Levi Strauss & Co. Reports First-Quarter 2021 Financial Results
Reported Net Revenues of $1.3 Billion were down 13 percent
Diluted EPS was $0.35; Adjusted Diluted EPS was $0.34
Operating margin was 14 percent; Adjusted EBIT margin was 13 percent
Company raises second quarter dividend to $0.06 per share and raises first half outlook
SAN FRANCISCO--(BUSINESS WIRE)-- Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the first quarter ended February 28, 2021. Due to the company’s fiscal quarter end, the impacts of the pandemic were not material to the company's results of operations for the first quarter of 2020.
First-Quarter 2021 Results
Net revenues of $1,306 million declined 13 percent on a reported and 16 percent on a constant-currency basis compared to the same period in the prior year. The decrease was primarily due to the impacts of the COVID-19 pandemic, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter in certain markets. Additionally, the first quarter of fiscal 2021 did not include the benefit of a Black Friday, as compared to the first quarter of fiscal 2020, which adversely impacted the year-over-year net revenues comparison by approximately three percentage points.
The company’s global digital net revenues, which include net revenues attributable to the company's e-commerce sites as well as the online business of its pure-play and traditional wholesale customers, grew approximately 41 percent compared to the same period in the prior year, and comprised approximately 26 percent of first-quarter 2021 net revenues, up from approximately 16 percent in the first quarter of the prior year. Within digital, net revenues from the company's e-commerce sites were 10 percent of first-quarter 2021 total company net revenues, up from 7 percent in the prior year.
Reported gross margin increased 250 basis points to 58.2 percent, a record high for the company. Adjusted gross margin increased 200 basis points to 57.7 percent versus the year-ago quarter primarily due to better mix within wholesale, price increases, and lower promotions.
Selling, general and administrative (SG&A) expenses of $583 million were around 2019 levels, a 12 percent decline compared to first quarter of 2020; the $78 million decline reflected the company's cost-savings actions, net of continuing to invest in its omni-channel, A.I. and digitization initiatives.
The company recorded net income for the quarter of $143 million and Adjusted net income of $140 million, as compared to $153 million and $162 million, respectively, in the first quarter of the prior year. The decline is primarily attributable to the adverse revenue impact of COVID-19, as well as higher interest expense, reflecting the company’s additional borrowing in the prior year to enhance its liquidity position. Interest expense will decline in future quarters as the company issued $500 million of 3.5% coupon U.S. dollar bonds and used the proceeds and cash on hand to repay $800 million of its 5% coupon bonds in March 2021.
Adjusted EBIT was $174 million, and Adjusted EBIT margin was 13 percent, 70 basis points higher than the first quarter of 2020 on a reported basis, and 30 basis points higher than the first quarter of 2020 on a constant-currency basis.
Diluted EPS was 35 cents and Adjusted diluted EPS was 34 cents.
Total inventories, net of reserves, at quarter end decreased two percent compared to a year prior.
Total available liquidity of $2.8 billion; cash and cash equivalents at quarter end were $2 billion.
“We've started the year strong, beating our internal expectations even as we are lapping a particularly good quarter in the prior year," said Chip Bergh, chief executive officer of Levi Strauss & Co. "Our strong results this quarter were driven by faster-than-expected recovery in our business from our relentless focus on the priorities that are driving outsized performance. We continue to lean into our strategies – leading with our brands, investing in direct-to-consumer and diversifying our business – while still operating prudently to manage the ongoing uncertainty, especially in Europe. As the vaccine rollout continues and consumer excitement returns, I am more confident than ever that we will emerge from the pandemic a stronger business and drive sustainable, profitable growth.”
“We are very pleased to have exceeded our revenue, margins and EPS expectations during the quarter,” said Harmit Singh, chief financial officer of Levi Strauss & Co. “We are banking the outperformance and our outlook going forward has improved based on the strong demand signals we are seeing in the marketplace. We're delivering substantial gross margin expansion while holding our cost base in-line with 2019 and investing to accelerate growth. This gives me confidence we'll achieve our Adjusted EBIT margin objective of 12 percent-plus once revenues have returned to pre-pandemic levels. This, combined with the increase in our dividend, reflects our commitment to driving value for our shareholders over the long term.”
