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As filed with the Securities and Exchange Commission on March 11, 2019

Registration Statement No. 333-229630

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Levi Strauss & Co.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2325   94-0905160

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1155 Battery Street

San Francisco, CA 94111

415-501-6000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Charles V. Bergh

President and Chief Executive Officer

Levi Strauss & Co.

1155 Battery Street

San Francisco, CA 94111

415-501-6000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Eric Jensen

Jodie Bourdet

Siana Lowrey

Cooley LLP

101 California Street, Fifth Floor

San Francisco, CA 94111

415-693-2000

 

Harmit Singh

Seth R. Jaffe

David Jedrzejek

Levi Strauss & Co.

1155 Battery Street

San Francisco, CA 94111

415-502-6000

 

John L. Savva

Sarah P. Payne

Sullivan & Cromwell LLP

1870 Embarcadero Road

Palo Alto, CA 94303

650-461-5600

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.    

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.    

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer    Accelerated Filer     Non-accelerated Filer   

Smaller Reporting Company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act of 1933, as amended. 

 

 

Calculation of Registration Fee

 

 

Title of Each Class of Securities To Be Registered  

Amount

to be
Registered(1)

  Proposed Maximum
Offering Price Per
Share
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee(3)

Class A Common Stock, par value $0.001 per share

  42,166,667   $16.00   $674,666,672   $81,770

 

 

(1)

Includes 5,500,000 shares that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act.

(3)

The Registrant previously paid a registration fee of $12,120 in connection with the initial filing of this Registration Statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated March 11, 2019.

36,666,667 Shares

 

 

LOGO

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Levi Strauss & Co. We are offering 9,466,557 shares of Class A common stock. The selling stockholders identified in this prospectus are offering an additional 27,200,110 shares of Class A common stock. We will not receive any proceeds from the sale of Class A common stock being sold by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. We currently estimate that the initial public offering price for our Class A common stock will be between $14.00 and $16.00 per share. We have applied to list our Class A common stock on the New York Stock Exchange under the symbol “LEVI.”

Following this offering, we will have two classes of common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, conversion and transfer. Each share of Class A common stock will be entitled to one vote and each share of Class B common stock will be entitled to ten votes. Each share of Class B common stock may be converted at any time into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer, subject to certain exceptions. All shares of our capital stock outstanding immediately prior to this offering, including all shares held by our executive officers, directors and their respective affiliates, will be reclassified into shares of Class B common stock immediately prior to this offering. Following this offering, the holders of outstanding shares of Class B common stock will hold approximately 99% of the voting power of our outstanding capital stock.

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 20 for factors you should consider before investing in our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $        $    

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

Proceeds, before expenses, to the selling stockholders

   $                    $                

 

(1)

We have agreed to pay certain expenses in connection with this offering on behalf of the selling stockholders, including all underwriting discounts and commissions applicable to the sale of shares of Class A common stock by the selling stockholders. See “Underwriting” for a description of the compensation payable to the underwriters.

We have granted the underwriters an option for a period of 30 days to purchase up to an additional 5,500,000 shares of Class A common stock from us at the initial public offering price, less underwriting discounts and commissions.

 

 

 

Goldman Sachs & Co. LLC     J.P. Morgan
BofA Merrill Lynch   Morgan Stanley   Evercore ISI
BNP PARIBAS   Citigroup  

Guggenheim Securities

 

HSBC

Drexel Hamilton

  Telsey Advisory Group   The Williams Capital Group, L.P.

 

 

Prospectus dated                     .


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Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1  

Risk Factors

     20  

Special Note Regarding Forward-Looking Statements

     44  

Use of Proceeds

     46  

Dividend Policy

     47  

Capitalization

     47  

Dilution

     50  

Selected Consolidated Financial Data

     52  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     60  

Business

     92  

Management

     114  

Executive Compensation

     123  

Certain Relationships and Related Party Transactions

     153  

Principal and Selling Stockholders

     155  

Description of Certain Indebtedness

     159  

Description of Capital Stock

     164  

Shares Eligible for Future Sale

     170  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     173  

Underwriting

     177  

Legal Matters

     184  

Experts

     184  

Where You Can Find Additional Information

     184  

Index to Consolidated Financial Statements

     F-1  

 

 

Through and including        , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of Class A common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of Class A common stock.

For investors outside the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering of Class A common stock and the distribution of this prospectus outside the United States.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before making an investment decision. You should carefully read this entire prospectus, including “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to “Levi Strauss & Co.,” “Levi Strauss,” the “company,” “we,” “us,” “our” or similar terms refer to Levi Strauss & Co. and its consolidated subsidiaries.

We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest to November 30 of that year. Certain of our foreign subsidiaries have fiscal years ending on November 30. Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Each of fiscal years 2018, 2017, 2016 and 2015 included 52 weeks of operations, with each quarter consisting of 13 weeks. Fiscal year 2014 included 53 weeks of operations, with the fourth quarter consisting of 14 weeks and each other quarter consisting of 13 weeks. Unless the context otherwise requires or as otherwise noted, all references in this prospectus to quarters and years refer to our fiscal quarters and fiscal years, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information Presentation—Fiscal Year.”

Levi Strauss & Co.

Our mission is to be, and be seen as, the world’s best apparel company and one of the best performing companies in any industry.

We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began in San Francisco, California in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. With $5.6 billion in net revenues and sales in more than 110 countries in fiscal year 2018, we are one of the world’s leading apparel companies, with the Levi’s brand having the highest brand awareness in the denim bottoms category globally.

Our founder, Levi Strauss, was committed to integrity, philanthropy and good corporate citizenship. To this day, we continue to operate our company with these values through an approach we call “profits through principles.” It means never choosing easy over right. It means doing business in an ethical way and ensuring that the people who make our products are treated fairly. It means sourcing in a responsible manner and investing in innovative and more sustainable ways to make our products. Finally, it means using our influence as a successful business with global reach and powerful brands to advocate for social good and to give back to our communities.

Our business is operated through three geographic regions that comprise our three reporting segments: the Americas, Europe and Asia, which includes the Middle East and Africa. We service consumers through our global infrastructure, developing, sourcing and marketing our products around the world. Our Americas, Europe and Asia segments contributed 55%, 29% and 16%, respectively, of our net revenues in fiscal year 2018.



 

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Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi’s brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi’s as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized and original. This approach has enabled the Levi’s brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers brand helped drive “Casual Friday” in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature by Levi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices.

We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, leading third-party eCommerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers through a variety of formats, including our own company-operated mainline and outlet stores, company-operated eCommerce sites and select shop-in-shops located in department stores and other third-party retail locations. As of January 30, 2019, our products were sold in over 50,000 retail locations, including approximately 3,000 brand-dedicated stores and shop-in-shops. As of January 30, 2019, we had 831 company-operated stores and approximately 500 company-operated shop-in-shops.

The vision and leadership of our management team, the sustained strength of our brands and our ability to scale our operations profitably while driving strong commercial execution across our three regions have resulted in robust financial performance. When our current management team joined our company starting in 2011, they implemented new revenue and profit growth strategies that remain in place today. These strategies are focused on delivering consistent profitable growth and a strong return on investment. We are seeing the positive results of these growth strategies and management’s disciplined approach. Net revenues have grown from $4.8 billion in fiscal year 2011 to $5.6 billion in fiscal year 2018, representing a compound annual growth rate, or CAGR, of 2.3%. Net income has grown from $135 million in fiscal year 2011 to $285 million in fiscal year 2018, representing a CAGR of 11.3%.

Fiscal year 2017 marked an inflection point for our business in terms of year-over-year net revenues growth, and this momentum has continued through fiscal year 2018. Highlights of our results of operations in fiscal years 2018 and 2017 include:

 

     Year Ended  
     November 25,
2018
    November 26,
2017
 

Change from Prior Year

    

Net revenues

     14%       8%  

Gross margin

     151 basis points       110 basis points  

Operating income

     15%       1%(1)  

 

(1)

Our operating income in fiscal year 2017 reflects higher selling expenses associated with the growth and expansion of our direct-to-consumer, or DTC, channel and increased spending on advertising and promotions as a result of our launching new advertising campaigns and brand-building initiatives.

In addition, we have significantly improved our balance sheet over the last several years. From November 27, 2011 to November 25, 2018, our total debt decreased from $1.97 billion to $1.05 billion, and our leverage ratio decreased from 3.8x to 1.5x. For additional information regarding leverage ratio, which is a financial measure not prepared in conformity with generally accepted accounting principles in the United States, or GAAP, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”



 

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Our Competitive Strengths

The apparel industry is experiencing significant changes in how and where consumers shop for products, impacting the entire apparel value chain. We believe we are well-positioned to succeed in this environment due to the following strengths:

Iconic brands with deep heritage, superior product quality and a culture of innovation.

With a rich history spanning over 165 years, we offer products of exceptional quality at accessible prices. Levi’s is one of the most recognizable consumer brands in the world and the #1 brand globally in jeanswear (measured by total retail sales). Levi’s is an authentic and original lifestyle brand that has expanded beyond men’s jeans into women’s jeans and multiple product categories. Consumers around the world instantly recognize the distinctive traits of Levi’s jeans—the double arc stitching on the back pocket, known as the Arcuate Stitching Design, and the red fabric tab stitched into the right back pocket, known as the Red Tab Device. Building upon this rich history, we continue to innovate our product offerings to meet the evolving tastes of today’s consumers. For example, in recent years we have introduced new tapered fits in men’s jeans and a new stretch and fit system for our Dockers khaki pants. In addition, we relaunched our Levi’s women’s jeans business in fiscal year 2015, resulting in a number of new styles, and from fiscal year 2015 to fiscal year 2018, our women’s jeans net revenues grew at a CAGR of 14%. Our Eureka Innovation Lab, an in-house creative space in San Francisco, California dedicated to research, design, creative development and advanced product prototypes, is responsible for delivering cutting-edge advancements for our company and the industry, with an emphasis on fit, finish and fabric. For example, the 4-way stretch fabric underpinning our 2015 Levi’s women’s jeans relaunch was developed at Eureka.

Unique connection with our consumers.

Over the last two years, we have significantly increased the level of marketing support for our brands. This disciplined investment in brand-building is a key driver of the inflection in our financial performance that occurred in fiscal year 2017. In 2014, we launched a global brand campaign called “Live in Levi’s,” reflecting that many of our consumers’ greatest moments take place while they are wearing their favorite pair of Levi’s. As part of this ongoing campaign, our “Circles” TV and online ad was one of the top ten most-watched ads on YouTube in 2017, with over 25 million views to date.

We also maintain a leading presence at significant cultural events around the world such as music festivals and sporting events, which have put the Levi’s brand back at the center of culture. In 2013, we secured the naming rights to the new stadium for the San Francisco 49ers, allowing us to connect with sports and music fans across the world. In February 2016, Super Bowl 50 at Levi’s Stadium was one of the most-watched programs in TV history. In April 2017, our Levi’s cutoff shorts, worn by Beyoncé during her headline performance at the Coachella music festival, were deemed the “ultimate Coachella clothing item” by People magazine, with Coachella generating approximately 5.8 billion global impressions for the Levi’s brand.

We are also leading the way in customization and personalization, areas that we believe are increasingly important to today’s consumers. We developed an experiential in-store Tailor Shop concept in which, in select stores, consumers can alter or customize their own jeans and trucker jackets by adding personalized stitching and patches. In addition, we generate exposure through selective collaborations with key influencers such as Justin Timberlake, with whom we launched a 20-piece capsule collection in the fall of 2018, and with popular brands such as Nike’s Air Jordan. Our second collaboration with Air Jordan in the summer of 2018 generated over one billion global impressions and sold out in minutes.



 

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Robust, diversified business model across multiple regions, channels and categories.

We have a diversified business model that spans our three regions, a robust presence across both our wholesale and direct-to-consumer, or DTC, channels and an established market share position in jeans, non-jeans bottoms and tops for both men and women. In fiscal year 2018, 20% of our net revenues were from tops, 74% of our net revenues were from bottoms, and 6% of our net revenues were from footwear and accessories. In fiscal year 2015, 11% of our net revenues were from tops, 83% of our net revenues were from bottoms, and 6% of our net revenues were from footwear and accessories. The continued geographic and channel diversification of our business has contributed to improvements in our gross margin.

