % 2021 2020 February 28, February 23, Increase % of Net % of Net 2021 2020 (Decrease) Revenues Revenues (Dollars and shares in millions, except per share amounts) Net revenues$ 1,305.6 $ 1,506.1 (13.3) % 100.0 % 100.0 % Cost of goods sold 545.6 666.8 (18.2) % 41.8 % 44.3 % Gross profit 760.0 839.3 (9.4) % 58.2 % 55.7 % Selling, general and administrative expenses 582.9 660.5 (11.7) % 44.6 % 43.9 % Operating income 177.1 178.8 (1.0) % 13.6 % 11.9 % Interest expense (23.3) (16.7) 39.5 % (1.8) % (1.1) % Other income, net 0.9 2.7 (66.7) % 0.1 % 0.2 % Income before income taxes 154.7 164.8 (6.1) % 11.8 % 10.9 % Income tax expense 12.2 12.1 0.8 % 0.9 % 0.8 % Net income$ 142.5 $ 152.7 (6.7) % 10.9 % 10.1 % Earnings per common share attributable to common stockholders: Basic$ 0.36 $ 0.39 (7.7) % * * Diluted$ 0.35 $ 0.37 (5.4) % * * Weighted-average common shares outstanding: Basic 399.5 396.2 0.8 % * * Diluted 411.9 410.1 0.4 % * * _____________ * Not meaningful 28
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Table of Co ntents
Net revenues
The following table presents net revenues by reporting segment for the periods
indicated and the changes in net revenues by reporting segment on both reported
and constant-currency basis from period to period.
Three Months Ended
% Increase (Decrease)
February 28, February 23, As Constant
2021 2020 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 641.3 $ 745.6 (14.0) % (13.4) %
Europe 429.0 512.9 (16.4) % (22.3) %
Asia 235.3 247.6 (5.0) % (7.7) %
Total net revenues $ 1,305.6 $ 1,506.1 (13.3) % (15.6) %
Total net revenues decreased on both a reported and constant-currency basis for
the three-month period ended February 28, 2021 , as compared to the same period
in 2020.
Americas . On both a reported and constant-currency basis, net revenues in our
Americas region decreased for the three-month period ended February 28, 2021 ,
with currency translation affecting net revenues unfavorably by approximately $5
million .
The decrease in net revenues for the three-month period ended February 28, 2021
was primarily driven by the continued adverse impact of the COVID-19 pandemic
which led to lower revenues across both our DTC and wholesale channels, as well
as the inclusion of non-comparable Black Friday week results in the prior year.
The decrease in our DTC channel revenue was due to decreased revenue in our
company-operated stores as they continued to operate under reduced hours and
occupancy levels, including limited temporary store closures as a result of the
COVID-19 pandemic as well as the inclusion of Black Friday results in the prior
year period. The decrease in net revenues was partially offset by an increase in
our e-commerce revenue as a result of higher conversion. At the beginning of the
quarter, approximately 94% of our company-operated stores in the region were
open and as of February 28, 2021 , approximately 99% of our company-operated
stores in the region were open and our store network had 13 more stores in
operation versus the first quarter of 2020.
The decrease in our wholesale channel revenue was primarily within our
international markets due to reduced traffic and temporary closures of
third-party retail locations due to the continued adverse impact of the COVID-19
pandemic. The decrease in revenues was partially offset by growth of Levi's® and
Signature products within U.S. wholesale, mainly due to increases in products
sold to traditional and digital wholesale customers, either through their retail
locations, or e-commerce sites.
Europe . Net revenues in Europe decreased on both a reported and
constant-currency basis for the three-month period ended February 28, 2021 , with
currency translation affecting net revenues favorably by approximately $39
million .
Net revenues decreased for the three-month period ended February 28, 2021 driven
by lower revenue across both channels as a result of the continued adverse
impact of COVID-19. The decrease in our DTC channel revenue was due to the
impact of the temporary closures as well as lower traffic in our open stores as
they continued to operate under reduced hours and occupancy levels. E-commerce
revenue had strong growth during the quarter as a result of higher conversion
and increased dollars spent per order. At the beginning of the quarter,
approximately 67% of our company-operated stores in the region were open and as
of February 28, 2021 , approximately 57% of our company-operated stores in the
region were open and our store network had 22 more stores in operation versus
the end of the first quarter of 2020.
The decrease in our wholesale channel revenue was due to the temporary closure
of our wholesale customers' retail locations as partial and full lockdowns
continued to impact various markets throughout the quarter, which was partially
offset by significant growth in shipments to our digital wholesale customers.
Asia . Net revenues in Asia decreased on both a reported and constant-currency
basis for the three-month period ended February 28, 2021 , with currency
affecting net revenues favorably by approximately $7 million .
