Levi Strauss & Co. Reports Third-Quarter 2022 Financial Results; Updates Full Year Outlook

REPORTED NET REVENUES OF $1.5B INCREASED 1%, AND 7% IN CONSTANT-CURRENCY VS. Q3 2021

DILUTED EPS WAS $0.43; ADJUSTED DILUTED EPS WAS $0.40

EXPECTS FISCAL 2022 REPORTED NET REVENUES GROWTH OF 6.7-7.0%; 11.5-12% IN CONSTANT-CURRENCY

ADJUSTED DILUTED EPS OUTLOOK OF $1.44-$1.49 INCLUDES ADDITIONAL $0.05 FX IMPACT

Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the third quarter ended August 28, 2022. The Company reported net revenues growth of 1%, or 7% on a constant-currency basis, compared to the third quarter of 2021, driven by growth in its direct-to-consumer business and increases across the U.S., Asia and Latin America. On a constant-currency basis, Levi's brand net revenues grew 6% and Dockers brand net revenues grew 13% compared to the prior year.

The continued strength of the company’s brands offset macroeconomic pressure in Europe and in the U.S., and currency headwinds globally. Continued supply chain disruption, primarily in the U.S., also resulted in estimated missed sales of approximately $30 to $40 million, or 2% to 3% of growth. Given more modest expectations for the fourth quarter, the company has reduced its financial outlook for fiscal year 2022. Despite these near-term challenges, the company believes it remains well positioned to achieve its long-term growth plan.

“Despite a more challenging environment, we delivered solid third quarter results. The Levi's brand grew 6% in constant-currency, hitting a 10- year record third quarter sales result,” said Chip Bergh, president and chief executive officer of Levi Strauss & Co. “While we expect the macroeconomic backdrop to remain unpredictable over the next few quarters, our strong brands, diversified business model and proven team position us to deliver on our long-term objectives. We have separated ourselves from the competition by making the right moves in challenging times, and this environment is no different. We will operate with discipline and lean into our strengths to further expand our lead for the years to come.”

Financial Highlights for the Third-Quarter

• Reported net revenues of $1.5 billion increased 1%, and 7% on a constant-currency basis versus Q3 2021, driven by growth in the Levi's® and Dockers® brands
• Gross margin was 56.9%; Adjusted gross margin was 56.9%, 60 basis points below Q3 2021
• Operating margin was 13.1%; Adjusted EBIT margin was 12.4%, down from 14.8% in Q3 2021
• Net income was $173 million; Adjusted net income was $161 million, compared to $197 million in Q3 2021
• Diluted EPS was $0.43; Adjusted diluted EPS was $0.40, including an adverse currency exchange impact of $0.04
• Company returned approximately $74 million in capital to shareholders

“We delivered healthy results in the third quarter, growing net revenues by 7% in constant-currency, while protecting the bottom line to deliver adjusted diluted EPS ahead of expectations,” said Harmit Singh, chief financial officer of Levi Strauss & Co. “We have taken swift and decisive action to successfully navigate the dynamic operating environment. We are controlling discretionary spending, while maintaining our commitment to invest strategically to capitalize on our long-term growth opportunities. The strength of our brands around the globe, our diversified business model and our proven operational excellence give us confidence in our ability to manage though the industry’s near-term challenges, while achieving our long-term growth and value-creation objectives.”

Highlights include:

Third-Quarter 2022 Details:

• Net revenues of $1.5 billion increased 1% on a reported basis, and 7% on a constant-currency basis which excludes $76 million in unfavorable currency impacts.

– DTC net revenues increased 2% compared to Q3 2021, or 8% on a constant-currency basis, driven by constant-currency company-operated e-commerce growth of 16%. As a percentage of third quarter company net revenues, sales from DTC stores and e-commerce comprised 29% and 6%, respectively, for a total of 35%.
– Wholesale net revenues increased 1% versus Q3 2021, and 6% on a constant-currency basis, reflecting global demand for the Levi's® brand.
– The company’s global digital net revenues grew 9% compared to the same period in the prior year and comprised approximately 21% of third quarter fiscal 2022 net revenues.

