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. References to 2019, 2020 and 2021 below in this section are references to our fiscal years ending inNovember 2019 , 2020 and 2021, respectively. 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, dresses, 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. InSeptember 2021 , we acquired Beyond Yoga, which is a premium athletic and lifestyle apparel brand. 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. Seen as the khaki leader, Dockers has returned to itsCalifornia roots and is bringing a full range of casual, versatile styles for men and women to show up with cool confidence everyday. 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. The newly acquired Beyond Yoga brand is a body positive, premium athleisure apparel brand focused on quality, fit and comfort. We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers ("direct-to-consumer" or "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As ofAugust 29, 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 ofAugust 29, 2021 , we had 1,058 company-operated stores located in 37 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. 28 -------------------------------------------------------------------------------- Table of Contents Due to the continued outbreaks in COVID-19 cases in various parts of the world, primarily withinAsia , approximately 10% of our owned and operated retail stores were temporarily closed throughout the quarter. See "Impact of COVID-19 on our Business" below. OurEurope andAsia businesses, collectively, contributed 46% of our net revenues and 40% of our regional operating income in the first nine months of 2021, as compared to 49% of our net revenues and 43% of our regional operating income in the same period in 2020. Sales of Levi's® brand products represented 87% of our total net sales in the first nine months of both 2021 and 2020. Our wholesale channel generated 64% and 60% of our net revenues in the first nine months of 2021 and 2020, respectively. Our DTC channel generated 36% and 40% of our net revenues in the first nine months of 2021 and 2020, respectively, with sales through our company operated e-commerce sites representing 21% and 22% of DTC channel net revenues in the first nine months of 2021 and 2020, and 8% and 9% of total net revenues in the first nine 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 20% of our total net revenues in the third quarter of fiscal 2021, versus approximately 25% of our net revenues in the third 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. Due to the significant impact of COVID-19 on our prior year figures, certain comparisons to the same period in 2019 have been included for additional context. 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 of the inventory and receivable related charges initially recognized in the second quarter. Additional charges were recognized in the fourth quarter due 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 . During fiscal year 2021, many COVID-19 related restrictions on store business hours and customer capacity in many parts of the world eased and social events resumed. As markets reopened, consumers returned to stores and as of quarter end, approximately 95% of company-operated stores were open globally. Within ourAmericas andEurope regions, consumer demand was strong as net revenues in these regions were higher as compared to the pre-pandemic third quarter in 2019. Markets within ourAsia region continued to experience temporary store closures and other COVID-19 related restrictions along with reduced consumer confidence due to COVID-19 resurgences. 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. Although the global distribution of the vaccine continues to progress and many government-imposed restrictions have been lightened or removed, the future impact of the COVID-19 pandemic remains highly uncertain. Resurgences of COVID-19 cases continue and the emergence of new variants have led to reduced consumer confidence and changes in shopping patterns adversely impacting store traffic as more consumers are either not shopping or choosing to shop online. Consequently, our 29 -------------------------------------------------------------------------------- Table of Contents 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 lockdowns affecting production, distribution and other logistical issues, including port closures and shipping backlogs; •Challenges filling staffing requirements at our company-operated retail stores and distribution centers due to labor shortages affecting retail businesses; •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 and nine-month periods endedAugust 29, 2021 , we recognized a net reduction in restructuring charges of$3.6 million and net incremental restructuring charges of$11.1 million , respectively, as compared to restructuring charges of$1.1 million and$68.4 million for the same periods in 2020. These charges are recorded on a separate line item in our consolidated statements of operations. Within the consolidated balance sheets as ofAugust 29, 2021 , we had$30.2 million and$2.1 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 and are expected to be paid through 2021. 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 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 brands and 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. 30 -------------------------------------------------------------------------------- Table of Contents •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. •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. •There has been increased focus from our stakeholders, including consumers, employees and investors, on corporate environmental, social, and governance ("ESG") practices, including practices related to the causes and impacts of climate change. We expect that stakeholder expectations with respect to ESG expectations will continue to evolve rapidly, which may necessitate additional resources to monitor, report on, and adjust our 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 and nine-month periods endedAugust 29, 2021 andAugust 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 Third Quarter 2021 Results •Net revenues. Consolidated net revenues increased 40.9% on a reported basis and 38.0% on a constant-currency basis compared to the third quarter of fiscal 2020. The increase was primarily due to the adverse impacts of the COVID-19 pandemic in the third quarter of 2020, including reduced traffic and ongoing closures of company-operated and wholesale customer retail locations for portions of the quarter and in certain markets. •Operating income. We recognized consolidated operating income of$216.3 million , an increase from operating income of$92.3 million in the third quarter of 2020. The increase is due to higher net revenues and gross margin partially offset with higher SG&A expenses in the current year reflecting higher administration, advertising and selling expenses due to the increase in sales volume and improved overall company performance. •Net income. We recognized net income of$193.3 million as compared to$27.0 million in the third quarter of 2020. The increase is due to the increase in operating income described above. Additionally, we recognized foreign currency exchange losses in the prior year, and in the current year, incurred a lower tax rate and lower interest expense reflecting our debt refinancing and repayment