Q1 Reported Net Revenues of $1.7B Increased 6%, and 9% in Constant-Currency vs. Q1 2022

Constant-Currency Revenue Growth Driven by DTC and International Business

Q1 Diluted EPS of $0.29 and Adjusted Diluted EPS of $0.34

Company Reaffirms FY 2023 Guidance

Levi Strauss & Co. (NYSE: LEVI) today announced financial results for the first quarter ended February 26, 2023.

"Our first quarter results reflect the strength of our brands and the progress we are making against our strategic priorities," said Chip Bergh, president and chief executive officer of Levi Strauss & Co. "We delivered strong growth in our international business and record-breaking revenue performance in our direct-to-consumer channel. As we celebrate the 150th anniversary of the iconic 501® jean, we are deepening connections with consumers and cementing loyalty with the next generation of Levi’s® fans. This past quarter in the U.S., we were the market share leader among the key 18- to 30-year-old consumer, and we continued to grow share in our women’s denim bottoms business, further narrowing the gap to number one."

Financial Highlights for the First-Quarter

• Reported net revenues of $1.7 billion increased 6%, and 9% on a constant-currency basis versus Q1 2022, reflecting strong growth in the Direct-to-Consumer (DTC) channel, up 12%. Total DTC comprised 42% of first quarter net revenues. Net revenues related to the shift in wholesale shipments from Q2 to Q1 primarily due to the U.S. ERP implementation benefited Q1 by approximately $100 million or 6% of net revenues.
• Gross margin was 55.8%; Adjusted gross margin was 55.8%, 360 basis points below the record level of 59.4% in Q1 2022
• Operating margin was 9.3%; Adjusted EBIT margin was 11.0%, down from 14.9% in Q1 2022
• Net income was $115 million; Adjusted net income was $135 million, compared to $189 million in Q1 2022
• Diluted EPS was $0.29; Adjusted diluted EPS was $0.34, including an adverse currency exchange impact of $0.01
• Total inventories increased 33% on a dollar basis over prior year, representing 25 points of sequential improvement relative to Q4 2022
• The Company paid a dividend of $0.12 per share, up nearly 20% from prior year; approximately $56 million in capital returned to shareholders

"On top of 26% constant currency growth a year ago, the company achieved solid results in the first quarter," said Harmit Singh, chief financial and growth officer of Levi Strauss & Co. "Our teams also made significant progress reducing inventory levels, putting us in a stronger position as we move through the balance of the year. We are reaffirming our annual revenue and EPS guidance reflecting a cautious outlook on the macro-environment though we remain excited about the momentum in our DTC and international businesses."

Highlights include:

(1) Note: per share increase compared to prior year displayed in cents

First-Quarter 2023 compared to First-Quarter 2022 Details:

• Net revenues of $1.7 billion increased 6% on a reported basis, and 9% on a constant-currency basis which excludes $40 million in unfavorable currency impacts. Net revenues related to the shift in wholesale shipments from Q2 to Q1 primarily due to the U.S. ERP implementation benefited Q1 by an estimate of approximately $100 million or 6% of net revenues.
  • DTC net revenues increased 12% on a reported basis and 16% on a constant-currency basis, driven by broad-based growth in both company-operated stores and e-commerce across all segments. E-commerce increased 11% on a reported basis and 14% on a constant-currency basis. As a percentage of first quarter company net revenues, sales from DTC stores and e-commerce comprised 33% and 9%, respectively, for a total of 42%.
  • Wholesale net revenues increased 2% on a reported basis and 4% on a constant-currency basis, driven by strong growth in Asia and Canada, as well as growth in the U.S.
• Gross profit was $942 million compared to $944 million last year. Gross margin was 55.8%, down from 59.3%. Adjusted gross margin was also 55.8%, down 360 basis points. Unfavorable currency exchange accounted for approximately 30 basis points of the decline, while the balance reflects the impact of lower full-priced sales and higher product costs, partially offset by favorable channel mix, price increases and lower air freight expenses.
• Selling, general and administrative (SG&A) expenses were $785 million compared to $709 million last year. Adjusted SG&A was $757 million compared to $708 million last year. As a percentage of net revenues, Adjusted SG&A was 44.8%, up 30 basis points reflecting planned higher advertising and promotion expenses to support the 501®’s 150th anniversary campaign and higher DTC expenses due to higher sales.
• Operating income was $157 million compared to $234 million last year while Adjusted EBIT was $185 million compared to $238 million last 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 11.0%, 390 basis points lower on a reported basis, and 380 basis points lower on a constant-currency basis.
• Below the operating line, interest and other expenses, which include foreign exchange losses, were a net expense of $18 million compared to a net gain of $12 million last year. The effective income tax rate was 17.6% compared to 20.4% last year.
• Net income was $115 million compared to $196 million last year, primarily due to the decrease in operating income described above. Adjusted net income was $135 million compared to $189 million last year. The decrease was primarily due to the lower operating income described above.
• Diluted earnings per share was $0.29 compared to $0.48 last year. Adjusted diluted earnings per share was $0.34 compared to $0.46 last year. This quarter's figure includes an adverse foreign currency impact of $0.01 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.