The decrease in net revenues for the three-month period ended February 28, 2021
was driven by a decline in wholesale channel revenue, partially offset with an
increase in DTC channel revenue. The decline in wholesale revenue was due to the
continued adverse impact from the COVID-19 pandemic as partial and full
government imposed lockdowns continued to
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Table of Co ntents
impact our wholesale customer retail locations across the region, partially
offset with strong growth in shipments to our wholesale customers in support of
online sales through their e-commerce sites. The growth in DTC revenue is driven
by higher e-commerce revenue as a result of increased traffic to our site,
partially offset by a decline in company-operated store revenue as certain
markets continued to be impacted by reduced store hours and occupancy levels as
a result of the COVID-19 pandemic. Approximately 99% of our company-operated
stores in the region were open at the beginning of the quarter and as of
February 28, 2021 , and our store network had 19 more stores in operation versus
the first quarter of 2020.
Gross profit
The following table shows consolidated gross profit and gross margin for the
periods indicated and the changes in these items from period to period:
Three Months Ended
%
February 28, February 23, Increase
2021 2020 (Decrease)
(Dollars in millions)
Net revenues $ 1,305.6 $ 1,506.1 (13.3) %
Cost of goods sold 545.6 666.8 (18.2) %
Gross profit $ 760.0 $ 839.3 (9.4) %
Gross margin 58.2 % 55.7 %
Currency translation favorably impacted gross profit by approximately $27
million for the three-month period ended February 28, 2021 , respectively.
For the three-month period ended February 28, 2021 , the increase in gross margin
was primarily due to favorable product mix within wholesale, price increases,
lower promotions and $7.2 million of reductions in COVID-19 related inventory
charges, largely due to reductions in our estimate of adverse fabric purchase
commitments, partially offset with a lower proportion of sales in our DTC
channel, which has higher margins.
Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these
items from period to period and these items expressed as a percentage of net
revenues:
Three Months Ended
February 28, February 23,
% 2021 2020
February 28, February 23, Increase % of Net % of Net
2021 2020 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 275.4 $ 307.7 (10.5) % 21.1 % 20.4 %
Advertising and promotion 63.3 89.1 (29.0) % 4.8 % 5.9 %
Administration 105.3 115.7 (9.0) % 8.1 % 7.7 %
Other 135.8 148.0 (8.2) % 10.4 % 9.8 %
COVID-19 related charges 3.1 - - 0.2 % -
Total SG&A $ 582.9 $ 660.5 (11.7) % 44.6 % 43.9 %
Currency translation impacted SG&A unfavorably by approximately $14 million for
the three-month period ended February 28, 2021 .
Selling. Currency translation impacted selling expenses unfavorably by
approximately $8 million for the three-month period ended February 28, 2021 . For
the three-month period ended February 28, 2021 , lower selling expenses primarily
reflected lower sales volume as well as lower costs due to the cost-savings
actions initiated in the second quarter of fiscal year 2020 in response to
COVID-19.
Advertising and promotion. Currency translation impacted advertising and
promotion expenses unfavorably by approximately $2 million for the three-month
period ended February 28, 2021 . The decrease in advertising and promotion
expenses for the three-month period ended February 28, 2021 is due to our
continued focus on cost savings in response to COVID-19 in the channels most
affected by the economic shutdown.
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Table of Co ntents
Administration. Administration expenses include functional administrative and
organization costs. Currency translation impacted administration expenses
unfavorably by approximately $2 million for the three-month period ended
February 28, 2021 . The decrease in administration costs for the three-month
period ended February 28, 2021 is due to the cost-savings actions initiated in
the second quarter of fiscal year 2020 in response to COVID-19.
Other. Other costs include distribution, information resources and marketing
organization costs. Currency translation impacted other costs unfavorably by
approximately $2 million for the three-month period ended February 28, 2021 . For
the three-month period ended February 28, 2021 the decrease in other costs was
primarily due to lower marketing organization costs driven from the cost-savings
actions initiated in the second quarter of fiscal year 2020 in response to
COVID-19 as well as from lower distribution expenses attributable to reduced
sales volume.
COVID-19 related charges. COVID-19 related charges consist of incremental
charges as a result of COVID-19 related business disruptions, including asset
impairment and other charges. During the three-month period ended February 28,
2021 , we recognized the impairment of operating lease right-of-use assets and
property and equipment related to certain retail locations, resulting from lower
revenue and future cash flow projections from the ongoing effects of the
COVID-19 pandemic.