activity. •Adjusted EBIT. Adjusted EBIT was$221.8 million as compared to an Adjusted EBIT of$84.2 million in the third quarter of 2020. The increase is due to higher net revenues and Adjusted gross margin partially offset with higher 31 -------------------------------------------------------------------------------- Table of Contents Adjusted SG&A expenses in the current year reflecting higher administration, advertising and selling expenses due to the increase in sales volume and improved overall company performance. •Adjusted net income. Compared to the third quarter of 2020, Adjusted net income was$197.4 million as compared to an Adjusted net income of$31.3 million . The increase is due to the increase in Adjusted EBIT described above. Additionally, we recognized foreign currency exchange losses in the prior year, and in the current year, incurred a lower tax rate and lower interest expense reflecting our debt refinancing and repayment activity. •Diluted earnings per share. Compared to the third quarter of 2020, diluted earnings per share were$0.47 as compared to diluted earnings per share of$0.07 due to the increase in net income described above. •Adjusted diluted earnings per share. Adjusted diluted earnings per share were$0.48 compared to Adjusted diluted earnings per share of$0.08 in the third quarter of 2020, due to the increase in Adjusted net income described above. Our Year-to-Date 2021 Results •Net revenues. Consolidated net revenues increased 33.0% on a reported basis and 29.6% on a constant-currency basis compared to the first nine months of 2020. The increase was primarily due to the adverse impacts of the COVID-19 pandemic in the second and third quarter of 2020, including temporary store closures of company-operated and wholesale customer retail locations. •Operating income (loss). We recognized consolidated operating income of$499.9 million as compared to an operating loss of$177.1 million in the first nine months of 2020. The increase is due to higher net revenues and gross margin partially offset with higher SG&A expenses in the current year reflecting higher administration, advertising and selling expenses due to the increase in sales volume and improved overall company performance. The prior year also included the recognition of$231.0 million in incremental COVID-19 charges. •Net income (loss). We recognized net income of$400.6 million as compared to a net loss of$183.8 million . The increase is due to the increase in operating income (loss) described above. Additionally, we recognized$30.3 million in incremental costs in the current year related to the early extinguishment of debt. •Adjusted EBIT. Adjusted EBIT was$510.4 million for the first nine months of 2021 compared to Adjusted EBIT of$67.7 million for the first nine months of 2020. The increase was primarily due to higher net revenues and higher Adjusted gross margin in the current year partially offset with higher Adjusted SG&A expenses reflecting higher administration, advertising and selling expenses due to the increase in sales volume and improved overall company performance. •Adjusted net income. Compared to the first nine months of 2020, Adjusted net income was$431.2 million as compared to Adjusted net income of$2.3 million . The increase was primarily due to the increase in Adjusted EBIT described above. •Diluted earnings (loss) per share. Diluted earnings per share were$0.97 compared to diluted loss per share of$0.46 in the third quarter of 2020 due to the increase in net income (loss) described above. •Adjusted diluted earnings per share. Adjusted diluted earnings per share were$1.05 compared to Adjusted diluted earnings per share of$0.01 in the third quarter of 2020, due to the increase 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 and nine-month periods endedAugust 29, 2021 andAugust 23, 2020 are not necessarily indicative of those for a full fiscal year. 32 -------------------------------------------------------------------------------- Table of Contents 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. 33 -------------------------------------------------------------------------------- Table of Contents Results of Operations for Three and Nine Months EndedAugust 29, 2021 , as Compared to Comparable Periods in 2020 The following table presents, for the periods indicated, our consolidated statements of operations, the changes in these items from period to period and these items expressed as a percentage of net revenues: Three Months Ended Nine Months EndedAugust 29 ,August 23 ,August 29 ,August 23 , % 2021 2020 % 2021 2020August 29 ,August 23 , Increase % of Net % of NetAugust 29 ,August 23 , Increase % of Net % of Net 2021 2020 (Decrease) Revenues Revenues 2021 2020 (Decrease) Revenues Revenues (Dollars and shares in millions, except per share amounts) Net revenues$ 1,497.6 $ 1,063.1 40.9 % 100.0 % 100.0 %$ 4,079.2 $ 3,066.8 33.0 % 100.0 % 100.0 % Cost of goods sold 635.4 485.7 30.8 % 42.4 % 45.7 % 1,706.8 1,480.4 15.3 % 41.8 % 48.3 % Gross profit 862.2 577.4 49.3 % 57.6 % 54.3 % 2,372.4 1,586.4 49.5 % 58.2 % 51.7 % Selling, general and administrative expenses 649.5 484.0 34.2 % 43.4 % 45.5 % 1,861.4 1,695.1 9.8 % 45.6 % 55.3 % Restructuring charges, net (3.6) 1.1 * (0.2) % 0.1 % 11.1 68.4 (83.8) % 0.3 % 2.2 % Operating income (loss) 216.3 92.3 134.3 % 14.4 % 8.7 % 499.9 (177.1) * 12.3 % (5.8) % Interest expense (18.1) (28.4) 36.3 % (1.2) % (2.7) % (61.4) (56.3) (9.1) % (1.5) % (1.8) % Loss on early extinguishment of debt - - * - % - (30.3) - * (0.7) - Other income (expense), net 4.8 (12.3) 139.0 % 0.3 % (1.2) % 5.2 (8.3) 162.7 % 0.1 % (0.3) % Income (loss) before income taxes 203.0 51.6 * 13.6 % 4.9 % 413.4 (241.7) * 10.1 % (7.9) % Income tax expense (benefit) 9.7 24.6 (60.6) % 0.6 % 2.3 % 12.8 (57.9) 122.1 % 0.3 % (1.9) % Net income (loss)$ 193.3 $ 27.0 * 12.9 % 2.5 %$ 400.6 $ (183.8) * 9.8 % (6.0) % Earnings (loss) per common share attributable to common stockholders: Basic$ 0.48 $ 0.07 * * *$ 1.00 $ (0.46) * * * Diluted$ 0.47 $ 0.07 * * *$ 0.97 $ (0.46) * * * Weighted-average common shares outstanding: Basic 403.0 397.7 1.3 % * * 401.5 397.0 1.1 % * * Diluted 413.1 407.7 1.3 % * * 411.5 397.0 3.7 % * * _____________ * Not meaningful 34
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Net revenues
The following table presents net revenues by reporting segment for the periods
indicated and the changes in net revenues by reporting segment on both reported
and constant-currency basis from period to period.
Three Months Ended Nine Months Ended
% Increase (Decrease) % Increase (Decrease)
August 29, August 23, As Constant August 29, August 23, As Constant
2021 2020 Reported Currency 2021 2020 Reported Currency
(Dollars in millions)
Net revenues:
Americas $ 838.0 $ 549.8 52.4 % 50.6 % $ 2,194.3 $ 1,578.1 39.0 % 38.6 %
Europe 494.5 390.4 26.7 % 23.5 % 1,288.9 1,032.4 24.8 % 18.2 %
Asia 165.1 122.9 34.3 % 29.1 % 596.0 456.3 30.6 % 25.5 %
Total net revenues $ 1,497.6 $ 1,063.1 40.9 % 38.0 % $ 4,079.2 $ 3,066.8 33.0 % 29.6 %
Total net revenues increased on both a reported and constant-currency basis for
the three-month and nine-month periods ended August 29, 2021 , as compared to the
same period in 2020.
Americas . On both a reported and constant-currency basis, net revenues in our
Americas region increased for the three-month and nine-month periods ended
August 29, 2021 , with currency translation affecting net revenues favorably by
approximately $7 million and $5 million , respectively.