• Gross profit was $863 million compared to $862 million in the same quarter of the prior year. Gross margin was 56.9% of net revenues versus 57.6% in the prior year. Adjusted gross margin, was 56.9%, down 60 basis points compared to the same period in the prior year. Unfavorable currency exchange accounted for approximately half of the decline, while the balance reflects the impact of higher product costs and lower full-priced sales, partially offset by price increases and favorable channel mix.
• Selling, general and administrative (SG&A) expenses were $664 million compared to $646 million in the same quarter of the prior year. Adjusted SG&A was $675 million compared to $640 million in the same quarter of the prior year. As a percentage of net revenues, Adjusted SG&A was 44.5%, 180 basis points above the prior year period, reflecting higher distribution expenses and ongoing strategic investments in IT and our direct-to-consumer business.
• Operating income was $199 million compared to $216 million in the same quarter of the prior year due to the factors described above. Adjusted EBIT was$188 million compared to $222 million in the same quarter of the prior year due to lower Adjusted gross margins and higher Adjusted SG&A expenses, which were partially offset by higher net revenues. As a result, Adjusted EBIT margin was 12.4%, 240 basis points below the third quarter of 2021 on a reported basis, and 200 basis points lower on a constant-currency basis.
• Below the operating line, interest and other expenses, which include foreign exchange losses, were $13 million compared to $13 million in the prior year. The effective income tax rate was 7.2% for the third quarter, compared to 4.8% in the same quarter of the prior year. The lower effective tax rate relative to the company’s updated full year outlook for mid-teens was driven by the planned execution of certain tax related transactions.
• Net income was $173 million compared to $193 million in the same quarter of the prior year, primarily due to the decrease in operating income described above. Adjusted net income was $161 million compared to $197 million in the same quarter of the prior year. The decrease was due to the lower operating income described above.
• Diluted earnings per share was$0.43 compared to $0.47 in the same quarter of the prior year. Adjusted diluted earnings per share was $0.40 compared to $0.48 in the same quarter of the prior year. This quarter's figure includes an adverse foreign currency impact of $0.04 per share.

Additional information regarding Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, 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.

Third-Quarter Segment Overview

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

• In the Americas, net revenues grew 3% on reported and constant-currency bases, driven primarily by growth in our DTC channels. DTC net revenues increased 7% driven by our company-operated mainline and outlet stores. Wholesale net revenues grew 1%, driven by growth of the Levi’s® brand in the U.S. and in Latin America. Digital net revenues grew 24% and represented 20% of the segment's sales in the quarter.
  
  Operating income for the segment decreased due to lower gross margins and higher SG&A expenses, partially offset by higher net revenues.
  
  
• In Europe, net revenues decreased 19% on a reported basis. On a constant-currency basis, net revenues declined 9%, including a 4% negative impact from the suspension of our business in Russia. DTC net revenues decreased 21% on a reported basis and 14% on a constant-currency basis. Wholesale net revenues decreased 16% on a reported basis and 5% on a constant-currency basis, reflecting the ongoing macroeconomic challenges in the region. Net revenues through all digital channels declined 18% and represented 24% of the segment's sales in the quarter.
  
  Operating income for the segment decreased due to lower net revenues and gross margins and higher SG&A expenses as a percentage of net revenues.
  

• In Asia, net revenues increased 36% on a reported basis and 53% on a constant-currency basis. The increase in net revenues was driven by both our wholesale and DTC channels and most markets outside of China. DTC net revenues increased 33% on a reported basis and 50% on a constant-currency basis, driven by strength in our company-operated mainline and outlet stores and e-commerce. Wholesale net revenues increased 39% on a reported basis and 55% on a constant-currency basis, driven by strength in India, among other markets. Net revenues through all digital channels grew 13% and represented 17% of the segment's sales in the quarter.
  
  Operating income for the segment increased due to higher net revenues and gross margins and lower SG&A expenses as a percentage of net revenues.
  