First-Quarter Total Company Overview
*Note: per share increase (decrease) compared to prior year displayed in cents
Net revenues declined 13 percent on a reported basis, and 16 percent on a constant-currency basis. The decrease was primarily due to the impacts of the COVID-19 pandemic, including reduced traffic and ongoing closures of company-operated and third-party retail locations for portions of the quarter and in certain markets. Wholesale net revenues declined 4 percent, a significant sequential improvement from the fourth quarter of fiscal 2020, reflecting strong performance in the company’s global digital business. Direct-to-consumer net revenues declined 26 percent; the decline in first quarter direct-to-consumer net revenues was driven by lower traffic to brick-and-mortar stores due to the pandemic, particularly in tourist locations, which comprise a substantial portion of the company’s brick and mortar network. The brick and mortar decline was partially offset by 25 percent growth in company operated e-commerce business, including the benefit of accelerating omni-channel initiatives. Direct-to-consumer stores and e-commerce comprised 26 percent and ten percent, respectively, of total company reported net revenues in the first quarter. The lack of a Black Friday in the current year adversely impacted the year-over-year direct-to-consumer net revenues growth comparison by about five percentage points, and total company net revenues comparison by three percentage points.
Gross profit was $760 million, as compared to $839 million in the same quarter in the prior year. Gross margin was 58.2 percent of net revenues, up from 55.7 percent in the same quarter of the prior year. The increase in gross margin was primarily due to favorable product mix, price increases, lower promotions and $7.2 million reduction in estimated COVID-19 related inventory charges, largely for adverse fabric purchase commitments, partially offset by a lower proportion of sales in the company's direct-to-consumer channel, which has higher margins.
Adjusted gross margin, which excludes the COVID-19 related charges, was 57.7 percent, an increase of 200 basis points compared to prior year, primarily due to favorable product mix, price increases and lower promotions, partially offset by a lower proportion of sales in the company's direct-to-consumer channel, which has higher margins. Favorable currency exchange rates benefited year-over-year comparisons by approximately 70 basis-points.
SG&A expenses were $583 million, a 12 percent decline compared to $661 million in the same quarter in the prior year, reflecting the company’s cost-savings actions, net of continuing to invest in its omni-channel, A.I. and digitization initiatives.
Operating income of $177 million declined 1% as compared to $179 million in the same quarter in the prior year, as lower net revenues as a result of the continued adverse impact of COVID-19 were offset by higher gross margins and lower SG&A expenses reflecting the company’s cost-reduction initiatives.
Net income was $143 million as compared to net income of $153 million in the same quarter of the prior year, due to higher interest expense.
Adjusted EBIT of $174 million declined eight percent as compared to $189 million in the same quarter of the prior year. First quarter Adjusted EBIT margin was 13 percent, despite the adverse revenue impact of COVID-19, due to the company’s higher gross margin and cost-reduction initiatives.
Adjusted net income was $140 million as compared to Adjusted net income of $162 million in the same quarter of the prior year, due to the decline in Adjusted EBIT and higher interest expense.
Adjusted diluted earnings per share declined to $0.34 compared to $0.40 for the same prior-year period in-line with the Adjusted net income decline.
Additional information regarding Adjusted gross margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, and Adjusted diluted earnings per share, as well as amounts presented on a constant-currency basis, all of which are non-GAAP financial measures, is provided at the end of this press release.
First-Quarter Regional Overview
Reported regional net revenues and operating income for the quarter are set forth in the table below:
In the Americas, net revenues declined 14 percent on a reported basis. The region's direct-to-consumer net revenues declined 29 percent and wholesale net revenues declined 5 percent as a result of the continued adverse impact of COVID-19. The decrease in net revenues was partially offset by 15 percent growth in company operated e-commerce business, including the benefit of accelerating omni-channel initiatives, as well as growth of U.S. wholesale driven by strength in the Levi’s and Signature brands. The lack of a Black Friday benefit in the current year adversely impacted the year-over-year direct-to-consumer net revenues growth comparison by about eight percentage points and the total region’s net revenues growth comparison by about four percentage points.