The increase in net revenues for the three-month period ended August 29, 2021
was driven by increased revenues across both our wholesale and DTC channels as
the adverse impacts of COVID-19 significantly impacted the third quarter of
2020. Wholesale channel revenue increased due to higher sales to both our U.S.
and international wholesale customers as most locations were open during the
third quarter of 2021 as compared to third quarter of 2020, when most locations
were closed for part or all of the quarter. The growth in U.S. wholesale revenue
was across our brands driven by increased products sold to both our traditional
and digital wholesale customers.
The increase in DTC revenue was due to the adverse impact of COVID-19 in the
prior year, as most company-operated stores were closed for varying periods of
time throughout the third quarter of 2020. For the three-month period ended
August 29, 2021 , the majority of our company-operated stores in the region were
open with most of our mainline stores reaching pre-pandemic traffic levels.
Additionally, we benefited from 20 more stores in operation as of August 29,
2021 as compared to August 23, 2020 . Compared to the third quarter of fiscal
2020, e-commerce revenue decreased due to lower traffic to our site as more
customers returned to in-store shopping.
The increase in net revenues for the nine-month period ended August 29, 2021 was
due to the adverse impacts of the COVID-19 pandemic in second and third quarter
of fiscal 2020, including temporary store closures of company-operated and
wholesale customer retail locations. The 2020 period also benefited from the
inclusion of non-comparable net revenues from the week of Black Friday.
Europe . Net revenues in Europe increased on both a reported and
constant-currency basis for the three-month and nine-month periods ended
August 29, 2021 , with currency translation affecting net revenues favorably by
approximately $10 million and $58 million , respectively.
Net revenues for the three-month period ended August 29, 2021 increased across
both channels as COVID-19 significantly impacted the third quarter of fiscal
2020. Wholesale channel revenue increased as a larger number of stores were open
during the third quarter of 2021 as compared to the same period in 2020 when
many stores were closed for part or all of the quarter as a result of the
COVID-19 pandemic. Sales to our digital wholesale customers increased in
comparison to the third quarter of fiscal 2020.
The increase in DTC revenue was primarily due the majority of our
company-operated stores being open and operating during the third quarter of
2021, in comparison to the third quarter of 2020 when many of our company
operated stores were closed for varying periods of time as a result of the
COVID-19 pandemic. Additionally, we benefited from 16 more stores in operation
as of August 29, 2021 as compared to August 23, 2020 . E-commerce revenue also
grew compared to the third quarter of fiscal 2020, as a result of increased
dollars spent per order.
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The increase in net revenues for the nine-month period ended August 29, 2021 was
primarily due to the adverse impacts of the COVID-19 pandemic in the second and
third quarter of fiscal 2020, including temporary store closures of
company-operated and wholesale customer retail locations.
Asia . Net revenues in Asia increased on both a reported and constant-currency
basis for the three-month and nine-month periods ended August 29, 2021 , with
currency affecting net revenues favorably by approximately $5 million and $18
million , respectively.
Net revenues increased for the three-month period ended August 29, 2021
primarily driven by the wholesale channel, as a larger portion of wholesale
customer locations were open and operating in the third quarter of 2021, as
compared to the same period in 2020 where many locations were closed,
particularly in India , as a result of the COVID-19 pandemic. This was partially
offset with a decrease in DTC revenue driven from lower sales in our
company-operated stores as some markets experienced COVID-19 resurgences
impacting store traffic, including restrictions on operating hours and occupancy
as well as temporary store closures more widespread than the same quarter in
prior year. Additionally, there were 2 less stores in operation as of August 29,
2021 as compared to August 23, 2020 . E-commerce revenue grew compared to the
third quarter of fiscal 2020, as a result of increased traffic.
The increase in net revenues for the nine-month period ended August 29, 2021 was
primarily due to the adverse impacts of the COVID-19 pandemic in the second and
third quarter of fiscal 2020, including temporary store closures of
company-operated and wholesale customer retail locations.
Gross profit
The following table shows consolidated gross profit and gross margin for the
periods indicated and the changes in these items from period to period:
Three Months Ended Nine Months Ended
% %
August 29, August 23, Increase
2021 2020 (Decrease) 2021 2020 (Decrease)
(Dollars in millions)
Net revenues $ 1,497.6 $ 1,063.1 40.9 % $ 4,079.2 $ 3,066.8 33.0 %
Cost of goods sold 635.4 485.7 30.8 % 1,706.8 1,480.4 15.3 %
Gross profit $ 862.2 $ 577.4 49.3 % $ 2,372.4 $ 1,586.4 49.5 %
Gross margin 57.6 % 54.3 % 58.2 % 51.7 %
Currency translation favorably impacted gross profit by approximately $11
million and $45 million for the three-month and nine-month periods ended
August 29, 2021 , respectively.
For the three-month period ended August 29, 2021 , the increase in gross margin
was primarily due a higher proportion of sales in our DTC channel, which has
higher margins. The fiscal 2020 period also included $7.9 million in reductions
in COVID-19 related inventory costs, attributing 0.7 percentage points of the
3.3 percentage point increase.
The increase in gross margin for the nine-month period ended August 29, 2021 was
primarily due to a higher proportion of sales in our DTC channel, which has
higher margins, favorable product mix within our retail and wholesale channels,
and price increases. Additionally, there were $78.7 million of COVID-19 related
inventory charges recognized in the prior year, attributing to 2.6 percentage
points of the 6.5 percentage point increase.
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Selling, general and administrative expenses
The following table shows SG&A for the periods indicated, the changes in these
items from period to period and these items expressed as a percentage of net
revenues:
Three Months Ended Nine Months Ended
August 29 , August 23 , August 29 , August 23 ,
% 2021 2020 % 2021 2020
August 29 , August 23 , Increase % of Net % of Net August 29 , August 23 , Increase % of Net % of Net
2021 2020 (Decrease) Revenues Revenues 2021 2020 (Decrease) Revenues Revenues
(Dollars in millions)
Selling $ 273.0 $ 234.7 16.3 % 18.2 % 22.1 % $ 808.9 $ 760.3 6.4 % 19.8 % 24.8 %
Advertising and promotion 95.9 56.4 70.0 % 6.4 % 5.3 % 271.3 217.8 24.6 % 6.7 % 7.1 %
Administration 123.5 71.2 73.5 % 8.2 % 6.7 % 358.1 239.9 49.3 % 8.8 % 7.8 %
Other 151.4 125.8 20.3 % 10.1 % 11.8 % 424.3 393.2 7.9 % 10.4 % 12.8 %
COVID-19 related charges 5.7 (4.1) 239.0 % 0.4 % (0.4) (1.2) 83.9 (101.4) % - % 2.7 %
Total SG&A $ 649.5 $ 484.0 34.2 % 43.4 % 45.5 % $ 1,861.4 $ 1,695.1 9.8 % 45.6 % 55.3 %
Currency translation impacted SG&A unfavorably by approximately $10 million and
$43 million for the three-month and nine-month periods ended August 29, 2021 ,
respectively.