Our Europe and Asia segments represented 29% and 16% of our net revenues, respectively, in fiscal year 2018, as compared to 23% and 17% of our net revenues, respectively, in fiscal year 2015, demonstrating the geographical diversification of our business.

Our wholesale channels, excluding franchise stores, generated 57% and 62% of our net revenues in fiscal years 2018 and 2015, respectively. Franchise stores (which are part of our wholesale channels) generated 7% and 8% of our net revenues in fiscal years 2018 and 2015, respectively. Sales to our top ten wholesale customers accounted for 27% and 28% of our net revenues in fiscal year 2018 and in fiscal year 2017, respectively. No single customer represented 10% or more of our net revenues in either of these years. Sales through our DTC channel have increased from 29% of our net revenues in fiscal year 2015 to 35% of our net revenues in fiscal year 2018, with growth at a CAGR of 14%. Our DTC channel also experienced 18% year-over-year net revenues growth from fiscal year 2017 to fiscal year 2018. Of sales through our DTC channel: sales from our company-operated mainline and outlet stores represented 26% of our net revenues in fiscal year 2018, as compared to 22% of our net revenues in fiscal year 2015; sales from our shop-in-shops represented 5% of our net revenues in fiscal year 2018, as compared to 4% of our net revenues in fiscal year 2015; and sales from our company-operated eCommerce sites represented 4% of our net revenues in fiscal year 2018, as compared to 3% of our net revenues in fiscal year 2015.

We are dedicated to expanding product category offerings that are underdeveloped for us today and that we believe can continue to drive organic business growth. For example, our tops category has increased from 11% of our net revenues in fiscal year 2015 to 20% of our net revenues in fiscal year 2018, with growth at a CAGR of 31%, and women’s sales increased from 20% of our net revenues in fiscal year 2015 to 29% of our net revenues in fiscal year 2018, with growth at a CAGR of 21%, driven by our women’s jeans relaunch and product category diversification efforts. Net revenues from men’s sales grew at a CAGR of 4% over the same period.

Strong global operating infrastructure.

Our presence in more than 110 countries enables us to leverage our global scale for product development and sourcing while using our local expertise to tailor products and retail experiences to individual markets. In addition, our integrated production development and distribution platform enables us to achieve operating efficiencies and deliver superior quality products. In fiscal year 2018, we announced Project F.L.X. (Future-Led Execution), an approach that uses lasers in a new way to reduce finishing time and increase our operational agility, reducing lead time from more than six months to as fast as weeks or days in some cases. In fiscal year 2018, we sourced products from independent contractors located in approximately 23 countries around the world, with no single country accounting for more than 20% of our sourcing by unit volume. By leveraging our flexible supply chain and global operating infrastructure, we are able to more quickly respond to consumer and customer demands, scale operations across diverse geographies and sales channels, shorten product development cycles and adapt to changing economic and political conditions, including new trade policies.



 

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Values-driven company with an unwavering commitment to corporate citizenship.

Throughout our long history, we have upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. The Levi Strauss Foundation, founded in 1952, is our main philanthropic arm. Its mission is to advance the human rights and well-being of underserved people in places where we have a business presence. We contribute to this foundation on an ongoing basis from the profits we generate. Across all aspects of our business, we engage in a “profits through principles” business approach and constantly strive to set higher standards for ourselves and the industry. For example, Project F.L.X. supports our position as a leader in sustainable apparel by enabling the elimination of thousands of chemical formulations from our supply chain. We were named to Fortune magazine’s “Change the World” list in 2017 and 2018 as a result of our initiatives to improve worker well-being and reduce the use of chemicals in our finishing process, respectively. Our milestone initiatives over the years include: integrating our factories prior to the enactment of the Civil Rights Act of 1964; developing a comprehensive supplier code of conduct that requires safe and healthy working conditions before such codes of conduct became commonplace among multinational apparel companies; and offering benefits to same-sex partners in the 1990s, long before most other companies.

Management team with a track record of success.

Over the last several years, our leadership team has built upon the strong foundation of our business, guiding our transformation into a more global, diversified lifestyle apparel company, driving strong financial results and improving our balance sheet. Our distinct culture and track record of success have enabled us to become a leading destination for top talent. Our Chief Executive Officer and Chief Financial Officer have been with the company for seven and six years, respectively, and most of our other key executives have worked together at the company for the last five years. Additionally, we have senior leadership in each of our operating segments to execute our growth strategy across our markets with the benefit of local knowledge and relationships.

Our Business Strategies

Our growth and financial performance over the last several years has been the result of key growth strategies adopted by our management team, each of which is described in more detail below. We will continue to aggressively pursue our global market opportunity by executing these growth strategies and continuing to innovate throughout our business.

Drive the Profitable Core. Our core includes our most profitable and cash-generating businesses. Keeping these businesses healthy and growing is critical for funding expansion in other key growth areas.

Maintain and strengthen our longstanding leadership in men’s bottoms.    We are actively focused on maintaining and strengthening our men’s bottoms business, which has been and will continue to be a key driver of our operating results. Our men’s bottoms net revenues grew 3% from fiscal year 2017 to fiscal year 2018. Our iconic 501 jean continues to be a staple in closets around the world, and we continually find ways to update this fit to appeal to new consumers and remain relevant as tastes change. We are also introducing new products, such as updated straight leg and taper styles and fabrics with added stretch for greater comfort. Enhancing the fit, finish and fabric of our existing product offerings while continuing to introduce new styles enables us to appeal to millennial consumers and to capitalize on the ongoing consumer trend toward casualization in fashion. We will continue to be nimble and respond to evolving demographics and fashion trends while retaining our authentic heritage.



 

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Expand and strengthen our established wholesale customer base.    Our established wholesale customer base represents our largest distribution channel and will continue to represent a significant opportunity for growth. We are deepening key wholesale relationships through more targeted product assortments and a broader lifestyle offering. Despite recent challenges to chain retailers and department stores, primarily in the United States, net revenues from our top ten wholesale customers globally increased 8% year-over-year in fiscal year 2018. We are also expanding our wholesale relationships, with a focus in the United States on growing premium accounts such as Nordstrom and Bloomingdale’s. We are also growing our core business through wholesale eCommerce sites, including Amazon, where we have expanded our core product offering and established a Levi’s-branded storefront that offers consumers a curated experience similar to the one they enjoy when they visit our company-operated eCommerce sites.

Increase penetration and sales within our top five developed markets.    We manage our business by region, which enables us to respond more rapidly to opportunities presented by specific geographic markets. We continue to see growth among our top five developed markets: the United States, France, Germany, Mexico and the United Kingdom. Our net revenues in these five markets have collectively increased from $3.0 billion in fiscal year 2015 to $3.5 billion in fiscal year 2018, and net revenues in these markets grew 10% from fiscal year 2017 to fiscal year 2018. In 2018, our men’s jeans business had a #1 market share (measured by total retail sales) in four of these five markets, and in Germany we were third. Across these markets, we plan to expand via a combination of new stores, expanded wholesale relationships and an increased eCommerce presence.

Invest in marketing and advertising to increase engagement with our brands.    We expect to continue our investment in marketing and advertising, including television, digital and influencer marketing, focusing primarily on growing sales of our core product offerings and increasing engagement with all of our brands, particularly among younger consumers.

Expand for More.    We have significant opportunity to grow by expanding beyond our core business into other underpenetrated categories, markets and brands.

Develop leading positions in categories outside of men’s bottoms.    We are focusing our product design and marketing efforts to reshape our global consumer perceptions from a U.S. men’s bottoms-oriented company to a global lifestyle leader for both men and women. To this end, in the near term, we are focusing on growing our tops and women’s businesses. In fiscal year 2018 and in fiscal year 2017, our tops net revenues increased by 38% and 37%, respectively, year-over-year, reaching $1.1 billion in fiscal year 2018. While our logo T-shirt business has been a key driver of this growth, we are also seeing growth across other tops sub-categories such as fleece (sweatshirts) and trucker jackets. In fiscal year 2018 and in fiscal year 2017, our women’s net revenues increased by 29% and 25%, respectively, year-over-year, reaching over $1.6 billion in fiscal year 2018. In addition, from fiscal year 2015 to fiscal year 2018, our women’s tops net revenues grew at a CAGR of 46% and our women’s bottoms net revenues grew at a CAGR of 16%. We believe we have a long runway for growth in both our tops and women’s categories. In the longer term, we intend to increase our focus on expanding our other product categories such as footwear and outerwear. For example, from fiscal year 2015 to fiscal year 2018, our footwear and accessories net revenues grew at a CAGR of 6% and in fiscal year 2018 represented only 6% of our net revenues.

Expand presence in underpenetrated international markets.    We believe we have a significant opportunity to deepen our presence in key emerging markets, such as China, India and Brazil, to drive long-term growth. Net revenues from the United States were $2.5 billion, $2.3 billion, $2.3 billion, $2.4 billion and $2.5 billion in fiscal years 2018, 2017, 2016, 2015 and 2014, respectively, and net revenues from non-U.S. markets were $3.0 billion, $2.6 billion, $2.3 billion, $2.1 billion and $2.3 billion in fiscal years 2018, 2017, 2016, 2015 and 2014, respectively. From



 

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fiscal year 2015 to fiscal year 2018, net revenues from the United States and non-U.S. markets grew at a CAGR of 2% and 13%, respectively. China represents roughly 20% of the global apparel market, but only represented 3% of our net revenues in fiscal year 2018. We believe our new management team in China can significantly expand our business in China as we leverage a localized go-to-market strategy to open new stores and build affinity among Chinese consumers. We are a market leader in jeanswear in India and have consistently increased net revenues in the last three fiscal years across all channels, driven by eCommerce and retail growth. To support further growth, we opened our first company-operated store in India in December 2017 and launched a company-operated eCommerce platform for the country in January 2018. Brazil represented less than 1% of our net revenues in fiscal year 2018, but our net revenues in Brazil grew at a CAGR of 20% from fiscal year 2016 to fiscal year 2018.

Continue to grow and expand the presence of our value brands, Signature by Levi Strauss & Co. and Denizen.    We are targeting value-conscious consumers through our Signature by Levi Strauss & Co. and Denizen brands, which are sold through wholesale accounts. We continue to grow our business with accounts such as Walmart and Target by expanding our offering within existing doors and leveraging our relationships with these retailers to launch our value brands in international markets. In fiscal year 2018 and in fiscal year 2017, net revenues from these brands increased 28% and 21%, respectively, year-over-year.

Opportunistically pursue acquisitions.    We expect to opportunistically pursue acquisitions to supplement our strong organic growth profile and drive further brand and category diversification. We will evaluate potential acquisition opportunities with a focus on strategic acquisitions that will enhance our portfolio of brands, bolster our product category expertise or add a new operating capability while fitting well with our corporate culture and providing an attractive financial return. We assess on a regular basis the potential acquisition of franchise partners, distributors and the product categories we have under license, to enhance the consumer experience and to accelerate distribution of our brands. We believe we are well-positioned and have the financial flexibility to pursue attractive acquisition opportunities as they arise.

Strengthen Position as a Leading Omni-Channel Retailer.    We are focused on growing our DTC channel in order to better control our brands and drive meaningful connections with our consumers globally.

Continue to expand our retail presence and improve our sales productivity in existing stores.    We continue to add new, profitable retail locations in the United States and across the globe. We had 74 more company-operated stores on November 25, 2018 than we did on November 26, 2017. We are focused on creating a shopping experience that excites today’s consumers with enhanced customization and personalization through our Tailor Shops and Print Bars. We continue to focus on redesigning the shopping experience, including the opening of a new flagship store in New York City’s Times Square in November 2018. At approximately 17,000 square feet, this is our largest mainline store. Additionally, we are continuing to implement integrated omni-channel and digital capabilities across our store fleet. We have updated our systems to enable customers to return products in-store that they purchased through our websites and allow our sales associates to place orders in store when desired fits or sizes are not available. Over the last year, we have also been rolling out a new RFID inventory management system to improve operations and help us test the effectiveness of different store layouts and assortments.

