Levi Strauss & Co. announced financial results for the second quarter ended May 30, 2010, and filed its second-quarter 2010 results on Form 10-Q with the Securities and Exchange Commission.
Second-quarter net revenues increased 8 percent compared to last year due to the continued worldwide growth of the Levi’s brand. Net revenues benefited from business acquisitions made during 2009 and ongoing retail expansion, partially offset by revenue declines in the wholesale channel in certain markets. Excluding the effect of currency, net revenues improved 5 percent.
Operating income improved from $56 million to $69 million through the positive effect of currency translation during the quarter. Below operating income, the company recorded financing costs and the non-cash write-down of deferred tax assets in the second quarter of 2010, partially offset by foreign currency gains during the quarter as compared to losses in the prior year. As a result, the net loss attributable to the company was higher as compared to last year. Due to first-quarter results, net income attributable to the company for the first six months of the year is consistent with the same period last year.
The company maintained a strong liquidity position during the second quarter. At May 30, 2010, cash and cash equivalents were $353 million and $180 million was available under its revolving credit facility.
“We had another good quarter, which gives us solid revenue growth and operating income for the first six months of the year,” said John Anderson, president and chief executive officer. “We are seeing the benefit of our investments in the business over recent years. The Levi’s brand is performing well, and consumers are responding to our more innovative products.”
Second-Quarter 2010 Highlights
• Gross profit in the second quarter increased to $499 million compared with $415 million for the same period in 2009. The increase in gross profit was driven by higher gross margins and the effects of currency. Gross margin for the second quarter increased to 51 percent of revenues compared with 46 percent of revenues in the same quarter of 2009. The gross margin improvement reflected increased contribution from company-operated retail stores, which typically generate a higher gross margin than the wholesale business.
• Selling, general and administrative (SG&A) expenses for the second quarter increased to $430 million from $359 million in the same period of 2009. Higher SG&A was primarily due to additional selling expenses related to the expansion of the company-operated retail network, higher advertising and promotion expense as the company increased support for its Levi’s and Dockers brands, and higher administration expenses associated with pension and postretirement benefit plans.
• Operating income for the second quarter was $69 million compared with $56 million for the same period of 2009. The 23 percent increase primarily reflects the favorable impact of currency as the higher gross margins were offset by higher SG&A expenses.
• In May 2010, the company offered €300 million aggregate principal amount of 7.75% Senior Notes due 2018 and $525 million aggregate principal amount of 7.625% Senior Notes due 2020. Net proceeds were used to retire the outstanding 9.75% Senior Notes due 2015 and 8.625% Senior Notes due 2013. Additionally, the company repurchased ¥10.9 billion aggregate principal amount of 4.25% Yen-denominated Eurobonds due November 22, 2016, for total consideration of $100 million.
Regional Overview
• Higher net revenues in the Americas were primarily due to the contribution of the outlet stores acquired in 2009 and strong Levi’s brand performance in men’s, juniors’ and boys’ products in the wholesale channel. These improvements were partially offset by lower Signature and U.S. Dockers brand sales.
• Net revenues in Europe benefited from the impact of the acquisition of the footwear and accessories business during 2009 and expansion of the company-operated retail network across the region. Revenue gains were partially offset by lower sales in the wholesale channel, reflecting the continued difficult retail environment across the region.
• Net revenues in Asia Pacific increased on a reported basis and decreased on a constant currency basis. Growth in the company’s developing markets in the region – driven by brand-dedicated retail store expansion – was more than offset by lower revenue performance in Japan.
The company ended the second quarter with cash and cash equivalents of $353 million, an increase of $82 million from November 29, 2009. Cash provided by operating activities was $146 million, compared with $159 million for the same period in 2009. Net debt was $1.46 billion at the end of the quarter, down from $1.58 billion at the end of 2009.
“We delivered solid operating results in the second quarter of 2010,” said Blake Jorgensen, chief financial officer. “Our cash flow is strong and we continued to build our liquidity position during the quarter. We also successfully completed the refinancing of our 2013 and 2015 debt maturities, as well as a portion of our 2016 Yen Eurobonds, extending our debt maturities and enabling us to focus on driving our growth strategies. As we continue to invest in the business, we remain focused on controlling costs and managing inventories.”