Selling. Currency translation impacted selling expenses unfavorably by
approximately $6 million and $25 million for the three-month and nine-month
periods ended August 29, 2021 , respectively. For the three-month and nine-month
periods ended August 29, 2021 , higher selling expenses is primarily due to the
majority of our company-operated stores being open and operating during the
third quarter of 2021, in comparison to substantially all of our
company-operated stores being temporarily closed for varying periods of time
throughout the third quarter of 2020. The increase was partially offset with
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 did not have a significant
impact on advertising and promotion expenses for the three-month period ended
August 29, 2021 and had an unfavorable impact of $6 million for the nine-month
period ended August 29, 2021 . The increase in advertising and promotion expenses
for the three-month and nine-month periods ended August 29, 2021 is due to
increased spend to support revenue growth and restoring media spend that was
eliminated in the prior year in response to the COVID-19 pandemic. The third
quarter of fiscal 2021 also includes additional investments to fuel digital
growth.
Administration. Administration expenses include functional administrative and
organization costs. Currency translation did not have a significant impact on
administration expenses for the three-month period ended August 29, 2021 and had
an unfavorable impact of $6 million for the nine-month period ended August 29,
2021 . The increase in administration costs for the three-month and nine-month
periods ended August 29, 2021 is primarily due to higher incentive costs
attributed to higher sales and stronger company performance as compared to the
same periods in prior year.
Other. Other costs include distribution, information resources and marketing
organization costs. Currency translation did not have a significant impact on
other costs for the three-month period ended August 29, 2021 and had an
unfavorable impact of $6 million for the nine-month period ended August 29,
2021 . For the three-month and nine-month periods ended August 29, 2021 the
increase in other costs was primarily due to higher distribution expenses
attributable to increased sales volume as compared to the same periods in prior
year.
COVID-19 related charges. COVID-19 related charges consist of incremental
charges as a result of COVID-19 related business disruptions, including asset
impairment and other charges. During the three-month period ended August 29,
2021 , we recognized $5.7 million in impairment of assets related to certain
retail locations resulting from lower revenue and future cash flow projections
from the ongoing effects of the COVID-19 pandemic. During the three-month period
ended August 23, 2020 , we recognized a net reduction of $4.1 million in COVID-19
related charges, primarily due to recoveries of receivables previously estimated
to be not collectible, offset by incremental costs incurred in response to the
global pandemic.
37
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Table of Contents
The decrease in COVID-19 related charges for the nine-month period ended
August 29, 2021 is due to the initial recognition of related inventory costs and
other charges upon the onset of the pandemic recognized in the prior year.
During the nine-month period ended August 23, 2020 , we recognized $43.0 million
in impairment of certain operating lease right-of-use assets and $17.4 million
in impairment of property and equipment related to certain retail locations and
other corporate assets, as a result of lower revenue and future cash flow
projections in relation to the pandemic. Additional charges of $21.0 million
related to customer receivables, including provisions and other allowances as a
result of changes in their financial condition of $8.5 million and actual and
anticipated bankruptcies and other associated claims of $12.5 million . The
remainder relates to incremental costs incurred in response to the global
pandemic.
Restructuring charges, net
For the three-month and nine-month periods ended August 29, 2021 , we recognized
a net reduction in restructuring charges of $3.6 million and restructuring
charges of $11.1 million , respectively, as compared to restructuring charges of
$1.1 million and $68.4 million for the same periods in the prior year. The
charges consist primarily of severance and other post-employment benefits. See
"-2020 Restructuring Initiative" above for more information.
Operating income (loss)
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 Nine Months Ended
August 29 , August 23 , August 29 , August 23 ,
% 2021 2020 % 2021 2020
August 29 , August 23 , Increase % of Net % of Net August 29 , August 23 , Increase % of Net % of Net
2021 2020 (Decrease) Revenues Revenues 2021 2020 (Decrease) Revenues Revenues
(Dollars in millions)
Operating income (loss):
Americas $ 202.9 $ 92.3 119.8 % 24.2 % 16.8 % $ 486.2 $ 178.6 172.2 % 22.2 % 11.3 %
Europe 140.0 87.6 59.8 % 28.3 % 22.4 % 308.8 152.3 102.8 % 24.0 % 14.8 %
Asia (16.4) (23.3) 29.6 % (9.9) % (19.0) % 19.9 (19.1) 204.2 % 3.3 % (4.2) %
Total regional operating
income (loss) 326.5 156.6 108.5 % 21.8 % v 14.7 % v 814.9 311.8 161.4 % 20.0 % v 10.2 % v
Corporate:
Restructuring charges, net (3.6) 1.1 * (0.2) % v 0.1 % v 11.1 68.4 (83.8) % 0.3 % v 2.2 % v
Other corporate staff costs
and expenses 113.8 63.2 80.1 % 7.6 % v 5.9 % v 303.9 420.5 (27.7) % 7.4 % v 13.7 % v
Corporate expenses 110.2 64.3 71.4 % 7.4 % v 6.0 % v 315.0 488.9 (35.6) % 7.7 % v 15.9 % v
Total operating income
(loss) $ 216.3 $ 92.3 134.3 % 14.4 % v 8.7 % v $ 499.9 $ (177.1) 382.3 % 12.3 % v (5.8) % v
Operating margin 14.4 % 8.7 % 12.3 % (5.8) %
______________v Percentage of consolidated net revenues
* Not meaningful. Currency translation favorably affected total operating income by approximately$2 million for both the three-month and nine-month periods endedAugust 29, 2021 . 38 -------------------------------------------------------------------------------- Table of Contents Regional operating income (loss). •Americas. Currency translation did not have a significant impact for the three-month and nine-month periods endedAugust 29, 2021 . The increase in operating income for the three-month period endedAugust 29, 2021 was primarily due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues and gross margin this year, being partially offset with higher selling expense to support our stores, higher advertising and promotion expense and higher distribution costs. The increase in operating income for the nine-month period endedAugust 29, 2021 was primarily due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues and gross margin this year, which were partially offset with higher selling expense to support our stores, higher incentive compensation costs, higher advertising and promotion expense and higher distribution costs. •Europe. Currency translation had a favorable impact of approximately$2 million and$6 million for the three-month and nine-month periods endedAugust 29, 2021 , respectively. The increase in operating income for the three-month period endedAugust 29, 2021 was due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues and gross margin this year, being partially offset with higher advertising and promotion expense and higher selling expense to support our stores. The increase in operating income for the nine-month period endedAugust 29, 2021 was primarily due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues this year, as well as improved gross margin and lower selling expenses partially offset with higher advertising and incentive compensation costs. •Asia. Currency translation did not have a significant impact for the three-month and nine-month periods endedAugust 29, 2021 . The increase in operating income for the three-month period endedAugust 29, 2021 was primarily due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues this year, being partially offset with higher advertising and promotion expense and higher selling expense to support our stores. The increase in operating income for the nine-month period endedAugust 29, 2021 was primarily due to the adverse impact of the COVID-19 pandemic in the prior year, resulting in higher net revenues this year partially offset with higher selling expense to support our stores as well as higher advertising and promotion expense and higher incentive compensation costs. 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 endedAugust 29, 2021 and had an unfavorable impact of$2 million for the nine-month period endedAugust 29, 2021 . The increase in corporate expenses for the three-month period endedAugust 29, 2021 was primarily due to higher administration expenses mainly related to incentive costs recognized in the third quarter of fiscal 2021 as well as the recognition of reductions in COVID-19 related charges in the third quarter of fiscal 2020. The increase was partially offset with lower global inventory sourcing costs recognized in the third quarter of fiscal 2021 as compared to the same period in the prior year. The decrease in corporate expenses for the nine-month period endedAugust 29, 2021 was primarily due to the COVID-19 related net inventory costs and other charges, net restructuring charges, and impairment of certain store right-of-use and other store assets, recognized in the prior year in response to the COVID-19 pandemic. Interest expense Interest expense was$18.1 million and$61.4 million for the three-month and nine-month periods endedAugust 29, 2021 , as compared to$28.4 million and$56.3 million for the comparable prior-year periods. Interest expense on debt borrowings decreased in the third quarter of 2021 due to redemption of$800.0 million senior notes. The decrease in interest expense for the three-month period endedAugust 29, 2021 was primarily driven from lower interest on debt borrowings due to the redemption of$800.0 million of our senior notes. The increase in interest expense for the nine-month period endedAugust 29, 2021 was primarily related to higher interest on deferred compensation plans partially offset with lower interest on debt borrowings due to the redemption of$800.0 million of our senior notes. Our weighted-average interest rate on average borrowings outstanding during the three-month and nine-month periodsAugust 29, 2021 was 4.12% and 4.34%, respectively, as compared to 4.78% and 4.65% during the comparable periods in 2020. 39 -------------------------------------------------------------------------------- Table of Contents Loss on early extinguishment of debt For the nine-month period endedAugust 29, 2021 , a loss of$30.3 million was recognized, related to our debt refinancing activities. The loss recognized included$20.0 million of call premium on the retired debt. Other income (expense), net For the three-month and nine-month periods endedAugust 29, 2021 , we recorded income of$4.8 million and$5.2 million , respectively, as compared to expense of$12.3 million and$8.3 million for the same prior-year periods. Other income (expense), net, primarily consists of foreign exchange management gains and losses and foreign currency transaction losses. Income tax expense The effective income tax rate was 4.8% for the three months endedAugust 29, 2021 and reflects a$9.7 million income tax expense recorded on$203.0 million of income before income taxes. The effective income tax rate for the three months endedAugust 23, 2020 , was 47.6% and reflects a$24.6 million income tax expense recorded on$51.6 million of income before income taxes. The lower effective tax rate in 2021 was primarily driven by benefit from the foreign derived intangible income deduction on an internal restructuring. The higher effective tax rate in the prior year resulted from a reduction of theU.S. federal net operating loss available to carryback. The effective income tax rate was 3.1% for the nine months endedAugust 29, 2021 and reflects a$12.8 million income tax expense recorded on$413.4 million of income before income taxes. The effective income tax rate for the nine months endedAugust 23, 2020 , was 24.0% and reflects a$57.9 million income tax benefit recorded on$241.7 million of losses before income taxes. The effective tax rate for the nine months endedAugust 29, 2021 was favorably impacted by tax benefit attributable to employees exercising stock-based equity awards and the foreign derived intangible income deduction that was not available in prior year. 40 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Liquidity outlook We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. We remain committed to increasing total shareholder returns through deploying capital across all three of our capital allocation priorities: (1) to invest in high growth investment 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, both organic and inorganic, that support our current strategies. We continue to concentrate our capital investments in new stores, distribution capacity and technology. InOctober 2021 , the Board approved a share repurchase program that authorizes the repurchase of up to$200.0 million of the Company's Class A common stock with the intention to offset dilution from employee incentive grants. 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 ofAugust 29, 2021 , we did not have any borrowings under the credit facility. Unused availability under the facility was$716.4 million and our total availability of$728.8 million , based on collateral levels as defined by the agreement, was reduced by$12.4 million of other credit-related instruments. As ofAugust 29, 2021 , we had cash and cash equivalents totaling approximately$1.4 billion and short-term investments of$95.5 million resulting in a total liquidity position (unused availability and cash and cash equivalents and short-term investments) of approximately$2.2 billion . Cash uses Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our equity incentive plans and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements. OnSeptember 21, 2021 , we completed the acquisition of Beyond Yoga for$403 million , funded entirely by cash on hand. We believe that this acquisition will allow us to enter into the activewear category, complementing our growing women's business and enabling us to allocate global resources and infrastructure to significantly expand Beyond Yoga, building on its largely digital ecosystem. OnSeptember 30, 2021 , we used cash on hand to redeem the remaining$200.0 million of the 5.00% Senior Notes due 2025. InOctober 2021 , the Board declared a cash dividend of$0.08 per share, to holders of record of its Class A and Class B common stock at the close of business onOctober 29, 2021 , for a total quarterly dividend of approximately$32 million . 41 -------------------------------------------------------------------------------- Table of Contents Cash flows The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows: Nine Months Ended August 29, August 23, 2021 2020 (Dollars in millions) Cash provided by operating activities$ 498.9 $
