Levi Strauss & Co. Reports Second Quarter 2018 Financial Results and Raises Full-Year Guidance

July 10, 2018

SAN FRANCISCO--(BUSINESS WIRE)--Jul 10, 2018--Levi Strauss & Co. (LS&Co.) today announced financial results for the second quarter ended May 27, 2018.

“We delivered our third consecutive quarter of double-digit revenue growth, driven by the disciplined execution of our strategies and our more diversified portfolio,” said Chip Bergh, president and chief executive officer, Levi Strauss & Co. “These results have outpaced the industry and exceeded even our own expectations, and as a result, we are raising our full-year revenue guidance.”

Highlights include:

Net revenues grew 17 percent on a reported basis and 13 percent excluding $35 million in favorable currency translation effects, driven by broad-based Levi’s® brand growth in all regions and channels. On a reported basis, direct-to-consumer revenues grew 19 percent on performance and expansion of the retail network, as well as ecommerce growth. The company had 53 more company-operated stores at the end of the second quarter of 2018 than it did a year prior. Wholesale reported revenues grew 14 percent reflecting higher revenues in all regions.

Net income increased $59 million primarily reflecting gains on the company’s hedging contracts in the second quarter of 2018 as compared with losses on hedging contracts and a debt refinancing charge in the second quarter of 2017.

Adjusted EBIT grew 15 percent reflecting the revenue growth and higher gross margins, partially offset by higher SG&A. Reconciliations of Adjusted EBIT are provided at the end of this press release.

Second Quarter 2018 Highlights

On a reported basis, gross margin for the second quarter was 53.9 percent of revenues compared with 52.3 percent in the same quarter of fiscal 2017, reflecting the margin benefit from revenue growth in the direct-to-consumer channel and international business, a favorable transactional impact of currency and lower product sourcing costs. Selling, general and administrative expenses (SG&A) were $594 million compared with $496 million in the same quarter of fiscal 2017. SG&A as a percent of revenue grew 130 basis-points compared to the same quarter of fiscal 2017 primarily reflecting higher selling, incentive compensation and advertising expenses. Operating income of $77 million was up 22 percent for the second quarter compared to the same quarter of fiscal 2017 reflecting the revenue growth and higher gross margins, partially offset by higher SG&A.

Regional Overview

Reported regional net revenues and operating income for the quarter are set forth in the table below:

* Note: Regional operating income is equal to regional adjusted EBIT.

In the Americas, excluding favorable currency effects of $1 million, net revenues grew 11 percent reflecting higher revenues across wholesale and direct-to-consumer channels across the region. The region’s operating income declined 5% as higher revenues were more than offset by planned increased direct-to-consumer and advertising expenses this quarter. In Europe, excluding favorable currency effects of $28 million, net revenues grew 19 percent reflecting continued broad-based growth across all markets, channels, and product categories, with the strongest growth in women’s and tops. The region’s operating income grew 53% reflecting higher revenues partially offset by direct-to-consumer and advertising investments. In Asia, excluding favorable currency effects of $6 million, net revenues grew nine percent reflecting growth in direct-to-consumer channels and wholesale across the region. The region’s operating income grew 73% reflecting higher revenues and gross margins, partially offset by direct-to-consumer investments.

Cash Flow and Balance Sheet

At May 27, 2018, cash and cash equivalents of $699 million were complemented by $698 million available under the company’s revolving credit facility, resulting in a total liquidity position of approximately $1.4 billion. Net debt at the end of the second quarter was $359 million.

Cash from operations for the first half of the year was $228 million, an increase of $11 million from last year, which included a planned acceleration of pension funding of approximately $50 million. Free cash flow for the first six months of 2018 was $81 million, a decline of $19 million compared to the first six months of 2017. This was due to the increase in cash from operations being more than offset by realized losses on our hedging contracts compared to realized gains last year, higher repurchases of common stock in connection with our equity incentive program and a higher dividend payment. A reconciliation of net debt and free cash flow, non-GAAP financial measures, is provided at the end of this press release.

Investor Conference Call

The company’s second-quarter 2018 investor conference call will be available through a live audio webcast at http://engage.vevent.com/rt/levistraussao~071018 on July 10, 2018, at 1 p.m. Pacific / 4 p.m. Eastern or via the following phone numbers: 800-891-4735 in the United States and Canada, or +1-973-200-3066 internationally; I.D. No. 5288288. A replay is available the same day on http://www.levistrauss.com/investors/earnings-webcast and will be archived for one month. A telephone replay is also available through July 16, 2018, at 855-859-2056 in the United States and Canada or +1-404-537-3406 internationally; I.D. No. 5288288. Please see http://www.levistrauss.com/investors/earnings-webcast for a discussion and reconciliation of non-GAAP measures referenced on the investor conference call.

About Levi Strauss & Co.

Levi Strauss & Co. is one of the world’s largest brand-name apparel companies and a global leader in jeanswear. The company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi’s ®, Dockers ®, Signature by Levi Strauss & Co.™, and Denizen ® brands. Its products are sold in more than 110 countries worldwide through a combination of chain retailers, department stores, online sites, and a global footprint of approximately 2,900 retail stores and shop-in-shops. Levi Strauss & Co.’s reported fiscal 2017 net revenues were $4.9 billion. For more information, go to http://levistrauss.com.

Forward Looking Statement

This news release and related conference call contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to: revenue growth and currency impacts. We have based these forward-looking statements on our current assumptions, expectations and projections about future events. We use words like “believe,” “will,” “so we can,” “when,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Investors should consider the information contained in our filings with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year 2017 and our Quarterly Report on Form 10-Q for the quarter ended May 27, 2018, especially in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this news release and related conference call may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this news release and related conference call. We are not under any obligation and do not intend to update or revise any of the forward-looking statements contained in this news release and related conference call to reflect circumstances existing after the date of this news release and related conference call or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.

Non-GAAP Financial Measures

The company reports its financial results in conformity with generally accepted accounting principles in the United States (“GAAP”) and the rules of the SEC. However, management believes that certain non-GAAP financial measures, such as Free Cash Flow, Net Debt and Adjusted EBIT, provide users of the company’s financial information with additional useful information. The tables found below include Free Cash Flow, Net Debt and Adjusted EBIT and corresponding reconciliations to the most comparable GAAP financial measures. These non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the company’s financial results prepared in accordance with GAAP. Certain of these items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the company’s financial position, results of operations and cash flows and should therefore be considered in assessing the company’s actual financial condition and performance. Non-GAAP financial measures are subject to inherent limitations as they reflect the exercise of judgment by management in determining how they are formulated. Some specific limitations, include but are not limited to, the fact that such non-GAAP financial measures: (a) do not reflect cash outlays for capital expenditures, contractual commitments or liabilities including pension obligations, post-retirement health benefit obligations and income tax liabilities, (b) do not reflect changes in, or cash requirements for, working capital requirements; and (c) they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness. Additionally, the methods used by the company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies, limiting the usefulness of these measures. The company urges investors to review the reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures included in this press release, and not to rely on any single financial measure to evaluate its business.

The company presents non-GAAP financial measures, such as Free Cash Flow, Net Debt and Adjusted EBIT, because it believes they provide investors, financial analysts and the public with additional information to measure performance and evaluate the company’s ability to service its debt and may be useful for comparing its operating performance with the performance of other companies that have different financing and capital structures and tax rates. The company further believes these measures may be useful for period-over-period comparisons of underlying business trends and its ongoing operations. See “RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR THE SECOND QUARTER OF 2018” below for reconciliation to the most comparable GAAP financial measures.

Constant currency

Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. The company routinely evaluates its financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

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