Operating income
The following table shows operating income by reporting segment and corporate
expenses for the periods indicated, the changes in these items from period to
period and these items expressed as a percentage of net revenues:
Three Months Ended
February 28, February 23,
% 2021 2020
February 28, February 23, Increase % of Net % of Net
2021 2020 (Decrease) Revenues Revenues
(Dollars in millions)Operating income: Americas$ 130.7 $ 124.0 5.4 % 20.4 % 16.6 % Europe 111.1 132.4 (16.1) % 25.9 % 25.8 % Asia 29.3 32.7 (10.4) % 12.5 % 13.2 % Total regional operating income 271.1 289.1 (6.2) % 20.8 % * 19.2 % * Corporate expenses 94.0 110.3 (14.8) % 7.2 % * 7.3 % * Total operating income$ 177.1 $ 178.8 (1.0) % 13.6 % * 11.9 % * Operating margin 13.6 % 11.9 % ______________ * Percentage of consolidated net revenues Currency translation favorably affected total operating income by approximately$13 million for the three-month period endedFebruary 28, 2021 . Regional operating income. •Americas. Currency translation did not have a significant impact for the three-month period endedFebruary 28, 2021 . The increase in operating income for the three-month period endedFebruary 28, 2021 was due to lower SG&A expenses primarily reflecting the cost-reduction initiatives started in the second quarter of fiscal year 2020 and lower variable expenses associated with lower revenues. These savings were partially offset by lower net revenues as the COVID-19 pandemic continued to adversely impact the region during the quarter. •Europe. Currency translation had a favorable impact of approximately$13 million for the three-month period endedFebruary 28, 2021 . The decrease in operating income for the three-month period endedFebruary 28, 2021 was due to lower net revenues as a result of the continued adverse impact of COVID-19 partially offset by lower SG&A expenses primarily reflecting the cost-reduction initiatives started in the second quarter of fiscal year 2020 and lower variable expenses associated with lower revenues. •Asia. Currency translation did not have a significant impact for the three-month period endedFebruary 28, 2021 . The decrease in operating income for the three-month period endedFebruary 28, 2021 was primarily due to lower net revenues as a result of the continued adverse impact of COVID-19 partially offset by lower SG&A expenses primarily reflecting the cost-reduction initiatives started in the second quarter of fiscal year 2020. 31 -------------------------------------------------------------------------------- Table of Co ntents Corporate. Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are restructuring charges, COVID-19 related charges and other corporate staff costs. Corporate expenses also include costs associated with our global inventory sourcing organization and COVID-19 related inventory costs which are reported as a component of consolidated gross margin. Currency translation did not have a significant impact on corporate expenses for the three-month period endedFebruary 28, 2021 . The decrease in corporate expenses for the three-month period endedFebruary 28, 2021 was primarily due to the recognition of foreign currency transaction gains related to our global sourcing organizations procurement of inventory on behalf of our foreign subsidiaries as well as$7.2 million in reductions in COVID-19 related inventory charges, primarily related to lower adverse fabric purchase commitments. These decreases were partially offset by the recognition of$3.1 million in asset impairments. Interest expense Interest expense was$23.3 million for the three-month period endedFebruary 28, 2021 , as compared to$16.7 million for the comparable prior-year period. The increase in interest expense was primarily related to the issuance of additional senior notes. Subsequent to quarter end, onMarch 4, 2021 , we used the proceeds from the newly issued 3.50% Senior Notes due 2031 plus cash on hand to redeem$800.0 million of the 5.00% Senior Notes due 2025. Our weighted-average interest rate on average borrowings outstanding during the three-month periodFebruary 28, 2021 was 4.55%, as compared to 4.88% during the comparable period in 2020. Other income, net For the three-month period endedFebruary 28, 2021 , we recorded income of$0.9 million , as compared to income of$2.7 million for the same prior-year period. The decrease in other income, net, was primarily driven by lower interest income generated from money market funds and short-term investments compared to the prior year. Income tax expense The effective income tax rate was 7.9% for the three months endedFebruary 28, 2021 , compared to 7.4% for the same prior-year period. The increase in the effective tax rate in the quarter was primarily driven by a lower tax benefit attributable to employees exercising stock-based equity awards, offset by an increased benefit from foreign-derived intangible income in the current year and more valuation allowance charges compared in the prior year. 32 -------------------------------------------------------------------------------- Table of Co ntents Liquidity and Capital Resources Liquidity outlook We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. As ofFebruary 28, 2021 , we had cash and cash equivalents totaling approximately$2.0 billion , short-term investments of$94.3 million and unused availability under our credit facility of$689.1 million , resulting in a total liquidity position of approximately$2.8 billion . We continue to actively manage the impacts of COVID-19 on our operations and liquidity and make cash management a priority. Through our restructuring actions as well as through negotiated vendor savings and reduced travel and other discretionary expenditures, we executed structural cost savings that will allow us to continue executing our strategies using our disciplined approach while also driving margin, cost productivity and working capital efficiencies. As part of our cash management strategies, we will continue to assess the payment of our dividends on a quarterly basis and plan to keep our share repurchase program on hold until further notice. InFebruary 2021 , we issued$500.0 million in aggregate principal amount of 3.50% Senior Notes due 2031. OnMarch 4, 2021 , subsequent to our quarter end, these proceeds plus cash on hand from the balance sheet were used to pay down$800.0 million of our higher interest senior notes due 2025, which will yield annual savings in interest. We will continue to evaluate our cash on hand and expect to pay down the remaining$200 million of these senior notes in fiscal year 2021, should business conditions improve. While the impact and duration of COVID-19 on our business remains uncertain, the situation is expected to be temporary. In the longer term, we remain committed to increasing total shareholder returns through our three capital allocation priorities: (1) to invest in opportunities and initiatives to grow our business organically; (2) to return capital to our stockholders in the form of cash dividends, as well as stock repurchases to offset dilution that would otherwise be introduced from stock-based incentive compensation grants; and (3) to pursue acquisitions that support our current strategies. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then-existing economic conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our Board may deem relevant. Cash sources We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. We are party to the Second Amended and Restated Credit Agreement that provides for a senior secured revolving credit facility. The maximum availability under our credit facility is$850.0 million , of which$800.0 million is available to us for revolving loans inU.S. Dollars and$50.0 million is available to us for revolving loans either inU.S. Dollars or Canadian Dollars. This credit facility is an asset-based facility, in which the borrowing availability is primarily based on the value of ourU.S. Levi's® trademarks and the levels of accounts receivable and inventory inthe United States andCanada . As ofFebruary 28, 2021 , we did not have any borrowings under the credit facility, unused availability under the facility was$689.1 million , and our total availability of$719.9 million , based on collateral levels as defined by the agreement, was reduced by$30.8 million of other credit-related instruments. As ofFebruary 28, 2021 , we had cash and cash equivalents totaling approximately$2.0 billion and short-term investments of$94.3 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately$2.8 billion . Cash uses Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our equity incentive plans and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements. Subsequent to quarter end, onMarch 4, 2021 , we used the proceeds from the newly issued 3.50% Senior Notes due 2031 plus cash on hand to redeem$800.0 million of the 5.00% Senior Notes due 2025. 33 -------------------------------------------------------------------------------- Table of Co ntents InApril 2021 , the Board declared a cash dividend of$0.06 per share, which was$0.02 per share higher than the dividend declared in the prior quarter, to holders of record of its Class A and Class B common stock at the close of business onMay 7, 2021 , for a total quarterly dividend of approximately$24 million . Cash flows The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows: Three Months Ended February 28, February 23, 2021 2020 (Dollars in millions)
Cash provided by operating activities$ 69.5 $ 197.9 Cash used for investing activities (34.9) (119.3) Cash provided by (used for) financing activities 439.7 (138.0) Cash and cash equivalents at period end 1,973.6 873.6 Cash flows from operating activities Cash provided by operating activities was$69.5 million for the three-month period endedFebruary 28, 2021 , as compared to$197.9 million for the comparable period in 2020. The decrease in cash provided by operating activities is primarily driven by lower sales in comparison to the same period of last year, partially offset by lower spending on inventory and employee incentives. Our cash flows from operations in the first quarter of fiscal year 2020 had not yet been materially impacted by the global pandemic. Cash flows from investing activities Cash used for investing activities was$34.9 million for the three-month period endedFebruary 28, 2021 , as compared to$119.3 million for the comparable period in 2020. The decrease in cash used for investing activities is primarily due to the prior year including payments for a business acquisition, as well as decreases in settlement of foreign currency contracts, capital expenditures, and higher net proceeds from short-term investments. Cash flows from financing activities Cash provided by financing activities was$439.7 million for the three-month period endedFebruary 28, 2021 , as compared to$138.0 million for the comparable period in 2020. Cash provided in 2021 primarily reflects proceeds from senior notes of$500.0 million , partially offset by payments of$25.8 million for withholding tax on cashless equity award exercises, payment of a$16.0 million cash dividend, and payments of$10.1 million for debt issuance and refinancing costs. Cash used in 2020 primarily reflects payments of$30.1 million for common stock repurchases,$75.2 million for withholding tax on cashless equity award exercises, payment of a$31.9 million cash dividend and payments of$14.8 million for noncontrolling interest buyback. Indebtedness As ofFebruary 28, 2021 , our total debt of$2.1 billion was fixed-rate and unsecured, net of capitalized debt issuance costs and, after giving effect to the repayment of$800.0 million of our 5.00% Senior Notes due 2025 onMarch 4, 2021 , aggregate debt principal payments of$1.3 billion remain, with payments starting in 2025. Short-term borrowings of$8.1 million at various foreign subsidiaries are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms. Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in compliance with all of these covenants as ofFebruary 28, 2021 . 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 For the three-month and twelve-month periods endedFebruary 28, 2021 and the comparable periods in 2020, we define the following non-GAAP financial measures as follows: •Adjusted gross profit, as gross profit excluding COVID-19 related inventory costs. 