240.9
Cash used for investing activities (127.7)
(117.7)
Cash (used for) provided by financing activities (489.6) 302.5 Cash and cash equivalents at period end
1,376.6 1,353.0
Cash flows from operating activities Cash provided by operating activities was$498.9 million for the nine-month period endedAugust 29, 2021 , as compared to$240.9 million for the comparable period in 2020. Our cash flows from operations in the fiscal year 2020 were impacted by the widespread temporary store closures and other business disruptions caused by the COVID-19 pandemic. The increase in cash provided by operating activities is primarily driven by higher collections of trade receivables, partially offset by higher spending on inventory and SG&A expenses, reflective of the increase in sales in comparison to the same period in prior year. Cash flows from investing activities Cash used for investing activities was$127.7 million for the nine-month period endedAugust 29, 2021 , as compared to$117.7 million for the comparable period in 2020. The increase in cash used for investing activities is primarily due capital expenditures and higher payments to acquire short-term investments, partially offset by lower payments related to a business acquisition that occurred in the prior year. Cash flows from financing activities Cash used by financing activities was$489.6 million for the nine-month period endedAugust 29, 2021 , as compared to cash provided of$302.5 million for the comparable period in 2020. Cash used in 2021 primarily reflects redemption of$800.0 million senior notes due 2025, partially offset by proceeds from issuance of new senior notes of$500.0 million . Cash provided in 2020 primarily reflects proceeds from senior notes of$502.5 million , partially offset by payments of$56.2 million for common stock repurchases. Indebtedness Of our total debt of$1.3 billion as ofAugust 29, 2021 , 100% of it was fixed rate debt, net of capitalized debt issuance costs. As ofAugust 29, 2021 , our required aggregate debt principal payments on our unsecured long-term debt were$1.3 billion , with payments starting in 2025. Short-term borrowings of$7.5 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 ofAugust 29, 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, nine-month and twelve-month periods endedAugust 29, 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. •Adjusted gross margin, as Adjusted gross profit as a percentage of net revenues; •Adjusted SG&A, as SG&A less charges related to changes in fair value on cash-settled stock-based compensation, COVID-19 related charges, and restructuring related charges, severance and other, net; •Adjusted EBIT, as net income (loss) excluding income tax expense (benefit), interest expense, other (income) expense, net, loss on early extinguishment of debt, impact of changes in fair value on cash-settled stock-based 42 -------------------------------------------------------------------------------- Table of Contents 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 (loss) 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 restructuring related charges, severance and other, net, adjusted to give effect to the income tax impact of such adjustments, using an effective tax rate equal to our year to date income tax expense divided by our year to date income before income taxes, each as reflected in our statement of operations for the relevant period with any impacts of changes in effective tax rate being recognized in the current three-month period; •Adjusted net income 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 (income) expense, net, which includes 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 •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. 43 -------------------------------------------------------------------------------- Table of Contents 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 Nine Months Ended August 29, August 23, August 29, August 23, 2021 2020 2021 2020 (Dollars in millions) (Unaudited)
Most comparable GAAP measure:
Gross profit$ 862.2 $ 577.4 $ 2,372.4 $ 1,586.4 Non-GAAP measure: Gross profit$ 862.2 $ 577.4 $ 2,372.4 $ 1,586.4 COVID-19 related inventory costs (1) (0.7) (7.9) (15.1) 78.7 Adjusted gross profit$ 861.5 $ 569.5 $ 2,357.3 $ 1,665.1 Adjusted gross margin 57.5 % 53.6 % 57.8 % 54.3 % _____________ (1)For the three-month and nine-month periods endedAugust 29, 2021 , the reductions in COVID-19 related inventory charges is primarily related to reductions in our estimate of adverse fabric purchase commitments, initially recorded in the second quarter of 2020. For the three-month period endedAugust 23, 2020 , COVID-19 related inventory charges includes$7.9 million in reductions in COVID-19 related inventory charges, primarily due to reductions in our estimate of adverse fabric purchase commitments, initially recorded in the second quarter of 2020. During the nine-month period endedAugust 23, 2020 , the charges include$48.1 million of incremental inventory reserves and$29.8 million of adverse fabric purchase commitments. Adjusted SG&A: The following table presents a reconciliation of SG&A, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted SG&A for each of the periods presented. Three Months Ended Nine Months Ended August 29, August 23, August 29, August 23, 2021 2020 2021 2020 (Dollars in millions)
(Unaudited)
Most comparable GAAP measure: Selling, general and administrative expenses$ 649.5 $
484.0
Non-GAAP measure: Selling, general and administrative expenses$ 649.5 $ 484.0 $ 1,861.4 $ 1,695.1 Impact of changes in fair value on cash-settled stock-based compensation (0.9) (1.8) (3.4) (6.0) COVID-19 related charges(1) (5.7) 4.1 1.2 (83.9) Restructuring related charges, severance and other, net(2) (3.2) (1.1) (12.3) (7.8) Adjusted SG&A$ 639.7 $ 485.2 $ 1,846.9 $ 1,597.4 _____________ (1)For the three-month period endedAugust 29, 2021 , the COVID-19 related charges primarily include impairment charges of certain retail store related assets. For the nine-month period endedAugust 29, 2021 the COVID-19 related charges primarily include reductions in allowances related to customer receivables partially offset with impairment charges of certain retail store related assets. For the three-month period endedAugust 23, 2020 , the COVID-19 related charges include a net reduction of$4.1 million primarily related to recoveries of receivables previously estimated to be not collectible, offset by incremental costs incurred in response to the global pandemic. For the nine-month period endedAugust 23, 2020 , the COVID-19 related charges primarily include$43.0 million in impairment of certain operating lease right-of-use assets and$17.4 million in impairment of property and equipment related to certain retail locations and other corporate assets, and$21.0 million of charges related to customer receivables. (2)Other charges included in restructuring related charges, severance and other, net include charges related to an international customs audit, transaction and deal related costs, acquisition and integration costs and amortization of acquired intangible assets. 