Operating income for the Americas increased due to higher gross margins and lower SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19 partially offset by lower net revenues as the COVID-19 pandemic continued to adversely impact the region during the quarter.
In Europe, net revenues declined 16 percent on a reported basis and 22 percent on a constant-currency basis driven by COVID-19 store closures. During the quarter, approximately one-third of the region’s stores were closed, primarily concentrated in higher volume markets. Sales were strong in markets with fewer closure restrictions, reflecting consumer demand and strength of the brand. The company’s e-commerce business and broader digital footprint experienced strong growth during the quarter of 35 percent and 73 percent respectively. The lack of a Black Friday benefit in the current year adversely impacted the year-over-year direct-to-consumer net revenues growth comparison by about three percentage points and the year-over-year total region’s net revenues growth comparison by about two percentage points.
Europe's operating income declined primarily due to the adverse revenue impacts of COVID-19, partially offset by higher gross margins and declines in SG&A expenses driven by lower variable expenses from lower brick-and-mortar sales as well as the company’s cost reduction initiatives in response to COVID-19.
In Asia, net revenues declined five percent on a reported basis and eight percent on a constant-currency basis. The first-quarter decrease in net revenues was due to the impacts of COVID-19 across channels and markets, partially offset by e-commerce and the region's broader digital footprint, which experienced strong growth during the quarter of 54 percent and 68 percent respectively. China grew 30 percent to prior year with growth across all channels.
Operating income for Asia declined primarily due to the adverse revenue impacts of COVID-19, partially offset by higher gross margins and declines in SG&A expenses driven by the company’s cost reduction initiatives in response to COVID-19.
Cash Flow and Balance Sheet
Cash and cash equivalents at the end of the first quarter of 2021 of $2.0 billion and short-term investments of $94 million were complemented by $689 million available under the company's revolving credit facility, resulting in a total liquidity position of approximately $2.8 billion.
Net debt at the end of the first quarter of 2021 was $(8) million. The company’s leverage ratio was 6.8 at the end of the first quarter of 2021, as compared to 1.4 at the end of the first quarter of 2020, due to the increase in gross debt and adverse impact of COVID-19 on the company’s Adjusted EBIT during the prior twelve months. The company issued $500 million of 3.5% coupon U.S. dollar bonds in February and used the proceeds and cash on hand to repay $800 million of its 5% coupon bonds in March 2021.
Cash from operations for the first three months of 2021 decreased to $69 million compared to $198 million for the first three months of 2020. The decrease in cash provided by operating activities is primarily driven by lower sales in comparison to the same period of last year, partially offset by lower spending on inventory and employee incentives.
Adjusted free cash flow for the first three months of 2021 was $(9) million, a decline of $6 million compared to the first three months of 2020, primarily reflecting lower cash from operations, which was partially offset by lower repurchases of common stock, lower dividends and lower tax withholding on equity awards.
Total inventories were down 2 percent compared to the end of the corresponding prior-year period, despite the sales decline of 13 percent.
The company declared and paid a dividend of $0.04 per share in the first quarter totaling approximately $16 million. In April 2021, the company increased the dividend to $0.06 per share for the second quarter totaling approximately $24 million. The dividend will be payable in cash on or after May 25, 2021, to the holders of record of Class A common stock and Class B common stock at the close of business on May 7, 2021. The company will reassess dividend payments for future quarters as circumstances evolve.
Additional information regarding net debt, leverage ratio, and Adjusted free cash flow, all of which are non-GAAP financial measures, is provided at the end of this press release.
Author: Levi Strauss & Co
Original article: https://investors.levistrauss.com/news/financial-news/news-details/2021/Levi-Strauss--Co.-Reports-First-Quarter-2021-Financial-Results/default.aspx
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