34 -------------------------------------------------------------------------------- Table of Co ntents •Adjusted gross margin, as Adjusted gross profit as a percentage of net revenues; •Adjusted SG&A, as SG&A less charges related to changes in fair value on cash-settled stock-based compensation, COVID-19 related charges, restructuring and restructuring related charges, severance and other, net; •Adjusted EBIT, as net income (loss) excluding income tax (benefit) expense, interest expense, other (income) expense, net, underwriter commission paid on behalf of selling stockholders, impact of changes in fair value on cash-settled stock-based compensation, COVID-19 related inventory costs and other charges, and restructuring and restructuring related charges, severance and other, net; •Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues; •Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization expense; •Adjusted net income, as net income excluding charges related to the impact of changes in fair value on cash-settled stock-based compensation, loss on early extinguishment of debt, COVID-19 related inventory costs and other charges, and restructuring and related charges, severance and other, net, adjusted to give effect to the income tax impact of such adjustments, using an effective tax rate equal to our year to date income tax expense divided by our year to date income before income taxes, each as reflected in our statement of income for the relevant period with any impacts of changes in effective tax rate being recognized in the current three-month period; •Adjusted net income margin as Adjusted net income as a percentage of net revenues; and •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 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 expense (income) net, which includes losses on early extinguishment of debt 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; •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 toMarch 2019 , such awards were required to be settled in cash; •all of these non-GAAP financial measures exclude COVID-19 related inventory costs and other charges, and restructuring and related charges, severance and other, net which can affect our current and future cash requirements; •the expenses and other items that we exclude in our calculations of all of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from all of these non-GAAP financial measures or similarly titled measures; •Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of property and equipment and, although these are non-cash expenses, the assets being depreciated may need to be replaced in the future; and 35 -------------------------------------------------------------------------------- Table of Co ntents •Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share do not include all of the effects of income taxes and changes in income taxes reflected in net income. Because of these limitations, all of these non-GAAP financial measures should be considered along with net income and other operating and financial performance measures prepared and presented in accordance with GAAP. 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. Three Months Ended February 28, February 23, 2021 2020 (Dollars in millions) (Unaudited)
Most comparable GAAP measure:
Gross profit $ 760.0 $ 839.3
Non-GAAP measure:
Gross profit $ 760.0 $ 839.3
COVID-19 related inventory costs (1) (7.2) -
Adjusted gross profit $ 752.8 $ 839.3
Adjusted gross margin 57.7 % 55.7 %
_____________
(1)Represents costs incurred in connection with COVID-19, including$7.2 million in reductions in COVID-19 related inventory charges recognized during the three-month period endedFebruary 28, 2021 , primarily due to reductions in our estimate of adverse fabric purchase commitments, initially recorded in the second quarter of 2020. 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.
Three Months Ended
February 28, February 23,
2021 2020
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Selling, general and administrative expenses $ 582.9 $ 660.5
Non-GAAP measure:
Selling, general and administrative expenses $ 582.9 $ 660.5 Impact of changes in fair value on cash-settled stock-based compensation
(0.9) (4.9)
COVID-19 related charges(1) (3.1) -
Restructuring and restructuring related charges, severance and
other, net(2) (0.1) (5.6)
Adjusted SG&A $ 578.8 $ 650.0
_____________
(1)For the three-month period ended February 28, 2021 , the $3.1 million in
COVID-19 related charges is related to impairment of certain operating lease
right-of-use assets and property and equipment related to certain retail
locations, resulting from lower revenue and future cash flow projections from
the ongoing effects of the COVID-19 pandemic.
(2)Other charges included in restructuring and restructuring related charges,
severance and other, net include transaction and deal related costs, initial
acquisition and integration costs and amortization of acquired intangible
assets.
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Table of Co ntents
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.
Three Months Ended Twelve Months Ended
February 28, February 23, February 28, February 23,
2021 2020 2021 2020
(Dollars in millions)
(Unaudited)
Most comparable GAAP measure:
Net income (loss) $ 142.5 $ 152.7 $ (137.3) $ 401.2
Non-GAAP measure:
Net income (loss) $ 142.5 $ 152.7 $ (137.3) $ 401.2
Income tax expense (benefit) 12.2 12.1 (62.5) 59.4
Interest expense 23.3 16.7 88.8 65.4
Other (income) expense, net (0.9) (2.7) 24.2 (6.3)
Underwriter commission paid on behalf of
selling stockholders - - - 24.9
Impact of changes in fair value on
cash-settled stock-based compensation(1) 0.9 4.9 3.1 33.7
COVID-19 related inventory costs and other
charges (2) (4.1) - 155.5 -
Restructuring and restructuring related
charges, severance and other, net(3) 0.1 5.6 94.0 15.3
Adjusted EBIT $ 174.0 $ 189.3 $ 165.8 $ 593.6
Depreciation and amortization(4) 35.2 34.7 137.1 130.0
Adjusted EBITDA $ 209.2 $ 224.0 $ 302.9 $ 723.6
Adjusted EBIT margin 13.3 % 12.6 %
_____________
(1)Includes the impact of changes in fair value of Class B common stock
following the grant date on awards that were granted as cash-settled and
subsequently replaced with stock-settled awards concurrent with the IPO.
(2)For the three-month period ended February 28, 2021 , the net reduction of $4.1
million in COVID-19 related inventory costs and other charges recognized mainly
represents reductions in COVID-19 related inventory charges, as a result of
reductions in our estimate of adverse fabric purchase commitments, the
recoveries of receivables previously estimated to be not collectible, offset by
incremental impairment costs 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, initial
acquisition and integration costs and amortization of acquired intangible
assets.
(4)Depreciation and amortization amount net of amortization of acquired
intangible assets included in Restructuring and related charges, severance and
other, net.
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Table of Co ntents
Adjusted Net Income and Adjusted Diluted Earnings per Share:
The following table presents a reconciliation of net income, the most directly
comparable financial measure calculated in accordance with GAAP, to Adjusted net
income for each of the periods presented and the calculation of Adjusted diluted
earnings per share for each of the periods presented.