• For Other Brands, Dockers® and Beyond Yoga® combined, net revenues increased 37% on a reported basis and 44% on a constant-currency basis. The Dockers® brand was up 7% on a reported basis and 13% on a constant-currency basis reflecting growth across channels, while the acquisition of Beyond Yoga®, contributed incremental net revenues of approximately $22 million. Other Brands operating income decreased due to investments to expand Beyond Yoga®.

Year-to-date 2022 results are included in the company's Quarterly Report on Form 10-Q for the quarter ended August 28, 2022.

Balance Sheet Review as of August 28, 2022

• Cash and cash equivalents were $499 million and short-term investments were $101 million, while total liquidity was approximately $1.4 billion.
• The company’s leverage ratio was 1.1 as compared to 1.6 at the end of the third quarter of fiscal 2021.
• Total inventories increased 43% compared to the end of the corresponding prior year period. The primary drivers of the increase are approximately one third relating to COGS inflation and the normalization of last year’s unusually low inventory level. Another third of the increase relates to intentional earlier receipts of core inventory to mitigate supply chain risks and the U.S. implementation of a new ERP system. The final third was driven by an increase of goods in transit. Core product, which can be sold across multiple future seasons, represented approximately 2/3 of total inventories. The company remains comfortable with the quality and composition of inventories.

Additional information regarding leverage ratio, which is a non-GAAP financial measure, is provided at the end of this press release.

Shareholder Returns

The company returned approximately $74 million to shareholders in the third quarter, including:

• Dividends of $48 million, representing a dividend of $0.12 per share, up nearly 50% from prior year, and
• Share repurchases of $26 million, reflecting 1.5 million shares retired.

As of August 28, 2022, the company had $724 million remaining under its current share repurchase authorization, which has no expiration date.

Guidance

As a result of the significant incremental currency headwinds from the stronger U.S. dollar, as well as a more cautious outlook for North America and Europe due to macroeconomic conditions and ongoing supply chain disruptions, the company has adjusted its expectations for fiscal year 2022:

• Reported net revenues growth of 6.7% to 7.0%, representing 11.5% to 12% net revenues growth on a constant-currency basis.
• Adjusted diluted EPS of $1.44 to $1.49, inclusive of incremental FX headwinds of $0.0 since last reported in July.

Despite the near-term adjustments to its FY22 outlook, the company believes it remains well positioned to achieve the long-term outlook it provided in conjunction with its 2022 Investor Day in June. The company plans to share additional details during its investor conference call. The company's outlook assumes no significant worsening of the COVID-19 pandemic, inflationary pressures, supply chain disruptions or further worsening currency impacts.

Investor Conference Call

To access the conference call, please pre-register on https://register.vevent.com/register/BIfdd8f38bd11e411494c7814d2d78ee74 and you will receive confirmation with dial-in details.

A live webcast of the event can be accessed on https://edge.media-server.com/mmc/p/fz57czms. A replay of the webcast will be available on http://investors.levistrauss.com starting approximately two hours after the event and archived on the site for one quarter.

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.™, Denizen® and Beyond Yoga® 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 3,100 brand-dedicated stores and shop-in-shops. Levi Strauss & Co.'s reported 2021 net revenues were $5.8 billion. For more information, go to http://levistrauss.com, and for company news and announcements go to http://investors.levistrauss.com.