Drive eCommerce growth through global presence and superior consumer experience.    We have been focused on building out our eCommerce sites across geographies while also upgrading the foundation of our sites in key geographies such as the United States and



 

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Europe in order to deliver a better user experience. As of January 30, 2019, we had 43 branded websites, with a total of 180 million visits in fiscal year 2018. In addition, we are incubating a portfolio of innovative eCommerce features that further enhance consumer experience and demonstrate our leadership in fit and style in an online forum. For example, in 2017 we rolled out “Ask Indigo,” an AI-powered stylebot, to help guide consumers to the products that best fit their needs, just as an associate would in a brick-and-mortar store. We are continually testing and refining these features to help drive increased traffic, conversion and order size. We also recently rolled out an online program that enables consumers to customize trucker jackets, logo T-shirts and other products just as they would in-store. We expect to continue to build out this online customization offering by giving consumers the ability to create men’s and women’s denim bottoms, leveraging Project F.L.X. technology, scheduled to start in the United States this fall. Net revenues from our company-operated eCommerce sites increased 18% year-over-year in fiscal year 2018 and 22% year-over-year in fiscal year 2017.

Enhance Operational Excellence.    We seek out operational improvements that leverage our scale to unlock efficiencies throughout our organization and enable us to respond quickly to changing market dynamics.

Improve operations by leveraging our scale and consolidating end-to-end accountability. We have ongoing initiatives to reduce inefficiency and increase profitability in our business. Our key efforts include leveraging our global scale to drive supply chain savings, end-to-end planning efforts to manage inventory more efficiently and a focus on driving continuous organizational efficiencies. These efforts, along with channel and geographical mix shifts, drove a gross margin of 53.8% through fiscal year 2018, which represents a 329 basis point increase since fiscal year 2015. We are in the process of implementing a new enterprise resource planning system that will strengthen our data and analysis capabilities. We are also planning to upgrade our distribution centers and improve our distribution networks in the United States and Europe to ensure we are prepared for future growth.

Improve flexibility and ability to respond to changing fashion and consumer trends.    We are taking steps to shorten our time to market in order to better meet the rapidly evolving needs of our customers and consumers. For example, Project F.L.X. increases operational agility in our men’s and women’s bottoms businesses and improves inventory management by enabling us to make final decisions on the mix of styles for our denim products closer to the time of sale. We have also added shorter go-to-market processes in categories such as tops in order to forecast and buy inventory more effectively, leading to higher sell through rates and less marked down product.

Recent Developments

Set forth below are preliminary estimates of certain unaudited financial information for the three months ended February 24, 2019 and actual unaudited financial results for the three months ended February 25, 2018. Our actual results for the three months ended February 24, 2019 will not be available until after the completion of this offering. We have provided ranges, rather than specific amounts, for the preliminary estimates primarily because our financial closing and review procedures for the three months ended February 24, 2019 are not yet complete. The estimated ranges are preliminary and have not been audited or reviewed and are thus inherently uncertain and subject to change as we complete our financial closing and review procedures for the three months ended February 24, 2019. We are in the process of completing these closing and review procedures and, while we currently expect that our final results will be consistent with the preliminary estimates set forth below, such final results may differ materially from the preliminary estimates as a result of various factors, including those that are set forth under “Risk Factors” and “Special Note Regarding Forward-



 

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Looking Statements.” The preliminary estimates are not necessarily indicative of the results to be achieved for the remainder of fiscal year 2019 or any future period.

The preliminary estimates set forth below have been prepared by, and are the responsibility of, our management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to the preliminary estimates. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

 

     Three Months Ended  
     February 24, 2019
(Estimated)
     February 25,
2018

(Actual)
 
(in millions)    Low      High         

Net revenues

   $ 1,420      $ 1,435      $ 1,343.7  

Net income

     130        146        (18.6

Other Financial and Operating Data

        

Adjusted EBIT

   $ 195      $ 205      $ 179.4  

Adjusted Net Income

     136        149        83.5  

For the three months ended February 24, 2019, we estimate net revenues in the range of $1,420 million to $1,435 million, representing an increase in the range of 6% to 7% over the three months ended February 25, 2018 (10% to 11% on a constant-currency basis). Net revenues are estimated to increase on both reported and constant-currency bases, with currency translation impacting net revenues unfavorably by $48 million, for the three months ended February 24, 2019 as compared to the prior year period. The estimated increase in net revenues is due to strong performance across all regions and channels.

For the three months ended February 24, 2019, we estimate net income in the range of $130 million to $146 million. Prior year net loss of $19 million was the result of a $136 million provisional non-cash tax charge, including a $99 million re-measurement of our deferred tax assets and liabilities at lower rates and a $37 million one-time transition tax on undistributed foreign earnings, each as a result of the enactment of the 2017 Tax Cuts and Jobs Act, or the Tax Act.

For the three months ended February 24, 2019, we estimate Adjusted EBIT in the range of $195 million to $205 million, representing an increase in the range of 9% to 14% over the three months ended February 25, 2018. Currency translation impacted Adjusted EBIT for the three months ended February 24, 2019, unfavorably by $9 million.

For the three months ended February 24, 2019, we estimate Adjusted Net Income in the range of $136 million to $149 million, representing an increase in the range of 63% to 78% over the three months ended February 25, 2018.

Adjusted EBIT, Adjusted Net Income and constant-currency net revenues are non-GAAP financial measures used by management to measure our operating performance. For more information on these non-GAAP financial measures, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”



 

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The following table provides a preliminary reconciliation of preliminary estimated net income, the most directly comparable financial measure calculated in accordance with GAAP, to preliminary estimated Adjusted EBIT for the three months ended February 24, 2019, and a reconciliation of actual net income to actual Adjusted EBIT for the three months ended February 25, 2018.

 

     Three Months Ended  
     February 24,
2019

(Estimated)
     February 25,
2018

(Actual)
 
(in millions)    Low      High         

Net income

   $ 130      $ 146      $ (18.6

Income tax expense

     35        39        167.6  

Interest expense

     19        16        15.5  

Loss on early extinguishment of debt

     —          —          —    

Other (income) expense, net (1)

     3        —          9.6  

Charges related to the transition to being a public company (2)

     2        —          —    

Impact of changes in fair value on cash-settled stock based compensation (3)

     6        4        5.0  

Restructuring and related charges, severance and asset impairment charges, net

     —          —          0.3  

Pension and postretirement benefit plan curtailment and net settlement losses (gains) (4)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Adjusted EBIT

   $ 195      $ 205      $ 179.4  
  

 

 

    

 

 

    

 

 

 

 

(1)

For the three months ended February 24, 2019, other (income) expense, net includes an estimated $4 million of net periodic benefit costs, primarily interest cost and expected return on plan assets as a result of our adoption of ASU No. 2017-10 in the three months ended February 24, 2019. For the three months ended February 25, 2018, the adoption of ASU No. 2017-10 has not been reflected. Upon adoption of ASU No. 2017-10, the impact to Adjusted EBIT for the three months ended February 25, 2018 will be an increase of $0.8 million.

(2)

Includes fees and expenses in connection with our transition to being a public company, including incremental consulting fees associated with being a public company.

(3)

Includes the impact of the changes in fair value of our Class B common stock following the grant date on cash-settled awards, which are classified as liabilities. Following this offering, we anticipate that we will no longer grant cash-settled awards and will instead grant stock-settled awards to our employees. As a result, the liabilities and stock-based compensation expense subject to the variability of the fair market value at the end of each reporting period would be replaced by stock-based compensation expense based on the grant-date fair value of the awards.

(4)

Includes non-cash pension curtailment and settlement charges.



 

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The following table provides a preliminary reconciliation of preliminary estimated net income, the most directly comparable financial measure calculated in accordance with GAAP, to preliminary estimated Adjusted Net Income for the three months ended February 24, 2019, and a reconciliation of actual net income to actual Adjusted Net Income for the three months ended February 25, 2018.

 

     Three Months Ended  
     February 24,
2019

(Estimated)
    February 25,
2018

(Actual)
 
(in millions)    Low     High        

Net income

   $ 130     $ 146     $ (18.6

Loss on early extinguishment of debt

     —         —         —    

Charges related to the transition to being a public company (1)

     2       —      

Impact of changes in fair value on cash-settled stock based compensation (2)

     6       4       5.0  

Restructuring and related charges, severance and asset impairment charges, net

     —         —         0.3  

Pension and postretirement benefit plan curtailment and net settlement losses (gains)(3)

     —         —         —    

Remeasurement of deferred tax assets and liabilities (4)

     —         —         99.2  

Tax impact of adjustments (5)

     (2     (1     (2.4
  

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 136     $ 149     $ 83.5  
  

 

 

   

 

 

   

 

 

 

 

(1)

Includes fees and expenses in connection with our transition to being a public company, including incremental consulting fees associated with being a public company.

(2)

Includes the impact of the changes in fair value of our Class B common stock following the grant date on cash-settled awards, which are classified as liabilities. Following this offering, we anticipate that we will no longer grant cash-settled awards and will instead grant stock-settled awards to our employees. As a result, the liabilities and stock-based compensation expense subject to the variability of the fair market value at the end of each reporting period would be replaced by stock-based compensation expense based on the grant-date fair value of the awards.

(3)

Includes non-cash pension curtailment and settlement charges.

(4)

Represents the impact of the re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as a result of the Tax Act.

(5)

For the three months ended February 24, 2019 income tax impact of such adjustments, we utilize an effective tax rate equal to our estimated income tax expense divided by our estimated income before income taxes. For the three months ended February 25, 2018, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, as reflected in our statement of operations for the relevant period, excluding from income tax expense the effect of the $99 million re-measurement described in footnote (4) above. The effective tax rates reflected above are 21% for the three months ended February 24, 2019 and 46% for the three months ended February 25, 2018.



 

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The following table sets forth the preliminary calculation of preliminary estimated net revenues for the three months ended February 24, 2019, as compared to net revenues on a constant-currency basis for the three months ended February 25, 2018. We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period.

 

     February 24, 2019
(Estimated)
     % Increase
(Decrease) Over
Prior Year

(Estimated)
    February 25,
2018

(Actual)
 
(in millions)    Low      High      Low     High        

Total net revenues:

            

As reported

   $ 1,420      $ 1,435        6     7   $ 1,343.7  

Impact of foreign currency exchange rates

     —          —          —         —         (47.7
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Constant-currency net revenues

   $ 1,420      $ 1,435        10     11   $ 1,296.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Risk Factors

Investing in our Class A common stock involves risks, which are discussed more fully under “Risk Factors.” You should carefully consider all the information in this prospectus, including under “Risk Factors,” before making an investment decision. These risks include, but are not limited to, the following:

 

   

our success depends on our ability to maintain the value and reputation of our brands;

 

   

we depend on a group of key wholesale customers for a significant portion of our revenues, and a significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition;

 

   

our efforts to expand our retail business through company-operated stores and eCommerce sites, and franchisee and other brand-dedicated store models may not be successful, which could impact our operating results;

 

   

unexpected obstacles in new markets may limit our expansion opportunities and cause our business and growth to suffer;

 

   

our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contract manufacturers to perform, could harm our sales, service levels and reputation;

 

   

our success depends on the continued protection of our trademarks and other proprietary intellectual property rights;

 

   

future acquisitions of and investments in new businesses could impact our business and financial condition;

 

   

our revenues are influenced by economic conditions that impact consumer spending;

 

   

intense competition in the global apparel industry could lead to reduced sales and prices;

 

   

the success of our business depends upon our ability to forecast consumer demand and market conditions and offer on-trend and new and updated products at attractive price points;

 

   

our business is subject to risks associated with sourcing and manufacturing overseas and foreign currency risks, as well as risks associated with potential tariffs or a global trade war; and



 

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descendants of the family of Levi Strauss have the ability to control the outcome of matters submitted for stockholder approval, which will limit your ability to influence corporate matters.

Corporate Information

We were founded in San Francisco, California in 1853 and were incorporated in Delaware in 1970. We were a privately-held company until 1971, at which time we became a publicly-traded company. We returned to being a privately-held company in 1985 through a leveraged buyout and have been a privately-held company ever since. We conduct our operations outside the United States through directly- and indirectly-owned foreign subsidiaries. We have headquarter offices in San Francisco, Brussels and Singapore. Our principal executive offices are located at 1155 Battery Street, San Francisco, California 94111, and our telephone number is (415) 501-6000. Our website address is www.levistrauss.com. Information contained on, or that can be accessed through, our website is not incorporated by reference in this prospectus, and you should not consider information on our website to be part of this prospectus.