Three Months Ended
February 28 ,February 23, 2021 2020
(Dollars in millions, except per share
amounts)
(Unaudited)
Most comparable GAAP measure:
Net income $ 142.5 $ 152.7
Non-GAAP measure:
Net income $ 142.5 $ 152.7 Impact of changes in fair value on cash-settled stock-based compensation(1)
0.9 4.9
Loss on early extinguishment of debt 0.2 -
COVID-19 related inventory costs and other charges(2) (4.1) -
Restructuring and restructuring related charges, severance and other, net(3)
0.1 5.6
Tax impact of adjustments 0.7 (0.8)
Adjusted net income $ 140.3 $ 162.4
Adjusted net income margin 10.7 % 10.8 %
Adjusted diluted earnings per share $ 0.34 $ 0.40 _____________
(1)Includes the impact of changes in fair value of Class B common stock following the grant date on awards that were granted as cash-settled and subsequently replaced with stock-settled awards concurrent with the IPO. (2)For the three-month period endedFebruary 28, 2021 , the net reduction of$4.1 million in COVID-19 related inventory costs and other charges recognized mainly represents reductions in COVID-19 related inventory charges, as a result of reductions in our estimate of adverse fabric purchase commitments, the recoveries of receivables previously estimated to be not collectible, offset by incremental impairment costs incurred in response to the global pandemic. (3)Other charges included in restructuring and restructuring related charges, severance and other, net include transaction and deal related costs, initial acquisition and integration costs and amortization of acquired intangible assets. 38 -------------------------------------------------------------------------------- Table of Co ntents Net Debt and Leverage Ratio: We define net debt, a non-GAAP financial measure, as total debt, excluding capital leases, less cash and cash equivalents and short-term investments in marketable securities. We define leverage ratio, a non-GAAP financial measure, as the ratio of total debt to the last 12 months Adjusted EBITDA. Our management believes net debt and leverage ratio are important measures to monitor our financial flexibility and evaluate the strength of our balance sheet. Net debt and leverage ratio have limitations as analytical tools and may vary from similarly titled measures used by other companies. Net debt and leverage ratio should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to net debt for each of the periods presented.February 28 ,November 29, 2021 2020 (Dollars in millions) (Unaudited)
Most comparable GAAP measure: Total debt, excluding capital leases$ 2,060.0 $ 1,564.3 Non-GAAP measure: Total debt, excluding capital leases$ 2,060.0 $ 1,564.3 Cash and cash equivalents (1,973.6) (1,497.2) Short-term investments in marketable securities (94.3) (96.5) Net debt$ (7.9) $ (29.4) The following table presents a reconciliation of total debt, excluding capital leases, the most directly comparable financial measure calculated in accordance with GAAP, to leverage ratio for each of the periods presented. February 28, February 23, 2021 2020 (Dollars in millions) (Unaudited)
Total debt, excluding capital leases(1)
6.8 1.4
_____________
(1)Subsequent to quarter end, onMarch 4, 2021 , proceeds from the 3.50% senior notes due 2031 plus cash on hand were used to redeem$800.0 million of the 5.00% senior notes due 2025. (2)Last Twelve Months Adjusted EBITDA is reconciled from net income which is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for more information. 39 -------------------------------------------------------------------------------- Table of Co ntents Adjusted Free Cash Flow: We define Adjusted free cash flow, a non-GAAP financial measure, as net cash flow from operating activities less purchases of property, plant and equipment, plus proceeds (less payments) on settlement of forward foreign exchange contracts not designated for hedge accounting, less repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises, and cash dividends to stockholders. We believe Adjusted free cash flow is an important liquidity measure of the cash that is available after capital expenditures for operational expenses and investment in our business. We believe Adjusted free cash flow is useful to investors because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. Our use of Adjusted free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. First, Adjusted free cash flow is not a substitute for net cash flow from operating activities. Second, other companies may calculate Adjusted free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted free cash flow as a tool for comparison. Additionally, the utility of Adjusted free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, Adjusted free cash flow should be considered along with net cash flow from operating activities and other comparable financial measures prepared and presented in accordance with GAAP. The following table presents a reconciliation of net cash flow from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted free cash flow for each of the periods presented. Three Months Ended February 28, February 23, 2021 2020 (Dollars in millions) (Unaudited) Most comparable GAAP measure: Net cash provided by operating activities$ 69.5 $ 197.9 Net cash used for investing activities (34.9) (119.3) Cash provided by (used for) financing activities 439.7 (138.0) Non-GAAP measure: Net cash provided by operating activities$ 69.5 $ 197.9 Purchases of property, plant and equipment (37.0) (44.4)
Proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
0.1 (19.3)
Repurchase of common stock - (30.1)
Repurchase of shares surrendered for tax withholdings on equity
awards (25.8) (75.2)
Dividend to stockholders (16.0) (31.9)
Adjusted free cash flow $ (9.2) $ (3.0)
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
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Table of Co ntents
results have no standardized meaning prescribed by GAAP, are not prepared under
any comprehensive set of accounting rules or principles and should be read in
conjunction with our consolidated financial statements prepared in accordance
with GAAP. Constant-currency results have limitations in their usefulness to
investors and may be calculated differently from, and therefore may not be
directly comparable to, similarly titled measures used by other companies.