First-Quarter Segment Overview

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

(1) Segment operating income is equal to segment Adjusted EBIT.

• In the Americas, net revenues grew 7% on reported and constant-currency bases, driven by both our DTC and wholesale channels. DTC net revenues increased 15% driven by strength in our company-operated mainline and outlet stores and e-commerce. U.S. DTC net revenues grew to record levels. Wholesale net revenues grew 4%, driven by growth of the Levi’s® brand in Canada and the U.S.
  
  
  
  Operating income for the segment decreased due to lower gross margins and higher SG&A expenses as a percentage of net revenues, partially offset by higher net revenues.
  
  

• In Europe, net revenues decreased 3% on a reported basis. On a constant-currency basis, net revenues increased 2%, including a 4% negative impact from the suspension of our business in Russia. DTC net revenues increased 4% on a reported basis and 8% on a constant-currency basis, or 19% excluding Russia. Wholesale net revenues decreased 8% on a reported basis and 3% on a constant-currency basis, reflecting the ongoing retailer inventory rebalancing in the region.
  
  
  
  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 12% on a reported basis and 22% on a constant-currency basis. The increase in net revenues was driven by all markets outside China. DTC net revenues increased 15% on a reported basis and 25% on a constant-currency basis, driven by strength in our company-operated mainline and outlet stores and e-commerce. Wholesale net revenues increased 9% on a reported basis and 19% on a constant-currency basis.
  
  
  
  Operating income for the segment increased due to higher net revenues and lower SG&A expenses as a percentage of net revenues, partially offset by lower gross margins.
  
  

• For Other Brands, Dockers® and Beyond Yoga® combined, net revenues increased 24% on a reported basis and 25% on a constant-currency basis. Dockers® was up 28% on a reported basis and 29% on a constant-currency basis. Beyond Yoga® was up 11% on reported and constant-currency bases. Other Brands operating income decreased due to lower gross margins and higher SG&A expenses as a percentage of net revenues.

Balance Sheet Review as of February 26, 2023

• Cash and cash equivalents were $322 million, while total liquidity was approximately $1.2 billion.
• The company’s leverage ratio was 1.4 as compared to 1.1 at the end of the first quarter of fiscal 2022.
• Total inventories increased 33% on a dollar basis and 21% on a unit basis over prior year. The 25 points of sequential improvement on a dollar basis relative to Q4 was primarily attributable to deliberate actions taken during the quarter including reducing receipts and clearing inventory in the U.S. Core product represents more than two-thirds of total inventories. We continue to expect sequential improvement quarter-over-quarter, with Q2 being substantially lower than Q1, and expect inventory levels to be in-line with sales growth by the end of the year.

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 $56 million to shareholders in the first quarter, including:

• Dividends of $48 million, representing a dividend of $0.12 per share, up nearly 20% from the first quarter of prior year, and
• Share repurchases of $8 million, reflecting 0.5 million shares retired.

As of February 26, 2023, the company had $680 million remaining under its current share repurchase authorization, which has no expiration date.

The company declared a dividend of $0.12 per share totaling approximately $47 million, payable in cash on May 18, 2023 to the holders of record of Class A common stock and Class B common stock at the close of business May 4, 2023.