“Levi Strauss & Co.,” “Levi Strauss,” “Levi’s,” “Dockers,” “501,” “Signature by Levi Strauss & Co.,” “Denizen,” the Levi Strauss logo, and other trademarks or service marks of Levi Strauss & Co. appearing in this prospectus are the property of Levi Strauss & Co. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus generally appear without the ® or ™ symbols.



 

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The Offering

 

Class A common stock offered by us

9,466,557 shares

 

Class A common stock offered by the selling stockholders

27,200,110 shares

 

Class A common stock to be outstanding after this offering

36,666,667 shares

 

Class B common stock to be outstanding after this offering

348,828,320 shares

 

Total Class A common stock and Class B common stock to be outstanding after this offering

385,494,987 shares

 

Option to purchase additional shares of Class A common stock offered by us

5,500,000 shares

 

Use of proceeds

We estimate that we will receive net proceeds of approximately $106.6 million (or approximately $184.7 million if the underwriters exercise their option to purchase additional shares of Class A common stock from us in full), based on an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of Class A common stock by the selling stockholders.

 

  The principal purposes of this offering are to increase our financial flexibility and create a public market for our Class A common stock. We currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any plans to do so. See “Use of Proceeds.”

 

Voting rights

Following this offering, we will have two classes of common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, conversion and transfer.

 

 

Each share of Class A common stock will be entitled to one vote and each share of Class B common stock will be entitled to ten votes.



 

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Holders of Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation that will be in effect upon the completion of this offering. Each share of Class B common stock may be converted at any time into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer, subject to certain exceptions.

 

  Following this offering, the holders of outstanding shares of Class B common stock will hold approximately 99% of the voting power of our outstanding capital stock and will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See “Description of Capital Stock.”

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

 

Proposed NYSE symbol

“LEVI”

The numbers of shares of Class A common stock and Class B common stock that will be outstanding following this offering are based on no shares of Class A common stock and 376,028,430 shares of Class B common stock outstanding as of November 25, 2018, and excludes:

 

   

18,943,100 shares of Class B common stock issuable pursuant to restricted stock units, or RSUs, and stock appreciation rights, or SARs, granted under our 2016 Equity Incentive Plan, or 2016 EIP, that were outstanding as of November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

895,560 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP after November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

40,000,000 shares of Class A common stock reserved for future issuance under our 2019 Equity Incentive Plan, or 2019 EIP, which will become effective in connection with this offering, as more fully described under “Equity Compensation—Elements of Compensation—Long-Term Incentives”; and

 

   

12,000,000 shares of our Class A common stock reserved for future issuance under our 2019 Employee Stock Purchase Plan, or ESPP, which will become effective in connection with this offering.



 

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In addition, unless otherwise indicated, the information in this prospectus reflects and assumes the following:

 

   

the completion of the ten-for-one stock split of our common stock that became effective on March 4, 2019;

 

   

the reclassification of our outstanding common stock into an equal number of shares of Class B common stock and the authorization of our Class A common stock, each of which will occur prior to the completion of this offering;

 

   

the conversion of the shares of Class B common stock sold by the selling stockholders into an equal number of shares of Class A common stock upon the sale thereof in this offering;

 

   

no exercise by the underwriters of their option to purchase additional shares of Class A common stock; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each of which will occur prior to the completion of this offering.



 

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Summary Consolidated Financial Data

The summary consolidated statements of income data and summary consolidated statements of cash flow data for fiscal years 2018, 2017 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of income data and summary consolidated statements of cash flow data for fiscal years 2015 and 2014 have been derived from our audited consolidated financial statements not included in this prospectus, with the exception of earnings per common share attributable to common stockholders and weighted-average common shares outstanding, which are unaudited and were not historically included in our audited financial statements.

Our historical results are not necessarily indicative of future operating results. Because this table is a summary and does not provide all of the data contained in our consolidated financial statements, it should be read together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
    

(in thousands, except share and per share data)

 

Consolidated Statements of Income Data:

          

Net revenues

   $ 5,575,440     $ 4,904,030     $ 4,552,739     $ 4,494,493     $ 4,753,992  

Cost of goods sold

     2,577,465       2,341,301       2,223,727       2,225,512       2,405,552  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,997,975       2,562,729       2,329,012       2,268,981       2,348,440  

Selling, general and administrative expenses(1)

     2,460,915       2,095,560       1,866,493       1,823,863       1,906,164  

Restructuring, net

                 312       14,071       128,425  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     537,060       467,169       462,207       431,047       313,851  

Interest expense

     (55,296     (68,603     (73,170     (81,214     (117,597

Loss on early extinguishment of debt

           (22,793           (14,002     (20,343

Other income (expense), net

     18,258       (26,992     18,223       (25,433     (22,057
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     500,022       348,781       407,260       310,398       153,854  

Income tax expense

     214,778       64,225       116,051       100,507       49,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     285,244       284,556       291,209       209,891       104,309  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest

     (2,102     (3,153     (157     (455     1,769  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

   $ 283,142     $ 281,403     $ 291,052     $ 209,436     $ 106,078  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share attributable to common stockholders:

          

Basic

   $ 0.75     $ 0.75     $ 0.78     $ 0.56     $ 0.28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.73     $ 0.73     $ 0.76     $ 0.55     $ 0.28  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

          

Basic

     377,139,847       376,177,350       375,141,560       374,831,820       374,773,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     388,607,361       384,338,330       382,852,950       384,122,020       380,596,080  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
    

(in thousands, except share and per share data)

 

Consolidated Statements of Cash Flow Data:

          

Net cash flow provided by (used for):

          

Operating activities

   $ 420,371     $ 525,941     $ 306,550     $ 218,332     $ 232,909  

Investing activities

     (179,387     (124,391     (68,348     (80,833     (71,849

Financing activities

     (148,224     (151,733     (173,549     (94,895     (341,676

Other Financial Data:

          

Net income margin(2)

     5.1     5.8     6.4     4.7     2.2

Adjusted EBIT(3)

   $ 586,402     $ 488,949     $ 479,566     $ 479,180     $ 507,611  

Adjusted EBIT margin(4)

     10.5     10.0     10.5     10.7     10.7

Adjusted net income(5)

   $ 418,478     $ 320,928     $ 303,621     $ 251,894     $ 249,466  

Adjusted net income margin(6)

     7.5     6.5     6.7     5.6     5.2

Adjusted free cash flow(7)

   $ 94,945     $ 284,386     $ 158,212     $ 74,298     $ 118,012  

 

(1)

Fiscal year 2017 includes an out-of-period adjustment that increased selling, general and administrative expenses by $8.3 million and decreased income tax expense and net income by $3.2 million and $5.1 million, respectively. This item, which originated in prior years, relates to the correction of the periods used for the recognition of stock-based compensation expense associated with employees eligible to vest in awards after retirement. We have evaluated the effects of this out-of-period adjustment, both qualitatively and quantitatively, and concluded that the correction of this amount was not material to the current period or the periods in which they originated, including quarterly reporting.

(2)

We define net income margin as net income as a percentage of net revenues.

(3)

We define Adjusted EBIT, a non-GAAP financial measure, as net income excluding income tax expense, interest expense, loss on early extinguishment of debt, other expense (income), net, charges related to the transition to being a public company, impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and asset impairment charges, net, and pension and postretirement benefit plan curtailment and net settlement losses (gains). For more information about Adjusted EBIT and a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

(4)

We define Adjusted EBIT margin, a non-GAAP financial measure, as adjusted EBIT as a percentage of net revenues. For more information about Adjusted EBIT margin and a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT, see “Selected Consolidated Financial Data–Non-GAAP Financial Measures.”

(5)

We define adjusted net income, a non-GAAP financial measure, as net income excluding loss on early extinguishment of debt, charges related to the transition to being a public company, impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and asset impairment charges, net, pension and postretirement benefit plan curtailment and net settlement losses (gains) and, in fiscal year 2018, a $95.6 million re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as a result of the Tax Cuts and Jobs Act enacted in 2018, or the Tax Act, adjusted to give effect to the income tax impact of such adjustments. To calculate the income tax impact of such adjustments, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, each as reflected in our statement of operations for the relevant period, except that in fiscal year 2018 we excluded from income tax expense the effect of the $95.6 million re-measurement described above. For more information about adjusted net income and a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to adjusted net income, see “Selected Consolidated Financial Data–Non-GAAP Financial Measures.”

(6)

We define adjusted net income margin as adjusted net income as a percentage of net revenues.

(7)

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, less payments (plus proceeds) on settlement of forward foreign exchange contracts not designated for hedge accounting, and less payment of debt extinguishment costs, repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises, and cash dividends to stockholders. For more information about adjusted free cash flow and 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, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”



 

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     As of November 25, 2018  
     Actual      Pro Forma(1)      Pro Forma As
Adjusted(2)(3)
 
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 713,120      $ 713,120      $ 819,687  

Working capital

     1,235,860        1,125,860        1,232,427  

Total assets

     3,542,660        3,542,660        3,646,624  

Total debt, excluding capital leases

     1,052,154        1,052,154        1,052,154  

Temporary equity

     299,140                

Total Levi Strauss & Co. stockholders’ equity

     660,113        849,253        955,820  

 

(1)

Pro forma consolidated balance sheet data gives effect to (a) the reclassification of our outstanding common stock into an equal number of shares of Class B common stock, (b) the filing and effectiveness of our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, (c) the reclassification of temporary equity to permanent equity as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Business—Anticipated Changes to our Equity Compensation Program in Connection with this Offering” and (d) $110 million in cash dividends declared in January 2019 as described in “Dividend Policy.”

(2)

Pro forma as adjusted consolidated balance sheet data gives effect to (a) the items described in footnote (1) above and (b) our receipt of estimated net proceeds from the sale of Class A common stock that we are offering at an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share of Class A common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $7.5 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $14.2 million, assuming the assumed initial public offering price of $15.00 per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. The occurrence of any of the following risks, or additional risks not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, results of operations and prospects. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

Our success depends on our ability to maintain the value and reputation of our brands.

Our success depends in large part on the value and reputation of our brands, which are integral to our business and the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands will depend largely on the success of our marketing and merchandising efforts and our ability to provide consistent, high-quality products. Our brands and reputation could be adversely affected if we fail to achieve these objectives, if we fail to deliver high-quality products acceptable to our customers and consumers or if we face a product recall.

Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity and culture. Negative claims or publicity involving us or our products, or the production methods of any of our suppliers or contract manufacturers, could seriously damage our reputation and brand image, regardless of whether such claims or publicity are accurate. Social media, which accelerates and potentially amplifies the scope of negative claims or publicity, can increase the challenges of responding to negative claims or publicity. In addition, we may from time to time take positions on social issues that may be unpopular with some customers or potential customers, which may impact our ability to attract or retain such customers. Adverse publicity could undermine consumer confidence in our brands and reduce long-term demand for our products, even if such publicity is unfounded. Any harm to our brands and reputation could adversely affect our business and financial condition.

We depend on a group of key wholesale customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

Sales to our top ten wholesale customers accounted for 27%, 28% and 30% of our total net revenues in fiscal years 2018, 2017 and 2016, respectively. No single customer represented 10% or more of our net revenues in any of these years. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major wholesale customer decreases or ceases its purchases from us, cancels its orders, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition. In addition, a decline in the performance or financial condition of a major wholesale customer—including bankruptcy or liquidation—could result in a material loss of revenues to us and cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to our receivables from that customer or limit our ability to collect amounts related to previous purchases by that customer. Any of the foregoing could adversely affect our business and financial condition. For example, in October 2018, our wholesale

 

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customer, Sears Holdings Corporation and certain of its subsidiaries, including Kmart, filed for federal bankruptcy protection and announced plans to close unprofitable stores. These developments will likely adversely affect our sales to this customer, even if it continues operations.

The retail industry in the United States has experienced substantial consolidation over the last decade, and further consolidation may occur. In particular, consumers have continued to transition away from traditional wholesale retailers to large online retailers, where our products are exposed to increased competition. Consolidation in the retail industry has typically resulted in store closures, centralized purchasing decisions and increased emphasis by retailers on inventory management and productivity, which could result in fewer stores carrying our products or reduced demand by retailers of our products. In addition, we and other suppliers may experience increased customer leverage over us and greater exposure to credit risk as a result of industry consolidation. Any of the foregoing results can impact, and have adversely impacted in the past, our net revenues, margins and ability to operate efficiently.

We may be unable to maintain or increase our sales through our primary distribution channels.

