Press Release:

 

LEVI STRAUSS & CO. ANNOUNCES SECOND-QUARTER 2012 FINANCIAL RESULTS

 

Net Revenue and Net Income Decline in Challenging Global Environment

 

Company Reports Improved Cash Flow and Lower Net Debt

 

SAN FRANCISCO (July 10, 2012) – Levi Strauss & Co. (LS&Co.) announced financial results today for the second quarter ended May 27, 2012.

 

The company’s second quarter results reflected a challenging global economy, the continued impact of higher-priced cotton and the negative effects of currency. Net revenues decreased 4 percent on a reported basis and 1 percent on a constant-currency basis, primarily reflecting a decline in sales in the Asia Pacific and Europe regions.

 

 

 

Second quarter net income attributable to the company was $13 million compared with $21 million in the second quarter of 2011, as a gross margin decline reflecting the higher cost of cotton was only partially offset by lower SG&A expenses.

 

Net income also reflected a debt extinguishment charge of $8 million ($6 million net of the related tax effects), as the company completed a successful refinancing of $0.4 billion of its debt, taking advantage of lower interest rates and extending its bond maturity profile.

 

“It is clear that the economic headwinds are getting stronger. While our business grew in the Americas, primarily driven by our own retail stores, Europe continues to be a challenge, and for the first time in two years our business in Asia declined,” said Chip Bergh, president and chief executive officer. “In the face of these tougher economic conditions, we are rationalizing our business, reducing operating costs and focusing our resources on the opportunities that will have the most impact in growing shareholder value.”

 

Second-Quarter 2012 Highlights

 

Gross profit in the second quarter decreased to $481 million compared with $541 million for the same period in 2011, reflecting a decline in gross margin and the negative effects of currency.

 

Gross margin for the second quarter was 46 percent of revenues compared with 49 percent of revenues in the same quarter of 2011. The decline in gross margin was primarily due to higher- priced cotton, which price increases did not fully cover; however, margin benefitted from increased revenues from the company’s retail network and a decline in sales to lower-margin channels, reflecting the company’s tighter inventory position.

 

Selling, general and administrative expenses (SG&A) for the second quarter decreased to $435 million from $476 million in the same period of 2011. The decline in SG&A was primarily driven by a reduction in advertising activities in some markets, the favorable effects of currency and lower distribution costs.

 

Operating income of $46 million declined from $65 million the prior year due to the negative effects of currency and as the decline in SG&A did not sufficiently offset the lower gross margin.

 

Regional Overview

 

Regional net revenues for the second quarter were as follows:

 

 

 

 

Net revenues increased in the Americas primarily reflecting higher revenues from the company’s Levi’s® brand retail stores and increased sales of Denizen® and Signature brand products. Levi’s® and Dockers® brand net revenues declined at wholesale, as the benefit of price increases was offset by volume declines in certain major wholesale customers and a decline in sales to lower-margin channels.

 

Net revenues in Europe decreased primarily due to a lower volume of sales to the traditional wholesale channels and to franchisee stores, reflecting the ongoing depressed retail environment, most notably in southern Europe. Net revenues of the company-operated retail network grew, reflecting improved performance of its stores.

 

Net revenues in Asia Pacific decreased as key markets, such as India and China, faced increased economic challenges. Both Levi’s® and Denizen® brand revenues declined.

 

Cash Flow and Balance Sheet

 

Cash provided by operating activities was $328 million for the first half of 2012, compared with $85 million for the same period in 2011, reflecting the company’s improved working capital utilization, particularly receivables and inventories.

 

During the second quarter of 2012, the company refinanced a portion of its debt, taking advantage of lower interest rates and extending its bond maturity dates. The company completed an offering of $385 million of 6.875 percent senior notes due in 2022 and used the net proceeds to complete a tender offer for its outstanding 8.875 percent notes and to repurchase a portion of its 4.25 percent Yen-denominated Eurobonds, both due in 2016.

 

The company paid a $20 million dividend during the second quarter of 2012. Net debt at the end of the second quarter of 2012 was $1.5 billion, compared to $1.8 billion at the end of 2011, and the company’s total liquidity position was $864 million.

 

“In the face of challenging economic conditions, we continued to improve our liquidity position and manage our working capital closely. Across the company, we are focused on improving our operations and business performance to navigate through these difficult times,” said Blake Jorgensen, chief financial officer of Levi Strauss & Co.