Forward Looking Statements

This press release and related conference call contain, in addition to historical information, forward-looking statements, including statements related to: future financial results, including the company's expectations for the fourth quarter and full fiscal year 2022 net revenues, gross margin, adjusted EBIT margins, tax rate, adjusted diluted earnings per share, adjusted free cash flow, and capital expenditures; the continued impact of the COVID-19 pandemic on the company's business; inflationary pressures; fluctuations in foreign currency exchange rates; global economic conditions; supply chain constraints; investments in high growth initiatives; future dividend payments; future share repurchases; future shareholder return; efforts to diversify product categories, distribution channels and geographies; and achievement of our environmental, social and governance initiatives. The company has based these forward-looking statements on its current assumptions, expectations and projections about future events. Words such as, but not limited to, “believe,” “will,” “so we can,” “when,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are used 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 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 the company's filings with the U.S. Securities and Exchange Commission (SEC), including its Annual Report on Form 10-K for fiscal year 2021 and its Quarterly Reports on Form 10-Q for the quarters ended February 27, 2022 and August 28, 2022, 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 future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this press 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 press release and related conference call. The company is not under any obligation and does not intend to update or revise any of the forward-looking statements contained in this press release and related conference call to reflect circumstances existing after the date of this press release and related conference call or to reflect the occurrence of future events, even if such circumstances 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 accordance with generally accepted accounting principles in the United States (GAAP) and the rules of the SEC. To supplement its financial statements prepared and presented in accordance with GAAP, the company uses certain non-GAAP financial measures, such as Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT (both reported and on a constant-currency basis), Adjusted EBIT margin (both reported and on a constant-currency basis), Adjusted net income (both reported and on a constant-currency basis), Adjusted diluted earnings per share (both reported and on a constant-currency basis), constant-currency net revenues, net debt, leverage ratio, Adjusted free cash flow and return on invested capital to provide investors with additional useful information about its financial performance, to enhance the overall understanding of its past performance and future prospects and to allow for greater transparency with respect to important metrics used by management for financial and operating decision-making. The company presents these non-GAAP financial measures to assist investors in seeing its financial performance from management's view and because it believes they provide an additional tool for investors to use in computing the company's core financial performance over multiple periods with other companies in its industry. The tables found below present Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT (both reported and on a constant-currency basis), Adjusted EBIT margin (both reported and on a constant-currency basis), Adjusted net income (both reported and on a constant-currency basis), Adjusted net income margin (both reported and on a constant-currency basis), Adjusted diluted earnings per share (both reported and on a constant-currency basis), constant-currency net revenues, net debt, leverage ratio, Adjusted free cash flow, and return on invested capital, and corresponding reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. 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. Certain 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) do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on indebtedness. 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, the company's financial results prepared in accordance with GAAP. The company urges investors to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures included in this press release, and not to rely on any single financial measure to evaluate its business. See “RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES” below for reconciliation to the most comparable GAAP financial measures. A reconciliation of non-GAAP forward looking information to the corresponding GAAP measures cannot be provided without unreasonable efforts due to the challenge in quantifying various items including but not limited to, the effects of foreign currency fluctuations, taxes, and any future restructuring, restructuring-related, severance and other charges.

Constant-currency

The company reports certain operating results on a constant-currency basis in order to facilitate period-to-period comparisons of its results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates used to translate the company's operating results for all countries where the functional currency is not the U.S. Dollar into U.S. Dollars. Because the company is a global company, foreign currency exchange rates used for translation may have a significant effect on its reported results. In general, the company's 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 it conducts its business. References to operating results on a constant-currency basis mean operating results without the impact of foreign currency exchange rate fluctuations.

The company believes disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of its results by increasing the transparency of the 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 considered as an alternative or 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 the company's 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.

The company calculates constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. 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 is impacted by gains and losses related to the procurement of inventory, primarily products sourced in EUR and USD, by the company's global sourcing organization on behalf of its foreign subsidiaries.

Source: Levi Strauss & Co. Investor Relations

The notes accompanying the consolidated financial statements in the company's Form 10-Q for the third quarter of fiscal 2022 are an integral part of these consolidated financial statements.

The notes accompanying the consolidated financial statements in the company's Form 10-Q for the third quarter of fiscal 2022 are an integral part of these consolidated financial statements.

The notes accompanying the consolidated financial statements in the company's Form 10-Q for the third quarter of fiscal 2022 are an integral part of these consolidated financial statements.

The notes accompanying the consolidated financial statements in the company's Form 10-Q for the third quarter of fiscal 2022 are an integral part of these consolidated financial statements.