In the United States, chain retailers and department stores are the primary distribution channels for our Levi’s and Dockers products. Outside the United States, department stores, specialty retailers, franchised or other brand-dedicated stores, and shop-in-shops have traditionally been our primary distribution channels. Levi’s and Dockers products are also sold through our brand-dedicated company-operated retail stores and eCommerce sites, as well as the eCommerce sites operated by certain of our key wholesale customers and other third parties. We distribute our Signature by Levi Strauss & Co. and Denizen brand products primarily through mass channel retailers in the Americas.

We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:

 

   

the retailers in these channels maintain—and seek to grow—substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors;

 

   

the retailers may change their apparel strategies in a way that shifts focus away from our typical consumer or that otherwise results in a reduction of sales of our products generally, such as a reduction of fixture spaces devoted to our products or a shift to other brands;

 

   

other channels, including vertically-integrated specialty stores and eCommerce sites, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores and sites have placed competitive pressure on our primary distribution channels, and many of these stores and sites are now looking to our developing markets to grow their business; and

 

   

shrinking points of distribution, including fewer doors at our customer locations, or bankruptcy or financial difficulties of a customer.

Further success by retailer private-labels, vertically-integrated specialty stores and eCommerce sites may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, product display prominence, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, and such efforts could have an adverse impact on our margins.

 

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We are a global company with significant revenues and earnings generated internationally, which exposes us to the impact of foreign currency fluctuations, as well as political and economic risks.

A significant portion of our revenues and earnings are generated internationally. In addition, a substantial amount of our products comes from sources outside the country of distribution. As a result, we are both directly and indirectly (through our suppliers) subject to the risks of doing business outside the United States, including:

 

   

currency fluctuations, which have impacted our results of operations significantly in recent years;

 

   

political, economic and social instability;

 

   

changes in tariffs and taxes;

 

   

regulatory restrictions on repatriating foreign funds back to the United States; and

 

   

less protective foreign laws relating to intellectual property.

The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. For example, the June 2016 decision by the United Kingdom to leave the European Union, or Brexit, has resulted in increased uncertainty in the economic and political environment in Europe and has caused increased fluctuations and unpredictability in foreign currency exchange rates. Changes in foreign currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Given the unpredictability and volatility of foreign currency exchange rates, ongoing or unusual volatility may adversely impact our business and financial conditions.

Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export and anti-corruption, including but not limited to the Foreign Corrupt Practices Act, or the FCPA, and the U.K. Bribery Act. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have an adverse effect on our business.

Changes to trade policy, as well as tariff and import/export regulations, may have a material adverse effect on our business, financial condition and results of operations.

Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing trade, manufacturing, development and investment in the countries where we currently sell our products or conduct our business, as well as any negative sentiment toward the United States as a result of such changes, could adversely affect our business. The Trump Administration has recently instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, including the North America Free Trade Agreement, or NAFTA, the imposition of higher tariffs on imports into the United States, economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the United States and other countries where we conduct our business. The Trump Administration has also negotiated a replacement trade deal for NAFTA with Mexico and Canada, known as the United States-Mexico-Canada Agreement, or USMCA, which still needs to be ratified by the respective government of each

 

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of the three countries. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes.

As a result of recent policy changes of the Trump Administration and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade. New tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have imposed or are considering imposing trade sanctions on certain U.S. goods. Like many other multinational corporations, we do a significant amount of business that could be impacted by changes to U.S. and international trade policies (including governmental action related to tariffs, international trade agreements or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products and, as a result, could have a material adverse effect on our business, financial condition and results of operations.

The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.

Legislation or other changes in tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act, or the Tax Act, was enacted in the United States on December 22, 2017. The Tax Act could have a significant impact on our effective tax rate, cash tax expenses and net deferred tax assets. The Tax Act reduces the U.S. corporate statutory tax rate, eliminates or limits the deduction of several expenses that were previously deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We have completed our evaluation of the overall impact of the Tax Act on our effective tax rate and balance sheet through fiscal year 2018 and reflected the amounts in our financial statements. The Tax Act may have significant impacts in future periods.

If we encounter problems with distribution, our ability to deliver our products to market could be adversely affected.

We rely on both company-owned and third-party distribution facilities to warehouse and ship products to our wholesale customers, retail stores and eCommerce consumers throughout the world. As part of the pursuit for improved organizational agility and marketplace responsiveness, we have consolidated the number of distribution facilities we rely upon and continue to look for opportunities for further consolidation in certain regions. Such consolidation may make our operations more vulnerable to interruptions in the event of work stoppages, labor disputes, earthquakes, floods, fires or other natural disasters affecting these distribution centers. In addition, distribution capacity is dependent on the timely performance of services by third parties, including the transportation of products to and from their distribution facilities. Moreover, our distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to data and system security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. If we encounter problems with our distribution system, whether company-owned or third-party, our ability to meet customer and consumer expectations, manage inventory, complete sales and achieve operating efficiencies could be adversely affected.

Our efforts to expand our retail business may not be successful, which could impact our operating results.

One of our key strategic priorities is to become a world-class omni-channel retailer by expanding our consumer reach in brand-dedicated stores globally, including making selective investments in

 

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company-operated stores and eCommerce sites, franchisee and other brand-dedicated store models. In many locations, we face major, established retail competitors who may be able to better attract consumers and execute their retail strategies. In addition, a retail operating model involves substantial investments in equipment and property, information systems, inventory and personnel. Due to the high fixed-cost structure associated with these investments, a significant expansion in company-operated stores, a decline in sales or the closure of or poor performance of stores could result in significant costs and impacts to our margins. Our ability to grow our retail channel also depends on the availability and cost of real estate that meets our criteria for traffic, square footage, demographics and other factors. Failure to identify and secure adequate new locations, or failure to effectively manage the profitability of the fleet of stores, could have an adverse effect on our results of operations.

If we are unable to effectively execute our eCommerce business, our reputation and operating results may be harmed.

While eCommerce still comprises a small portion of our net revenues, it has been our fastest growing business over the last several years. The success of our eCommerce business depends, in part, on third parties and factors over which we have limited control, including changing consumer preferences and buying trends relating to eCommerce usage, both domestically and abroad, and promotional or other advertising initiatives employed by our wholesale customers or other third parties on their eCommerce sites. Any failure on our part, or on the part of our third-party digital partners, to provide attractive, reliable, secure and user-friendly eCommerce platforms could negatively impact our consumers’ shopping experience, resulting in reduced website traffic, diminished loyalty to our brands and lost sales. In addition, as we continue to expand and increase the global presence of our eCommerce business, sales from our retail stores and wholesale channels of distribution in areas where eCommerce sites are introduced may decline due to changes in consumer shopping habits and cannibalization.

We are also vulnerable to certain additional risks and uncertainties associated with our eCommerce sites, including:

 

   

changes in required technology interfaces;

 

   

website downtime and other technical failures;

 

   

costs and technical issues from website software upgrades;

 

   

data and system security;

 

   

computer viruses; and

 

   

changes in applicable federal and state regulations.

In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other eCommerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not succeed in increasing sales or attracting consumers. For example, it is possible that our plan to build out our online customization offering by giving consumers the ability to create men’s and women’s denim bottoms, leveraging our Project F.L.X. technology, will not provide a shopping experience that our consumers find compelling. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our eCommerce business, as well as damage our reputation and brands.

Additionally, the success of our eCommerce business and the satisfaction of our consumers depend on their timely receipt of our products. The efficient flow of our products requires that our company-operated and third-party operated distribution facilities have adequate capacity to support the

 

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current level of eCommerce operations and any anticipated increased levels that may follow from the growth of our eCommerce business. If we encounter difficulties with our distribution facilities or in our relationships with the third parties who operate the facilities, or if any such facilities were to shut down for any reason, including as a result of fire, other natural disaster or labor disruption, we could face shortages of inventory, resulting in “out of stock” conditions in the eCommerce sites we operate and those operated by our wholesale customers or other third parties, and we could incur significantly higher costs and longer lead times associated with distributing our products to our consumers and experience dissatisfaction from our consumers. Any of these issues could have an adverse effect on our business and harm our reputation.

Unexpected obstacles in new markets may limit our expansion opportunities and cause our business and growth to suffer.

Our future growth depends in part on our continued expansion efforts in new markets where we may have limited familiarity and experience with regulatory environments and market practices. We may not be able to penetrate or successfully operate in any new market as a result of such unfamiliarity or other unexpected barriers to entry. In connection with our expansion efforts, we may encounter obstacles, including cultural and linguistic differences, differences in regulatory environments, labor practices and market practices, economic or governmental instability, difficulties in keeping abreast of market, business and technical developments and foreign consumers’ tastes and preferences. Our failure to develop our business in new markets or disappointing growth outside of existing markets that we may experience could harm our business and results of operations.

We face risks arising from any future restructuring of our operations and uncertainty with respect to our ability to achieve any anticipated cost savings associated with such restructuring.

We continuously assess opportunities to streamline operations and fuel long-term profitable growth. Future charges related to such actions may harm our profitability in the periods incurred.

Implementation of global productivity actions presents a number of significant risks, including:

 

   

actual or perceived disruption of service or reduction in service levels to customers and consumers;

 

   

potential adverse effects on our internal control environment and inability to preserve adequate internal controls relating to our general and administrative functions in connection with the decision to outsource certain business service activities;

 

   

actual or perceived disruption to suppliers, distribution networks and other important operational relationships and the inability to resolve potential conflicts in a timely manner;

 

   

difficulty in obtaining timely delivery of products of acceptable quality from our contract manufacturers;

 

   

diversion of management attention from ongoing business activities and strategic objectives; and

 

   

failure to maintain employee morale and retain key employees.

Because of these and other factors, we cannot predict whether we will fully realize the purpose and anticipated operational benefits or cost savings of any global productivity actions and, if we do not, our business and results of operations may be adversely affected. Furthermore, if we experience adverse changes to our business, additional restructuring or reorganization activities may be required in the future.

 

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Any major disruption or failure of our information technology systems, or our failure to successfully implement new technology effectively, could adversely affect our business and operations.

We rely on various information technology systems, owned by us and third parties, to manage our operations. Over the last several years, we have been and continue to implement modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. For example, over the next several years, we plan to continue the process of implementing a new enterprise resource planning system across the company. These activities subject us to inherent costs and risks associated with replacing and upgrading these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new or upgraded systems or of integrating new or upgraded systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new or upgraded technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.

As we outsource functions, we become more dependent on the entities performing those functions. Disruptions or delays at our third-party service providers could adversely impact our operations.

As part of our long-term profitable growth strategy, we are continually looking for opportunities to provide essential business services in a more cost-effective manner. In some cases, this requires the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. For example, we currently outsource a significant portion of our information technology, finance, customer relations and customer service functions to Wipro Limited. While we believe we conduct appropriate diligence before entering into agreements with any outsourcing entity, the failure of one or more of such entities to meet our performance standards and expectations, including with respect to data security, providing services on a timely basis or providing services at the prices we expect, may have an adverse effect on our results of operations or financial condition. In addition, we could face increased costs associated with finding replacement vendors or hiring new employees in order to return these services in-house. We may outsource other functions in the future, which would increase our reliance on third parties.

We face cybersecurity risks and may incur increasing costs in an effort to minimize those risks.

We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our consumers, employees and others, including credit card information and personal information. As evidenced by the numerous companies who have suffered serious data security breaches, we may be vulnerable to, and unable to anticipate or detect, data security breaches and data loss, including rapidly evolving and increasingly sophisticated cybersecurity attacks. In addition, data security breaches can also occur as a result of a breach by us or our employees or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. In addition to our own databases, we use third-party service providers to store, process and transmit confidential or sensitive information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a data security breach will not occur in the future either at their location or within their systems.