We calculate constant-currency amounts by translating local currency amounts in
the prior-year period at actual foreign exchange rates for the current period.
Our constant-currency results do not eliminate the transaction currency impact,
which primarily include the realized and unrealized gains and losses recognized
from the measurement and remeasurement of purchases and sales of products in a
currency other than the functional currency. Additionally, gross margin 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.
The table below sets forth the calculation of net revenues for each of our
regional operating segments on a constant-currency basis for comparison periods
applicable to the three-month period ended February 28, 2021 :
Three Months Ended
%
February 28, February 23, Increase
2021 2020 (Decrease)
(Dollars in millions)
(Unaudited)
Total net revenues
As reported $ 1,305.6 $ 1,506.1 (13.3) %
Impact of foreign currency exchange rates - 41.5 *
Constant-currency net revenues $ 1,305.6 $ 1,547.6 (15.6) %
Americas
As reported $ 641.3 $ 745.6 (14.0) %
Impact of foreign currency exchange rates - (4.8) *
Constant-currency net revenues - Americas $ 641.3 $ 740.8 (13.4) %
Europe
As reported $ 429.0 $ 512.9 (16.4) %
Impact of foreign currency exchange rates - 39.0 *
Constant-currency net revenues - Europe $ 429.0 $ 551.9 (22.3) %
Asia
As reported $ 235.3 $ 247.6 (5.0) %
Impact of foreign currency exchange rates - 7.3 *
Constant-currency net revenues - Asia $ 235.3 $ 254.9 (7.7) %
_____________
* Not meaningful
41-------------------------------------------------------------------------------- Table of Co ntents Constant-Currency Adjusted EBIT: The table below sets forth the calculation of Adjusted EBIT on a constant-currency basis for comparison period applicable to the three-month period endedFebruary 28, 2021 . Three Months Ended % February 28, February 23, Increase 2021 2020 (Decrease) (Dollars in millions) (Unaudited) Adjusted EBIT(1)$ 174.0 $ 189.3 (8.1) % Impact of foreign currency exchange rates - 12.5 * Constant-currency Adjusted EBIT$ 174.0 $ 201.8 (13.8) % Constant-currency Adjusted EBIT margin(2) 13.3 %
13.0 %
_____________
(1)Adjusted EBIT is reconciled from net income (loss) which is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for more information. (2)We define constant-currency Adjusted EBIT margin as constant-currency Adjusted EBIT as a percentage of constant-currency net revenues. * Not meaningful Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share: The table below sets forth the calculation of Adjusted net income and Adjusted diluted earnings per share on a constant-currency basis for comparison periods applicable to the three-month period endedFebruary 28, 2021 . Three Months Ended % February 28, February 23, Increase 2021 2020 (Decrease)
(Dollars in millions, except per share amounts)
(Unaudited)
Adjusted net income (1) $ 140.3 $ 162.4 (13.6) %
Impact of foreign currency exchange rates - 11.0 *
Constant-currency Adjusted net income $ 140.3 $ 173.4 (19.1) %
Constant-currency Adjusted net income margin(2) 10.7 % 11.2 %
Adjusted diluted earnings per share $ 0.34 $ 0.40 (15.0) %
Impact of foreign currency exchange rates - 0.02 *
Constant-currency Adjusted diluted earnings per share $ 0.34 $ 0.42 (19.0) %
_____________
(1)Adjusted net income is reconciled from net income which is the most
comparable GAAP measure. Refer to Adjusted net income table for more
information.
(2)We define constant-currency Adjusted net income margin as constant-currency
Adjusted net income as a percentage of constant-currency net revenues.
* Not meaningful
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Table of Co ntents
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
As of February 28, 2021 , there had been no significant changes to our
off-balance sheet arrangements or contractual commitments from those disclosed
in our 2020 Annual Report on Form 10-K, except those changes resulting from
issuing $500.0 million in aggregate principal amount of 3.50% Senior Notes due
2031. See Note 6 to the consolidated financial statements included in this
report for more information.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the related notes. There have been no
significant changes to our critical accounting policies from those disclosed in
our 2020 Annual Report on Form 10-K.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this
Quarterly Report for recently issued accounting standards, including the
expected dates of adoption and estimated effects on our consolidated financial
statements.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report, including (without
limitation) statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements.
Although we believe that, in making any such statements, our expectations are
based on reasonable assumptions, any such statement may be influenced by factors
that could cause actual outcomes and results to be materially different from
those projected.