Guidance

The company reaffirms expectations for fiscal 2023 as follows:

• Net revenues between $6.3 billion and $6.4 billion, reflecting reported revenue growth of 1.5% to 3% year-over-year.
• Adjusted diluted EPS of $1.30 to $1.40.

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/BIf5b0c918a51a42528161065cbe6db6a4 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/sux2ig8j.

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 3,200 brand-dedicated stores and shop-in-shops. Levi Strauss & Co.'s reported 2022 net revenues were $6.2 billion. For more information, go to http://levistrauss.com, and for financial 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 full fiscal year 2023 net revenues and adjusted diluted earnings per share; 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 and disruptions; future dividend payments; future share repurchases; performance of our DTC business; future inventory levels and our ability to execute against our long-term business strategies. 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 2022 and its Quarterly Reports on Form 10-Q for the quarter ended February 26, 2023, 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 first quarter of fiscal 2023 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 first quarter of fiscal 2023 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 first quarter of fiscal 2023 are an integral part of these consolidated financial statements.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

FOR THE FIRST QUARTER OF 2023

The following information relates to non-GAAP financial measures, and should be read in conjunction with the investor call held on April 6, 2023, discussing the company’s financial condition and results of operations as of and for the quarter and year ended February 26, 2023.

We define the following non-GAAP measures as follows:

Adjusted Gross Profit, Adjusted SG&A, Adjusted Net Income and Adjusted Diluted Earnings per Share:

The following tables present our statement of operations on an as reported basis, as well as on an as adjusted basis, which is after the consideration of non-GAAP adjustments. All of these non-GAAP financial measures should be considered along with net income and other operating and financial performance measures prepared and presented in accordance with GAAP.

Adjusted EBIT and Adjusted EBITDA:

The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented.

Net Debt and Leverage Ratio:

We define net debt, a non-GAAP financial measure, as total debt, excluding finance leases, less cash and cash equivalents and short-term investments in marketable securities. We define leverage ratio, a non-GAAP financial measure, as the ratio of total debt to the last 12 months Adjusted EBITDA. Our management believes net debt and leverage ratio are important measures to monitor our financial flexibility and evaluate the strength of our balance sheet. Net debt and leverage ratio are not financial measures prepared in accordance with GAAP.

The following table presents a reconciliation of total debt, excluding finance leases, the most directly comparable financial measure calculated in accordance with GAAP, to net debt for each of the periods presented.

The following table presents a reconciliation of total debt, excluding finance leases, the most directly comparable financial measure calculated in accordance with GAAP, to leverage ratio for each of the periods presented.

Adjusted Free Cash Flow:

We define Adjusted free cash flow, a non-GAAP financial measure, as net cash flow from operating activities less purchases of property, plant and equipment. We believe Adjusted free cash flow is an important liquidity measure of the cash that is available after capital expenditures for operational expenses and investment in our business. We believe Adjusted free cash flow is useful to investors because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet, invest in future growth and return capital to stockholders.

The following table presents a reconciliation of net cash flow from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted free cash flow for each of the periods presented.

Return on Invested Capital:

We define Return on invested capital ("ROIC") as the trailing four quarters of Adjusted net income before interest and after taxes divided by the average trailing five quarters of total invested capital. We define earnings before interest and after taxes as Adjusted net income plus interest expense and income tax expense less an income tax adjustment. We define total invested capital as total debt plus shareholders' equity less cash and short-term investments. We believe ROIC is useful to investors as it quantifies how efficiently we generated operating income relative to the capital we have invested in the business.

Our calculation of ROIC is considered a non-GAAP financial measure because we calculate ROIC using the non-GAAP metric Adjusted net income. Although ROIC is a standard financial metric, numerous methods exist for calculating a company's ROIC. As a result, the method we use to calculate our ROIC may differ from the methods used by other companies. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP.

The table below sets forth the calculation of ROIC for each of the periods presented.

Constant-Currency:

We calculate constant-currency amounts by translating local currency amounts in the comparison period at actual foreign exchange rates for the current period.

Constant-Currency Net Revenues:

The table below sets forth the calculation of net revenues for each of our operating segments on a constant-currency basis for the comparison period applicable to the three-month period ended February 26, 2023:

* Not meaningful

Constant-Currency Adjusted EBIT and Constant Currency Adjusted EBIT margin:

* Not meaningful

Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share:

* Not meaningful

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