 

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A data security breach may expose us to a risk of loss or misuse of this information, and could result in significant costs to us, which may include, among others, potential liabilities to payment card networks for reimbursement of credit card fraud and card reissuance costs, including fines and penalties, potential liabilities from governmental or third-party investigations, proceedings or litigation and diversion of management attention. We could also experience delays or interruptions in our ability to function in the normal course of business, including delays in the fulfillment or cancellation of customer orders or disruptions in the manufacture and shipment of products. In addition, actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. In the United States, various laws and regulations apply to the collection, processing, disclosure and security of certain types of data, including the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996, the Gramm Leach Bliley Act and state laws relating to privacy and data security, including the California Consumer Privacy Act. Several foreign countries and governmental bodies, including the European Union, also have laws and regulations dealing with the handling and processing of personal information obtained from their residents, which in certain cases are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of various types of data, including data that identifies or may be used to identify an individual, such as names, email addresses and, in some jurisdictions, internet protocol addresses. Such laws and regulations may be modified or subject to new or different interpretations, and new laws and regulations may be enacted in the future. Within the European Union, the General Data Protection Regulation, which became effective in May 2018 and replaced the 1995 European Union Data Protection Directive and superseded applicable European Union member state legislation, imposes significant new requirements on how companies collect, process and transfer personal data, as well as significant fines for noncompliance.

Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity, and could cause our customers and consumers to lose trust in us, which could have an adverse effect on our reputation and business.

We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contract manufacturers to perform, could harm our sales, service levels and reputation.

In fiscal year 2018, we sourced approximately 99% of our products from independent contract manufacturers, who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on contract manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we currently do not have any material long-term contracts with any of our contract manufacturers. Under our current arrangements with our contract manufacturers, these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, while we have historically worked with numerous manufacturers, in recent years we have begun consolidating the number of contract manufacturers from which we source our products. In

 

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addition, some of our contract manufacturers have merged. Reliance on a fewer number of contract manufacturers involves risk, and any difficulties or failures to perform by our contract manufacturers could cause delays in product shipments or otherwise negatively affect our results of operations.

A contractor manufacturer’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices or reduce future orders, any of which could harm our sales and margins. If we need to replace any contract manufacturer, we may be unable to locate additional contract manufacturers on terms that are acceptable to us, or at all, or we may be unable to locate additional contract manufacturers with sufficient capacity to meet our requirements or to fill our orders in a timely manner.

We require contract manufacturers to meet our standards in terms of working conditions, environmental protection, raw materials, facility safety, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. We may also encounter delays in production and added costs as a result of the time it takes to train our contract manufacturers in our methods, products and quality control standards. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our contract manufacturers to adhere to labor or other laws, appropriate labor or business practices, safety, structural or environmental standards, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.

Our suppliers may be impacted by economic conditions and cycles and changing laws and regulatory requirements which could impact their ability to do business with us or cause us to terminate our relationship with them and require us to find replacements, which we may have difficulty doing.

Our suppliers are subject to the fluctuations in general economic cycles, and global economic conditions may impact their ability to operate their businesses. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our business and financial condition.

In addition, regulatory developments such as reporting requirements on the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of raw materials used by our suppliers in the manufacturing of certain of our products. We have been and may continue to be subject to costs associated with regulations, including for the diligence pertaining to the presence of any conflict minerals used in our products and the cost of remediation and other changes to products, processes or sources of supply as a consequence of such verification activities. The impact of such regulations may result in a limited pool of suppliers who provide conflict free metals, and we cannot be assured that we will be able to obtain products in sufficient quantities or at competitive prices. Also, because our supply chain is complex, we may face reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the products we sell.

 

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If one or more of our counterparty financial institutions default on their obligations to us, we may incur significant losses.

As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps, with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. This risk may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.

The loss of members of our executive management and other key employees or the failure to attract and retain key personnel could harm our business.

Our future success depends, in part, on the continued service of our executive management team and other key employees, and the loss of the services of any key individual could harm our business. Our future success also depends, in part, on our ability to recruit, retain and motivate our employees sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for experienced and well-qualified employees in our industry is particularly intense in many of the places where we do business, and we may not be successful in attracting and retaining such personnel. Moreover, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the United States.

Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.

In North America, most of our distribution employees are covered by various collective bargaining agreements. Outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or government-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.

Our licensees and franchisees may not comply with our product quality, manufacturing standards, marketing and other requirements, which could negatively affect our reputation and business.

We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.

In addition, we enter into franchise agreements with unaffiliated franchisees to operate stores and, in limited circumstances, websites in many countries around the world. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under

 

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our brand names. While the agreements we have entered into and plan to enter into in the future provide us with certain termination rights, the value of our brands could be impaired to the extent that these third parties do not operate their stores in a manner consistent with our requirements regarding our brand identities and customer experience standards. Failure to protect the value of our brands, or any other harmful acts or omissions by a franchisee, could have an adverse effect on our results of operations and our reputation.

Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.

Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a global basis. In addition to our trademarks and other intellectual property rights, as we develop technologies, such as Project F.L.X., that we believe are innovative, we intend to continually assess the patentability of new intellectual property. However, the patents that we own and those that may be issued in the future may not adequately protect our intellectual property, survive legal challenges or provide us with competitive advantages, and our patent applications may not be granted. Our efforts to establish and protect our proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks, patented technologies or other proprietary rights may not only erode sales of our products but may also cause significant reputational harm to our brand names and our ability to effectively represent ourselves to our consumers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other intellectual property, including through civil and/or criminal prosecution. We may not be able to successfully resolve those claims, which may result in financial liability and criminal penalties. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.

We have substantial liabilities and cash requirements associated with our postretirement benefits, pension and deferred compensation plans.

Our postretirement benefits, pension and deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns and/or the market value of plan assets, can affect the funded status of our defined benefit pension, other postretirement and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.

Natural disasters, public health crises, political crises and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend, and could impact consumer spending.

Our global headquarters and the headquarters of our Americas region are both located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or

 

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other natural disaster or power shortages or outages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our facilities, including our manufacturing, finishing or distribution facilities, our company-operated or franchised stores or the facilities of our suppliers, third-party service providers or customers, is affected by natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war, political instability or other conflict, or other events outside of our control, our business and operating results could suffer. Moreover, these types of events could negatively impact consumer spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our operating results. Similar disasters occurring at our vendors’ manufacturing facilities could impact our reputation and our consumers’ perception of our brands.

Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the U.K. Bribery Act and other anti-bribery, anti-corruption and anti-money laundering laws in various jurisdictions around the world. The FCPA, the U.K. Bribery Act and similar applicable laws generally prohibit companies, as well as their officers, directors, employees and third-party intermediaries, business partners and agents, from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state owned or affiliated entities and other third parties where we may be held liable for corrupt or other illegal activities, even if we do not explicitly authorize them. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and third-party intermediaries, business partners and agents will not take actions in violation of such policies and laws, for which we may be ultimately held responsible. To the extent that we learn that any of our employees or third-party intermediaries, business partners or agents do not adhere to our policies, procedures or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees or third-party intermediaries, agents or business partners have or may have violated such laws, we may be required to investigate or to have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, the U.K. Bribery Act or other applicable anti-bribery, anti-corruption and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, and criminal or civil sanctions, penalties and fines, any of which may could adversely affect our business and financial condition.

Our current and future products may experience quality problems from time to time that could result in negative publicity, litigation, product recalls and warranty claims, which could result in decreased revenues and harm to our brands.

There can be no assurance we will be able to detect, prevent or fix all defects that may affect our products. Inconsistency of legislation and regulations may also affect the costs of compliance with such laws and regulations. Such problems could hurt the image of our brands, which is critical to maintaining and expanding our business. Any negative publicity or lawsuits filed against us related to the perceived quality of our products could harm our brand and decrease demand for our products.

Climate change and related regulatory responses may adversely impact our business.

There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause

 

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significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Changes in weather patterns and an increased frequency, intensity and duration of extreme weather conditions could, among other things, adversely impact the cultivation of cotton, which is a key resource in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our product costs and impact the types of apparel products that consumers purchase. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.

In many of the countries in which we operate, governmental bodies are increasingly enacting legislation and regulations in response to the potential impacts of climate change. These laws and regulations, which may be mandatory, have the potential to impact our operations directly or indirectly as a result of required compliance by us, our suppliers and our contract manufacturers. In addition, we may choose to take voluntary steps to mitigate our impact on climate change. As a result, we may experience increases in energy, production, transportation and raw material costs, capital expenditures or insurance premiums and deductibles. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change in the countries in which we operate.

Future acquisitions of and investments in new businesses could impact our business and financial condition.

From time to time, we may acquire or invest in businesses or partnerships that we believe could complement our business or offer growth opportunities. The pursuit of such acquisitions or investments may divert the attention of management and cause us to incur various expenses, regardless of whether the acquisition or investment is ultimately completed. In addition, acquisitions and investments may not perform as expected or cause us to assume unrecognized or underestimated liabilities. Further, if we are able to successfully identify and acquire additional businesses, we may not be able to successfully integrate the acquired personnel or operations, or effectively manage the combined business following the acquisition, any of which could harm our business and financial condition.

We have debt and interest payment requirements at a level that may restrict our future operations.

As of November 25, 2018, we had $1.05 billion of debt, all of which was unsecured, and we had $805.2 million of additional borrowing capacity under our credit facility. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which reduces funds available for other business purposes and results in us having lower net income than we would otherwise have had. This dedicated use of cash could impact our ability to successfully compete by, for example:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

limiting our flexibility in planning for or reacting to changes in our business and industry;

 

   

placing us at a competitive disadvantage compared to some of our competitors that have less debt; and

 

   

limiting our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.

A substantial portion of our debt is Euro-denominated senior notes. In addition, borrowings under our credit facility bear interest at variable rates. As a result, increases in market interest rates and

 

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changes in foreign exchange rates could require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations. Increases in market interest rates may also affect the trading price of our debt securities that bear interest at a fixed rate. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.

The newly enacted Tax Act places limitations on businesses abilities to deduct interest expenses. If our adjusted taxable income were to decrease, we may not be able to fully deduct our interest expenses.

Restrictions in our notes, indentures and credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.

Our credit facility and the indentures governing our senior unsecured notes contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses or engage in other fundamental changes, sell assets, pay dividends and other distributions, repurchase stock, enter into transactions with affiliates, enter into capital leases or certain leases not in the ordinary course of business, enter into certain derivatives, grant negative pledges on our assets, make loans or other investments, guarantee third-party obligations, engage in sale leasebacks and make changes in our corporate structure. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.

If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.

We conduct our international operations through foreign subsidiaries and we only receive the cash that remains after our foreign subsidiaries satisfy their obligations. We may depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we may be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations.

Our business is affected by seasonality, which could result in fluctuations in our operating results.

We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in our third and fourth fiscal quarters have slightly exceeded those in our first and second fiscal quarters. In addition, our customers and consumers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, including the effects of climate change, the availability of import quotas, transportation disruptions and foreign currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate.

 

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We are subject to periodic claims and litigation that could result in unexpected expenses and could ultimately be resolved against us.

From time to time, we may be involved in litigation and other proceedings, including matters related to commercial disputes, product liability, intellectual property, trade, customs laws and regulations, employment, regulatory compliance and other claims related to our business. Any such proceeding or audit could result in significant settlement amounts, damages, fines or other penalties, divert financial and management resources and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed the limits of our insurance policies, or our insurance carriers may decline to fund such final settlements or judgments, which could have an adverse impact on our business, financial condition and results of operations. In addition, any such proceeding could negatively impact our brand equity and our reputation.

Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options.

Our long-term debt is currently rated BB+ by Standard & Poor’s and Ba1 by Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. In addition, macroeconomic conditions such as increased volatility or disruption in the credit markets could adversely affect our ability to refinance existing debt.

Risks Relating to Our Industry

Our revenues are influenced by economic conditions that impact consumer spending.

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Consumer purchases of discretionary items, including our products, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by closing doors, reducing inventories, canceling orders or increasing promotional activity. Our brand-dedicated stores are also affected by these conditions, which may lead to a decline in consumer traffic and spending in these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, the impact of foreign exchange fluctuations on tourism and tourist spending, volatility in investment returns, fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, natural disasters or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as their direct impact on us. These outcomes and behaviors have in the past, and may continue to in the future, adversely affect our business and financial condition.

Intense competition in the global apparel industry could lead to reduced sales and prices.

We face a variety of competitive challenges in the global apparel industry from a variety of jeanswear, athleisure and casual apparel companies, and competition has increased over the years due to factors such as:

 

   

the international expansion and increased presence of vertically integrated specialty stores;

 

   

expansion into eCommerce by existing and new competitors;

 

   

the proliferation of private labels and exclusive brands offered by department stores, chain stores and mass channel retailers;

 

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the introduction of lines of jeans, athleisure and casual apparel by well-known and successful athletic wear companies; and

 

   

the transition of apparel companies who traditionally relied on wholesale distribution channels into their own retail distribution network.