These forward-looking statements include statements relating to our anticipated
financial performance and business prospects, including debt reduction, currency
values and financial impact, foreign exchange counterparty exposures, the impact
of pending legal proceedings, adequate liquidity levels, dividends and/or
statements preceded by, followed by or that include the words "believe", "will",
"so we can", "when", "anticipate", "intend", "estimate", "expect", "project",
"could", "plans", "seeks" and similar expressions. These forward-looking
statements speak only as of the date stated, and we do not undertake any
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise, even if experience
or future events make it clear that any expected results expressed or implied by
these forward-looking statements will not be realized. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
these expectations may not prove to be correct or we may not achieve the
financial results, savings or other benefits anticipated in the forward-looking
statements. These forward-looking statements are necessarily estimates
reflecting the best judgment of our senior management and involve a number of
risks and uncertainties, some of which may be beyond our control. These risks
and uncertainties, including those disclosed under "Risk Factors" in Part II,
Item 1A on this Quarterly Report and in our other filings with the Securities
and Exchange Commission , could cause actual results to differ materially from
those suggested by the forward-looking statements and include, without
limitation:
•changes in general economic and financial conditions, and the resulting impact
on the level of discretionary consumer spending for apparel and pricing trend
fluctuations, and our ability to plan for and respond to the impact of those
changes;
•the potential impact of COVID-19 on our projected customer demand, store
closures and supply chain, as well as our consolidated financial position,
consolidated results of operations, and consolidated cash flows in fiscal 2021;
•the risk of future non-cash asset impairment charges, including to goodwill,
operating right-of-use assets and/or other store assets;
•our ability to effectively manage any global productivity and outsourcing
actions as planned, which are intended to increase productivity and efficiency
in our global operations, take advantage of lower-cost service-delivery models
in our distribution network and streamline our procurement practices to maximize
efficiency in our global operations, without business disruption or mitigation
to such disruptions;
•consequences of impacts to the businesses of our wholesale customers, including
significant store closures or a significant decline in a wholesale customer's
financial condition leading to restructuring actions, bankruptcies, liquidations
or other unfavorable events for our wholesale customers, caused by factors such
as inability to secure financing, decreased discretionary consumer spending,
inconsistent foot and online traffic patterns and an increase in promotional
activity as a result of decreased foot and online traffic, pricing fluctuations,
general economic and financial conditions and changing consumer preferences;
•our and our wholesale customers' decisions to modify strategies and adjust
product mix and pricing, and our ability to manage any resulting product
transition costs, including liquidating inventory or increasing promotional
activity;
•our ability to purchase products through our independent contract manufacturers
that are made with quality raw materials and our ability to mitigate the
variability of costs related to manufacturing, sourcing, and raw materials
supply and to manage consumer response to such mitigating actions;
•our ability to gauge and adapt to changing U.S. and international retail
environments and fashion trends and changing consumer preferences in product,
price-points, as well as in-store and digital shopping experiences;
•our ability to respond to price, innovation and other competitive pressures in
the global apparel industry, on and from our key customers and in our key
markets;
•our ability to increase the number of dedicated stores for our products,
including through opening and profitably operating company-operated stores;
•the extent to which wholesale customer forward demand signals result in actual
sales;
•consequences of foreign currency exchange and interest rate fluctuations;
•our ability to successfully prevent or mitigate the impacts of data security
breaches;
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•our ability to attract and retain key executives and other key employees;
•our ability to achieve our diversity, equity and inclusion, and sustainability
goals;
•our ability to protect our trademarks and other intellectual property;
•the impact of the variables that affect the net periodic benefit cost and
future funding requirements of our postretirement benefits and pension plans;
•our dependence on key distribution channels, customers and suppliers;
•our ability to utilize our tax credits and net operating loss carryforwards;
•potential future paydowns of existing debt;
•ongoing or future litigation matters and disputes and regulatory developments;
•changes in or application of trade and tax laws, potential increases in import
tariffs or taxes, and the implementation of trade restrictions or sanctions; and
•political, social and economic instability, or natural disasters, in countries
where we or our customers do business.
We have based the forward-looking statements contained in this Quarterly Report
primarily on our current expectations and projections about future events and
trends that we believe may affect our business, financial condition, results of
operations, prospects, business strategy and financial needs. The outcome of the
events described in these forward-looking statements is subject to risks,
uncertainties, assumptions and other factors described under "Risk Factors" and
elsewhere in this Quarterly Report. These risks are not exhaustive. Other
sections of this Quarterly Report include additional factors that could
adversely affect our business and financial performance. Moreover, we operate in
a very competitive and rapidly changing environment. New risks and uncertainties
emerge from time to time, and it is not possible for us to predict all risks and
uncertainties that could have an impact on the forward-looking statements
contained in this Quarterly Report. We cannot assure you that the results,
events and circumstances reflected in the forward-looking statements will be
achieved or occur, and actual results, events or circumstances could differ
materially from those described in the forward-looking statements.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Quarterly Report, and while
we believe such information forms a reasonable basis for such statements, such
information may be limited or incomplete, and our statements should not be read
to indicate that we have conducted an exhaustive inquiry into, or review of, all
potentially available relevant information. These statements are inherently
uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this Quarterly Report relate only to
events as of the date on which such statements are made. We undertake no
obligation to update any forward-looking statements after the date of this
Quarterly Report or to conform such statements to actual results or revised
expectations, except as required by law.
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