44 -------------------------------------------------------------------------------- Table of Contents Adjusted EBIT and Adjusted EBITDA: The following table presents a reconciliation of net income (loss), the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented. Three Months Ended Nine Months Ended Twelve Months Ended August 29, August 23, August 29, August 23, August 29, August 23, 2021 2020 2021 2020 2021 2020 (Dollars in millions) (Unaudited) Most comparable GAAP measure: Net income (loss)$ 193.3 $ 27.0 $ 400.6 $ (183.8) $ 457.3 $ (88.0) Non-GAAP measure: Net income (loss)$ 193.3 $ 27.0 $ 400.6 $ (183.8) $ 457.3 $ (88.0) Income tax expense (benefit) 9.7 24.6 12.8 (57.9) 8.1 (35.5) Interest expense 18.1 28.4 61.4 56.3 87.3 74.5 Other (income) expense, net (4.8) 12.3 (5.2) 8.3 8.9
3.5
Loss on early extinguishment of debt - - 30.3 - 30.3 - Impact of changes in fair value on cash-settled stock-based compensation(1) 0.9 1.8 3.4 6.0 4.5
14.7
COVID-19 related inventory costs and other charges (2) 5.0 (12.0) (16.3) 162.6 (19.3)
162.6
Restructuring and restructuring related charges, severance and other, net(3) (0.4) 2.1 23.4 76.2 46.7 82.2 Adjusted EBIT$ 221.8 $ 84.2 $ 510.4 $ 67.7 $ 623.8 $ 214.0 Depreciation and amortization(4) 35.5 32.6 105.2 101.0 140.8 134.6 Adjusted EBITDA$ 257.3 $ 116.8 $ 615.6 $ 168.7 $ 764.6 $ 348.6 Adjusted EBIT margin 14.8 % 7.9 % 12.5 % 2.2 % _____________ (1)Includes the impact of changes in fair value of Class B common stock following the grant date on awards that were granted as cash-settled and subsequently replaced with stock-settled awards concurrent with the IPO. (2)For the three-month period endedAugust 29, 2021 , the COVID-19 related inventory costs and other charges recognized mainly represents impairment charges of certain retail store related assets. For the nine-month period endedAugust 29, 2021 , the net reduction 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 and allowances related to customer receivables partially offset with impairment charges of certain retail store related assets. For the three-month period endedAugust 23, 2020 , the COVID-19 related inventory costs and other charges primarily include$12.0 million of reductions in COVID-19 related inventory charges, as a result of reductions in our estimate of adverse fabric purchase commitments, the recoveries of receivables previously estimated to be not collectible, offset by incremental costs incurred in response to the global pandemic. For the nine-month period endedAugust 23, 2020 , the COVID-19 related inventory costs and other charges primarily include$48.1 million of incremental inventory reserves,$29.8 million of adverse fabric purchase commitments,$43.0 million and$17.4 million in impairment of operating lease right-of-use assets and property and equipment related, respectively, and$21.0 million of charges related to customer receivables. (3)Other charges included in restructuring and restructuring related charges, severance and other, net include charges related to an international customs audit, transaction and deal related costs, 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. 45 -------------------------------------------------------------------------------- Table of Contents 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 Nine Months Ended August 29, August 23, August 29, August 23, 2021 2020 2021 2020
(Dollars in millions, except per share amounts)
(Unaudited)
Most comparable GAAP measure:
Net income (loss) $ 193.3 $ 27.0 $ 400.6 $ (183.8)
Non-GAAP measure:
Net income (loss) $ 193.3 $ 27.0 $ 400.6 $ (183.8)
Impact of changes in fair value on cash-settled
stock-based compensation(1) 0.9 1.8 3.4 6.0
Loss on early extinguishment of debt - - 30.3 -
COVID-19 related inventory costs and other charges(2) 5.0
(12.0) (16.3) 162.6
Restructuring and restructuring related charges,
severance and other, net(3) (0.4) 2.1 23.4 76.2
Tax impact of adjustments (1.4) 12.4 (10.2) (58.7)
Adjusted net income $ 197.4 $ 31.3 $ 431.2 $ 2.3
Adjusted net income margin 13.2 % 2.9 % 10.6 % 0.1 %
Adjusted diluted earnings per share $ 0.48 _____________
(1)Includes the impact of changes in fair value of Class B common stock following the grant date on awards that were granted as cash-settled and subsequently replaced with stock-settled awards concurrent with the IPO. (2)For the three-month period endedAugust 29, 2021 , the COVID-19 related inventory costs and other charges recognized mainly represents impairment charges of certain retail store related assets. For the nine-month period endedAugust 29, 2021 , the net reduction 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 and allowances related to customer receivables partially offset with impairment charges of certain retail store related assets. For the three-month period endedAugust 23, 2020 , the COVID-19 related inventory costs and other charges primarily include$12.0 million reductions in COVID-19 related inventory charges, as a result of reductions in our estimate of adverse fabric purchase commitments, the recoveries of receivables previously estimated to be not collectible, offset by incremental costs incurred in response to the global pandemic. For the nine-month period endedAugust 23, 2020 , the COVID-19 related inventory costs and other charges primarily include$48.1 million of incremental inventory reserves,$29.8 million of adverse fabric purchase commitments,$43.0 million and$17.4 million in impairment of operating lease right-of-use assets and property and equipment related, respectively, and$21.0 million of charges related to customer receivables. (3)Other charges included in restructuring and restructuring related charges, severance and other, net include charges related to an international customs audit, transaction and deal related costs, acquisition and integration costs and amortization of acquired intangible assets. 46 -------------------------------------------------------------------------------- Table of Contents 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.August 29 ,November 29, 2021 2020 (Dollars in millions) (Unaudited)
Most comparable GAAP measure:
Total debt, excluding capital leases $ 1,250.8 $ 1,564.3
Non-GAAP measure:
Total debt, excluding capital leases $ 1,250.8 $ 1,564.3
Cash and cash equivalents (1,376.6) (1,497.2)
Short-term investments in marketable securities (95.5) (96.5)
Net debt $ (221.3) $ (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.
August 29, August 23,
2021 2020
(Dollars in millions)
(Unaudited)
Total debt, excluding capital leases
1.6 4.5
_____________
(1)Last Twelve Months Adjusted EBITDA is reconciled from net income (loss) which
is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA
table for more information.