In addition, some of these competitors have greater financial, supply, distribution and marketing resources and may be able to adapt to changes in consumer preferences or retail requirements more quickly or devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products both in stores and online. In addition, some of these competitors may be able to achieve lower product costs or adopt more aggressive pricing and discounting policies. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the demand for our products. Failure to compete effectively due to these factors could reduce our sales and adversely affect our business and financial condition.

The success of our business depends upon our ability to forecast consumer demand and market conditions and offer on-trend and new and updated products at attractive price points.

The global apparel industry is characterized by ever-changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. The apparel industry is also impacted by changing consumer preferences regarding spending categories generally, including shifts away from consumer spending and towards “experiential” spending. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity and price competitive with other brands in the markets in which we sell our products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores and eCommerce sites situated in each of our diverse geographic regions. Our development and production cycles take place prior to full visibility into all of these factors for the coming seasons. Failure on our part to forecast consumer demand and market conditions and to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products and negatively impact the consumer traffic in our dedicated retail stores. In addition, if we fail to accurately forecast consumer demand, we may experience excess inventory levels, which may result in inventory write-downs and the sale of excess inventory at discounted prices. This could have an adverse effect on the image and reputation of our brands and could adversely affect our gross margins. Conversely, if we underestimate consumer demand for our products, we may experience inventory shortages, which could delay shipments to customers, negatively impact retailer and consumer relationships and diminish brand loyalty. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.

The global apparel industry is subject to intense pricing pressure.

The apparel industry is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, regular promotional activity and the ongoing emergence of new competitors with widely varying strategies and resources. These factors have contributed, and may continue to contribute in the future, to intense pricing pressure and uncertainty throughout the supply chain. Pricing pressure has been exacerbated by the variability of raw materials in recent years. This pressure could have adverse effects on our business and financial condition, including:

 

   

reduced gross margins across our product lines and distribution channels;

 

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increased retailer demands for allowances, incentives and other forms of economic support; and

 

   

increased pressure on us to reduce our production costs and operating expenses.

Increases in the price of raw materials or wage rates could increase our cost of goods and negatively impact our financial results.

The principal fabrics used in our products include cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. Cotton prices suffered from unprecedented variability and uncertainty in prior years and may fluctuate significantly again in the future. In addition, prices of purchased finished products also depend on wage rates in the regions where our contract manufacturers are located, as well as freight costs from those regions. In addition, fluctuations in wage rates required by legal or industry standards could increase our costs. Increases in raw material costs or wage rates, unless sufficiently offset by our pricing actions, may cause a decrease in our profitability and negatively impact our sales volume. These factors may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

Our business is subject to risks associated with sourcing and manufacturing overseas, as well as risks associated with potential tariffs or a global trade war.

We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather or security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition, specifically our gross margin and overall profitability.

Substantially all of our import operations are subject to complex custom laws, regulations and tax requirements as well as trade regulations, such as tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or the failure by us or our suppliers to comply with customs regulations or similar laws, could harm our business. In this regard, the results of the November 2016 election in the United States and the Brexit vote in the United Kingdom have introduced greater uncertainty with respect to future tax and trade regulations. Changes in tax policy or trade regulations, such as the recently passed Tax Act in the United States, a withdrawal of the United States from, or a significant renegotiation or replacement of, NAFTA, the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have an adverse effect on our business and results of operations.

Recently, the Trump Administration announced tariffs on certain steel and aluminum products imported into the United States, which has resulted in reciprocal tariffs from the European Union on

 

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goods, including denim products, imported from the United States. Because we manufacture most of our products outside the United States, these reciprocal tariffs are not expected to have a material impact on our business. The Trump Administration has also imposed $34 billion in tariffs on goods imported from China in connection with China’s intellectual property practices and has announced a potential additional $200 billion in tariffs on goods imported from China. The Trump Administration has also negotiated a replacement trade deal for NAFTA with Mexico and Canada, the USMCA, which still needs to be ratified by the respective government of each of the three countries. Approximately 15% to 20% of the products that we sell in the United States are manufactured in China and Mexico. If the Trump Administration follows through on its proposed China tariffs or replaces NAFTA with USMCA, or if additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, the cost of our products manufactured in China, Mexico or other countries and imported into the United States or other countries could increase, which in turn could adversely affect the demand for these products and have an adverse effect on our business and results of operations.

Risks Relating to This Offering and Ownership of Our Class A Common Stock

The market price of our Class A common stock may be volatile or may decline steeply or suddenly regardless of our operating performance and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the initial public offering price and may lose all or part of your investment.

The initial public offering price for our Class A common stock will be determined through negotiations among the underwriters and us, and may vary from the market price of our Class A common stock following this offering. If you purchase shares of Class A common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our revenues or other operating results;

 

   

variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

 

   

any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information or our failure to meet expectations based on this information;

 

   

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

   

whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure;

 

   

additional shares of Class A common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable “lock-up” periods end;

 

   

announcements by us or our competitors of significant products or features, innovations, acquisitions, strategic partnerships, joint ventures, capital commitments, divestitures or other dispositions;

 

   

changes in operating performance and stock market valuations of companies in our industry, including our vendors and competitors;

 

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price and volume fluctuations in the overall stock market, including as a result of general economic trends;

 

   

lawsuits threatened or filed against us, or events that negatively impact our reputation;

 

   

developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; and

 

   

other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect many retail companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the respective companies’ operating performance. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and seriously harm our business.

Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenues or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a decline could occur even when we have met any previously publicly stated revenues or earnings forecasts that we may provide.

An active trading market for our Class A common stock may never develop or be sustained.

We have applied to list our Class A common stock on the New York Stock Exchange, or NYSE, under the symbol “LEVI.” However, we cannot assure you that an active trading market for our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of Class A common stock when desired or the prices that you may obtain for your shares.

Future sales of our Class A common stock by existing stockholders could cause our stock price to decline.

If our existing stockholders, including employees, who obtain equity, sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our Class A common stock could decline. Based on shares outstanding as of January 30, 2019, upon the completion of this offering, we will have outstanding a total of 36,666,667 shares of Class A common stock and 348,882,120 shares of Class B common stock (assuming the sale of 27,200,110 shares of Class A common stock by the selling stockholders in this offering). This assumes the reclassification of our outstanding common stock into an equal number of shares of Class B common stock, the filing and effectiveness of our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, the issuance of Class A common stock upon the completion of this offering and the sale of Class A common stock by the selling stockholders in this offering. Of these shares, only the shares of Class A common stock sold in this offering will be freely tradable without restrictions or

 

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further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by persons who are not our “affiliates” as defined in Rule 144 under the Securities Act and who have complied with the holding period requirements of Rule 144 under the Securities Act.

Subject to certain exceptions described under “Underwriting,” we and our officers, directors and holders of substantially all of our common stock and securities convertible into or exchangeable for shares of our common stock, including the selling stockholders, have entered into or will enter into lock-up agreements with the underwriters under which we and they have agreed, subject to certain exceptions, not to dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus.

When the lock-up period in the lock-up agreements expires, we and our locked-up security holders will be able to sell our shares in the public market. In addition, Goldman Sachs & Co. LLC may release all or some portion of the shares subject to the lock-up agreements prior to the expiration of the lock-up period. See “Shares Eligible for Future Sale.” Sales of a substantial number of such shares, or the perception that such sales may occur, upon the expiration or early release of the securities subject to, the lock-up agreements, could cause our stock price to decline or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

Following the completion of this offering, based on the number of shares outstanding as of January 30, 2019, holders of more than 90% of our Class B common stock will have contractual rights, subject to certain conditions, to require us to file registration statements for the public resale of the shares of Class A common stock issuable upon conversion of their Class B common stock, or to include such shares in registration statements that we may file. See “Description of Capital Stock—Class A Common Stock and Class B Common Stock—Registration Rights.”

Descendants of the family of Levi Strauss have the ability to control the outcome of matters submitted for stockholder approval, which will limit your ability to influence corporate matters.

Our Class B common stock, which is entitled to ten votes per share, is primarily owned by descendants of the family of our founder, Levi Strauss, and their relatives and trusts established for their behalf. Collectively, these persons have the ability to control the outcome of stockholder votes, including the election of our board of directors and the approval or rejection of a merger, change of control or other significant corporate transaction. In addition, so long as any shares of Class B common stock remain outstanding, the approval of the holders of a majority of our then-outstanding Class B common stock (or, in certain cases, a majority of our then-outstanding Class A common stock and Class B common stock, voting together as a single class) will be required in order for us to take certain actions. See “Description of Capital Stock—Class A Common Stock and Class B Common Stock—Protective Provisions.”

We believe having a long-term-focused, committed and engaged stockholder base provides us with an important strategic advantage, particularly in our business, where our more than 165-year history contributes to the iconic reputations of our brands. However, the interests of these stockholders may not always be aligned with each other or with the interests of our other stockholders. By exercising their control, these stockholders could cause our company to take actions that are at odds with the investment goals or interests of institutional, short-term or other non-controlling investors, or that have a negative effect on our stock price. Further, because these stockholders control the majority of our Class B common stock, we might be a less attractive takeover target, which could adversely affect the market price of our Class A common stock.

 

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We cannot predict the impact our dual class structure may have on our stock price or our business.

We cannot predict whether our dual class structure will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. S&P Dow Jones and FTSE Russell have recently announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500. These changes exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several stockholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.

We have broad discretion in how we may use the net proceeds from this offering, and we may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in applying the net proceeds we receive from this offering. We may use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any plans to do so. We may also invest these proceeds in a way with which our stockholders disagree. If our management fails to use these funds effectively, our business could be seriously harmed. Pending their use, the net proceeds we receive from this offering may be invested in a way that does not produce income or that loses value.

If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business or our market, or if they adversely change their recommendations regarding our Class A common stock, the trading price or trading volume of our Class A common stock could decline.

The trading market for our Class A common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common stock, provide a more favorable recommendation about our competitors or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.

Future securities issuances could result in significant dilution to our stockholders and impair the market price of our Class A common stock.

Future issuances of our Class A common stock or the conversion of a substantial number of shares of our Class B common stock, or the perception that these issuances or conversions may occur, could depress the market price of our Class A common stock and result in dilution to existing holders of our Class A common stock. Also, to the extent stock-based awards are issued or become vested, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuances or exercises. Furthermore, we may issue additional equity securities that could

 

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have rights senior to those of our Class A common stock. As a result, purchasers of Class A common stock in this offering bear the risk that future issuances of debt or equity securities may reduce the value of such shares and further dilute their ownership interest.

As of January 30, 2019, there were 20,470,039 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP that may be settled in shares of our Class B common stock. In connection with this offering, all of the shares of Class A common stock issuable upon the conversion of shares of Class B common stock subject to outstanding options will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, and subject to compliance with applicable securities laws.

Following the completion of this offering, based on the number of shares outstanding as of January 30, 2019, holders of more than 90% of our Class B common stock will have contractual rights, subject to certain conditions, to require us to file registration statements for the public resale of the shares of Class A common stock issuable upon conversion of their Class B common stock, or to include such shares in registration statements that we may file. See “Description of Capital Stock—Class A Common Stock and Class B Common Stock—Registration Rights.”

The requirements of being a public company may strain our resources, result in more litigation and divert management’s attention.

Although we have made filings with the SEC for many years, as a public company we will be subject to the additional reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities rules and regulations. For example, upon the completion of this offering, we will be required to file proxy statements under Section 14 of the Exchange Act. Complying with these rules and regulations has increased and will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may also need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance and, in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

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By disclosing information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.

If you purchase shares of our Class A common stock in this offering, you will experience substantial and immediate dilution.

The assumed initial public offering price of $15.00 per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the net tangible book value per share of our outstanding Class A common stock immediately after this offering. If you purchase shares of Class A common stock in this offering, you will experience substantial and immediate dilution in the pro forma as adjusted net tangible book value per share of $13.23 per share as of November 25, 2018, based on the assumed initial public offering price of $15.00 per share. That is because the price that you pay will be substantially greater than the pro forma net tangible book value per share of Class A common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution to the extent that outstanding RSUs are settled, SARs are exercised or new RSUs or SARs or other securities are issued under our equity incentive plans or we issue additional shares of Class A common stock or Class B common stock in the future. See “Dilution.”