The notes accompanying the consolidated financial statements in the company's Form 10-Q for the third quarter of fiscal 2022 are an integral part of these consolidated financial statements.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
FOR THE THIRD QUARTER OF 2022

The following information relates to non-GAAP financial measures and should be read in conjunction with the investor call held on October 6, 2022, discussing the company’s financial condition and results of operations as of and for the quarter ended August 28, 2022. Adjusted gross profit, Adjusted gross margin, Adjusted SG&A, Adjusted EBIT, Adjusted EBIT margin, Adjusted net income, Adjusted diluted earnings per share, net debt, Adjusted free cash flow, return on invested capital, constant-currency net revenues, constant-currency Adjusted EBIT and leverage ratio are not financial measures prepared in accordance with GAAP. As used in this press release: (1) Adjusted gross profit, represents gross profit excluding COVID-19 and acquisition related inventory charges and Adjusted gross margin, represents Adjusted gross profit as a percentage of net revenues; (2) Adjusted SG&A represents SG&A less charges related to changes in fair value on cash-settled stock-based compensation, COVID-19 related charges, acquisition and integration related charges, impairment charges and early termination gains, and restructuring and restructuring related charges, severance and other, net; (3) Adjusted EBIT represents net income excluding income tax expense, interest expense, other expense (income), net, loss on early extinguishment of debt, impact of changes in fair value on cash-settled stock-based compensation, COVID-19 related inventory costs and other charges, acquisition and integration related charges, impairment charges and early termination gains, and restructuring and restructuring related charges, severance and other, net, and Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues; (4) Adjusted EBITDA represents Adjusted EBIT excluding depreciation and amortization expense; (5) Adjusted net income represents net income 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, net with a COVID-19 government subsidy gain, acquisition and integration related charges, impairment charges and early termination gains, and restructuring and restructuring related charges, severance and other, net, and tax impact of adjustments and Adjusted net income margin as Adjusted net income as a percentage of net revenues; (6) Adjusted diluted earnings per share represents Adjusted net income per weighted-average number of diluted common shares; (7) net debt represents total debt, excluding finance leases, less cash and cash equivalents and short-term investments in marketable securities; (8) leverage ratio represents total debt, excluding finance leases, divided by the last twelve months of Adjusted EBITDA; (9) Adjusted free cash flow represents cash from operating activities less purchases of property, plant and equipment; (10) return on invested capital represents the trailing four quarters of earnings before interest and after taxes (Adjusted net income plus interest expense and income tax expense less an income tax adjustment) divided by the average trailing five quarters of total invested capital (total debt plus shareholders' equity less cash and short-term investments); (11) constant-currency net revenues represents net revenues without the impact of foreign currency exchange rate fluctuations; (12) constant-currency Adjusted EBIT represents Adjusted EBIT without the impact of foreign currency exchange rate fluctuations; (13) constant-currency Adjusted net income represents Adjusted net income without the impact of foreign currency exchange rate fluctuations; and (14) constant-currency Adjusted diluted earnings per share represents Adjusted diluted earnings per share without the impact of foreign currency exchange rate fluctuations.

Adjusted Gross Profit:

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Adjusted SG&A:

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Adjusted EBIT and Adjusted EBITDA:

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Adjusted Net Income and Adjusted Diluted Earnings per Share:

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Net Debt and Leverage Ratio:

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Adjusted Free Cash Flow:

Effective the second quarter of 2022, the definition of Adjusted free cash flow, a non-GAAP financial measure, was revised to include net cash flow from operating activities less purchases of property, plant and equipment. Previously, we defined Adjusted free cash flow as net cash flow from operating activities less purchases of property, plant and equipment, plus proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting, less repurchases of common stock, tax withholdings on equity award exercises, and cash dividends to stockholders. We believe this is a more representative measure of our free cash flow, assists in the comparability of results, and is consistent with how management reviews performance. The table below includes the recast of prior period results. Additionally, we will provide updated non-GAAP reconciliations under this revised definition in future reports for the relevant prior year periods.