47
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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 Nine Months Ended
August 29, August 23, August 29, August 23,
2021 2020 2021 2020
(Dollars in millions) (Dollars in millions)
(Unaudited) (Unaudited)
Most comparable GAAP measure:
Net cash provided by operating activities $ 250.9 $ 199.5 $ 498.9 $ 240.9
Net cash used for investing activities (57.3) (10.1) (127.7) (117.7)
Net cash (used for) provided by financing
activities (36.5) (287.1) (489.6) $ 302.5
Non-GAAP measure:
Net cash provided by operating activities $ 250.9 $ 199.5 $ 498.9 $ 240.9
Purchases of property, plant and equipment (40.9) (14.3) (108.4) (89.5)
(Payments) proceeds on settlement of forward
foreign exchange contracts not designated for
hedge accounting (14.2) 2.5 (18.5) 17.6
Repurchase of common stock - - - (56.2)
Repurchase of shares surrendered for tax
withholdings on equity awards (3.3) (4.3) (79.7) (79.9)
Dividend to stockholders (32.2) - (72.3) (63.6)
Adjusted free cash flow $ 160.3 $ 183.4 $ 220.0 $ (30.7)
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
48
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considered in isolation or as a substitute for comparable measures prepared in
accordance with GAAP. Constant-currency results have no standardized meaning
prescribed by GAAP, are not prepared under any comprehensive set of accounting
rules or principles and should be read in conjunction with our consolidated
financial statements prepared in accordance with GAAP. Constant-currency results
have limitations in their usefulness to investors and may be calculated
differently from, and therefore may not be directly comparable to, similarly
titled measures used by other companies.
We calculate constant-currency amounts by translating local currency amounts in
the prior-year period at actual foreign exchange rates for the current period.
Our constant-currency results do not eliminate the transaction currency impact,
which primarily include the realized and unrealized gains and losses recognized
from the measurement and remeasurement of purchases and sales of products in a
currency other than the functional currency. Additionally, gross margin and
Adjusted gross margin are impacted by gains and losses related to the
procurement of inventory, primarily products sourced in Euros and U.S. dollars,
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 and nine-month periods ended August 29, 2021 :
Three Months Ended Nine Months Ended
% %
August 29, August 23, Increase August 29, August 23, Increase
2021 2020 (Decrease) 2021 2020 (Decrease)
(Dollars in millions)
(Unaudited)
Total net revenues
As reported $ 1,497.6 $ 1,063.1 40.9 % $ 4,079.2 $ 3,066.8 33.0 %
Impact of foreign currency exchange
rates - 21.8 * - 81.2 *
Constant-currency net revenues
38.0 %$ 4,079.2 $ 3,148.0 29.6 % Americas As reported$ 838.0 $ 549.8 52.4 %$ 2,194.3 $ 1,578.1 39.0 % Impact of foreign currency exchange rates - 6.7 * - 4.8
*
Constant-currency net revenues - Americas$ 838.0 $ 556.5 50.6 %$ 2,194.3 $ 1,582.9 38.6 % Europe As reported$ 494.5 $ 390.4 26.7 %$ 1,288.9 $ 1,032.4 24.8 % Impact of foreign currency exchange rates - 10.1 * - 58.0
*
Constant-currency net revenues -
23.5 %$ 1,288.9 $ 1,090.4 18.2 % Asia As reported$ 165.1 $ 122.9 34.3 %$ 596.0 $ 456.3 30.6 % Impact of foreign currency exchange rates - 5.0 * - 18.4
*
Constant-currency net revenues -
29.1 %$ 596.0 $ 474.7 25.6 % _____________ * Not meaningful 49
-------------------------------------------------------------------------------- Table of Contents Constant-Currency Adjusted EBIT: The table below sets forth the calculation of Adjusted EBIT on a constant-currency basis for comparison period applicable to the three-month and nine-month periods endedAugust 29, 2021 . Three Months Ended Nine Months Ended % % August 29, August 23, Increase August 29, August 23, Increase 2021 2020 (Decrease) 2021 2020 (Decrease) (Dollars in millions) (Unaudited) Adjusted EBIT(1)$ 221.8 $ 84.2 163.4 %$ 510.4 $ 67.7 * Impact of foreign currency exchange rates - 1.8 * - 2.4
*
Constant-currency Adjusted EBIT
157.9 %$ 510.4 $ 70.1
*
Constant-currency Adjusted EBIT margin(2) 14.8 % 7.9 % 12.5 % 2.2 % _____________ (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 and nine-month periods endedAugust 29, 2021 . Three Months Ended Nine Months Ended % % August 29, August 23, Increase August 29, August 23, Increase 2021 2020 (Decrease) 2021 2020 (Decrease)
(Dollars in millions, except per share amounts)
(Unaudited)
Adjusted net income (1) $ 197.4 $ 31.3 * $ 431.2 $ 2.3 *
Impact of foreign currency exchange rates - (0.3) * - 3.0
*
Constant-currency Adjusted net income
*$ 431.2 $ 5.3
*
Constant-currency Adjusted net income margin(2) 13.2 % 2.9 % 10.6 % 0.2 %
Adjusted diluted earnings per share
*$ 1.05 $ 0.01
*
Impact of foreign currency exchange rates - - * - -
*
Constant-currency Adjusted diluted earnings per share$ 0.48 $ 0.08 *$ 1.05 $ 0.01 * _____________ (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 50 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations As ofAugust 29, 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 and redemption of$800.0 million of the 5.00% Senior Notes due 2025. 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. 51 -------------------------------------------------------------------------------- Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Quarterly Report, including (without limitation) statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including debt reduction, currency values and financial impact, foreign exchange counterparty exposures, the impact of pending legal proceedings, adequate liquidity levels, dividends and/or statements preceded by, followed by or that include the words "believe", "will", "so we can", "when", "anticipate", "intend", "estimate", "expect", "project", "could", "plans", "seeks" and similar expressions. These forward-looking statements speak only as of the date stated, and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under "Risk Factors" in Part II, Item 1A on this Quarterly Report and in our other filings with theSecurities and Exchange Commission , could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation: •changes in general economic and financial conditions, and the resulting impact on the level of discretionary consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes; •the potential duration and impact of COVID-19 on our projected customer demand, store closures, supply chain and our business, 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 changingU.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences; •our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets; •our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; •the extent to which wholesale customer forward demand signals result in actual sales; •consequences of foreign currency exchange and interest rate fluctuations; 52 -------------------------------------------------------------------------------- Table of Contents •our ability to successfully prevent or mitigate the impacts of data security breaches; •our ability to attract and retain key executives and other key employees; •our ability to achieve our diversity, equity and inclusion, ESG and sustainability and climate change 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; •future acquisitions of or investments in new businesses, including the Beyond Yoga acquisition; •the process and risks relating to the implementation of a new enterprise resource planning (ERP) system; •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. 53
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