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws, each of which will be in effect upon the completion of this offering, could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws, each of which will be in effect upon the completion of this offering, contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that our stockholders may deem advantageous. In particular, our amended and restated certificate of incorporation and amended and restated bylaws:

 

   

establish a classified board of directors so that not all members are elected at one time;

 

   

permit our board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

restrict the forum for certain litigation against us to Delaware;

 

   

reflect the dual class structure of our common stock; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders.

Any provision of our amended and restated certificate of incorporation, our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock. See “Description of Capital Stock—Anti-Takeover Provisions.”

 

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Our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a breach of fiduciary duty;

 

   

any action asserting a claim against us arising under the Delaware General Corporation Law, or the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; and

 

   

any action asserting a claim against us that is governed by the internal-affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.

This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage lawsuits against us and our directors, officers and employees. If a court were to find this exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” “would” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

changes in general economic and financial conditions, and the resulting impact on the level of discretionary consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes;

 

   

our ability to effectively manage any global productivity and outsourcing actions as planned, which are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;

 

   

consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer’s financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent traffic patterns and an increase in promotional activity as a result of decreased traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;

 

   

our and our wholesale customers’ decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;

 

   

our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing and raw materials supply and to manage consumer response to such mitigating actions;

 

   

our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, and in-store and digital shopping experiences;

 

   

our ability to respond to price, innovation and other competitive pressures in the global apparel industry on and from our key customers and in our key markets;

 

   

our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;

 

   

consequences of foreign currency exchange and interest rate fluctuations;

 

   

our ability to successfully prevent or mitigate the impacts of data security breaches;

 

   

our ability to attract and retain key executives and other key employees;

 

   

our ability to protect our trademarks and other intellectual property;

 

   

the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;

 

   

our dependence on key distribution channels, customers and suppliers;

 

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our ability to utilize our tax credits and net operating loss carryforwards;

 

   

ongoing or future litigation matters and disputes and regulatory developments;

 

   

our liquidity outlook and capital allocation priorities;

 

   

our expectations regarding our preliminary estimates of certain unaudited financial information for the three months ended February 24, 2019;

 

   

the impact of the Tax Act in the United States, including related changes to our deferred tax assets and liabilities, tax obligations and effective tax rate in future periods, as well as the charge recorded for fiscal year 2018;

 

   

changes in or application of trade and tax laws, potential increases in import tariffs or taxes and the potential withdrawal from or renegotiation or replacement of NAFTA; and

 

   

political, social and economic instability or natural disasters in countries where we or our customers do business.

We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described under “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this prospectus or to conform such statements to actual results or revised expectations, except as required by law.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $106.6 million (or approximately $184.7 million if the underwriters exercise their option to purchase additional shares of Class A common stock from us in full) based upon an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of Class A common stock by the selling stockholders. We have agreed to pay certain expenses in connection with this offering on behalf of the selling stockholders, including all underwriting discounts and commissions applicable to the sale of shares of Class A common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share of Class A common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $7.5 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.2 million, assuming the assumed initial public offering price of $15.00 per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our financial flexibility and create a public market for our Class A common stock. We currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds we receive from this offering for acquisitions or other strategic investments, although we do not currently have any plans to do so.

We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds to us from this offering that are not used as described above in investment-grade, interest-bearing instruments.

 

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DIVIDEND POLICY

We have paid cash dividends on our common stock each year since 2008. As noted in “Liquidity and Capital Resources,” our top capital allocation priorities are reinvesting back into the existing business and returning cash to stockholders, including in the form of cash dividends, which we target to be equal to or greater than our most recent annual dividends. In January 2019, our board of directors declared two cash dividends of $55 million each, the first of which was paid in the first quarter of fiscal year 2019 to the holders of record of our common stock at the close of business on February 8, 2019 and the second of which will be paid in the fourth quarter of fiscal year 2019 to the holders of record of our Class A and Class B common stock at the close of business on October 5, 2019. We have not yet made a determination regarding the amount of any additional future payment of cash dividends. Future cash dividends will be paid in the same per-share amount on both our Class A common stock and Class B common stock. Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our board of directors may deem relevant.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of November 25, 2018:

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to (i) the reclassification of our outstanding common stock into an equal number of shares of Class B common stock as if such reclassification had occurred on November 25, 2018, (ii) the filing and effectiveness of our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, (iii) the reclassification of temporary equity to additional paid-in capital as described in footnote (1) to the table below and (iv) $110 million in cash dividends declared in January 2019 as described in “Dividend Policy”; and

 

   

on a pro forma as adjusted basis giving effect to (i) the pro forma items described immediately above, (ii) the reclassification of 27,200,110 shares of Class B common stock into an equal number of shares of Class A common stock upon the sale of such shares by the selling stockholders in this offering and (iii) the sale of 9,466,557 shares of Class A common stock by us in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of November 25, 2018  
             Actual                 Pro Forma         Pro Forma
    As Adjusted    
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 713,120     $ 713,120     $ 819,687  
  

 

 

   

 

 

   

 

 

 

Total debt, excluding capital leases

   $ 1,052,154     $ 1,052,154     $ 1,052,154  
  

 

 

   

 

 

   

 

 

 

Temporary equity(1)

   $ 299,140     $     $  
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Preferred stock, par value $1.00 per share; 100,000,000 shares authorized, no shares issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

   $     $     $  

Common stock, par value $0.001 per share; 2,700,000,000 shares authorized, 376,028,430 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     376              

Class A common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 1,200,000,000 shares authorized, no shares issued and outstanding, pro forma; 1,200,000,000 shares authorized, 36,666,667 shares issued and outstanding, pro forma as adjusted

                 37  

Class B common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 422,000,000 shares authorized, 376,028,430 shares issued and outstanding, pro forma; 422,000,000 shares authorized, 348,828,320 shares issued and outstanding, pro forma as adjusted

           376       349  

Additional paid-in capital

           299,140       427,117  

Accumulated other comprehensive loss

     (424,584     (424,584     (424,584

Retained earnings(2)

     1,084,321       974,321       952,901  
  

 

 

   

 

 

   

 

 

 

Total Levi Strauss & Co. stockholders’ equity

   $ 660,113     $ 849,253     $ 955,820  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 2,011,407     $ 1,901,407     $ 2,007,974  
  

 

 

   

 

 

   

 

 

 

 

(1)

Prior to this offering, the holder of shares of Class B common stock issued upon exercise or settlement of certain RSU or SAR awards may require us to repurchase such shares at certain times at the then-current market value pursuant to a contractual put right. Because these equity-classified awards may be redeemed in cash at the option of the holder, they are presented on the balance sheet outside of permanent equity, within “temporary equity.” Temporary equity reflects the redemption value of these awards, which incorporates the elapsed service period since the grant date reflecting the pattern of compensation cost recognition, as well as the fair value of the Class B common stock issued in accordance with our 2016 EIP. Upon the completion of this offering, the contractual put right related to these awards will terminate and these awards will no longer be presented in temporary equity. Accordingly, the balance in temporary equity as of immediately prior to the offering will be reclassified to additional paid-in capital upon completion of this offering. For more information regarding these awards, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Business—Anticipated Changes to our Equity Compensation Program in Connection with this Offering.”

(2)

We have agreed to pay all underwriting discounts and commissions applicable to the sale of shares of Class A common stock by the selling stockholders. This amount will be recorded as non-operating expense upon the completion of this offering and, accordingly, has been reflected as a reduction in retained earnings.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share of Class A common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $7.5 million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $14.2 million, assuming the assumed initial public offering price of $15.00 per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The numbers of shares of Class A common stock and Class B common stock that will be outstanding following this offering are based on no shares of Class A common stock and 376,028,430 shares of Class B common stock outstanding as of November 25, 2018, and excludes:

 

   

18,943,100 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP that were outstanding as of November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

895,560 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP after November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

40,000,000 shares of Class A common stock reserved for future issuance under our 2019 EIP, which will become effective in connection with this offering, as more fully described under “Equity Compensation—Elements of Compensation—Long-Term Incentives”; and

 

   

12,000,000 shares of our Class A common stock reserved for future issuance under our ESPP, which will become effective in connection with this offering.

 

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DILUTION

If you invest in our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately following the completion of this offering.

Our historical net tangible book value as of November 25, 2018 was $687.5 million, or $1.83 per share of common stock. Our historical net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of November 25, 2018.

Our pro forma net tangible book value as of November 25, 2018 was $577.5 million, or $1.54 per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of Class A common stock and Class B common stock outstanding as of November 25, 2018, after giving effect to: (i) the reclassification of our outstanding common stock into an equal number of shares of Class B common stock as if such reclassification had occurred on November 25, 2018, (ii) the filing and effectiveness of our amended and restated certificate of incorporation, which will be in effect upon the completion of this offering, (iii) the reclassification of temporary equity to additional paid-in capital as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Business—Anticipated Changes to our Equity Compensation Program in Connection with this Offering” and (iv) $110 million in cash dividends declared in January 2019 as described in “Dividend Policy.”

Our pro forma as adjusted net tangible book value represents our pro forma net tangible book value, plus the effect of the sale of 9,466,557 shares of Class A common stock by us in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our pro forma as adjusted net tangible book value as of November 25, 2018 was $684.1 million, or $1.77 per share. This amount represents an immediate increase in pro forma net tangible book value of $0.23 per share to our existing stockholders and an immediate dilution of $13.23 per share to investors participating in this offering. We determine dilution per share to investors participating in this offering by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by investors participating in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $ 15.00  

Historical net tangible book value per share as of November 25, 2018

   $ 1.83     

Decrease per share attributable to the pro forma adjustments described above

   $ 0.29     
  

 

 

    

Pro forma net tangible book value per share as of November 25, 2018

   $ 1.54     

Increase in pro forma net tangible book value per share attributed to new investors purchasing shares from us in this offering

   $ 0.23     
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

      $ 1.77  
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $ 13.23  
     

 

 

 

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. A $1.00 increase (decrease) in the assumed

 

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initial public offering price of $15.00 per share of Class A common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $.02 per share and increase (decrease) the dilution to new investors by $0.98 per share, in each case assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $0.03 per share and increase (decrease) the dilution to new investors by $(0.03) per share, in each case assuming the assumed initial public offering price of $15.00 per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares of Class A common stock from us in full, our pro forma as adjusted net tangible book value would be $1.95 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $13.05 per share.

The numbers of shares of Class A common stock and Class B common stock that will be outstanding following this offering are based on no shares of Class A common stock and 376,028,430 shares of Class B common stock outstanding as of November 25, 2018, and excludes:

 

   

18,943,100 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP that were outstanding as of November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

895,560 shares of Class B common stock issuable pursuant to RSUs and SARs granted under our 2016 EIP granted after November 25, 2018 that may be settled in or exercised for shares of our Class B common stock;

 

   

40,000,000 shares of Class A common stock reserved for future issuance under our 2019 EIP, which will become effective in connection with this offering, as more fully described under “Equity Compensation—Elements of Compensation—Long-Term Incentives”; and

 

   

12,000,000 shares of our Class A common stock reserved for future issuance under our ESPP, which will become effective in connection with this offering.

To the extent that outstanding RSUs are settled, SARs are exercised, new RSUs or SARs or other securities are issued under our equity incentive plans, or we issue additional shares of Class A common stock or Class B common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of income data and selected consolidated statements of cash flow data for fiscal years 2018, 2017 and 2016 and the selected consolidated balance sheet data as of November 25, 2018 and November 26, 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of income data and selected consolidated statements of cash flow data for fiscal years 2015 and 2014 and the selected consolidated balance sheet data as of November 27, 2016, November 29, 2015 and November 30, 2014 have been derived from our audited consolidated financial statements not included in this prospectus, with the exception of earnings per common share attributable to common stockholders and weighted-average common shares outstanding, which are unaudited and were not historically included in our audited financial statements.

Our historical results are not necessarily indicative of future operating results. The selected financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended  
    November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
   

(in thousands, except share and per share data)

 

Consolidated Statements of Income Data:

         

Net revenues(1)

  $ 5,575,440     $ 4,904,030     $ 4,552,739     $ 4,494,493     $ 4,753,992  

Cost of goods sold

    2,577,465       2,341,301       2,223,727       2,225,512       2,405,552  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,997,975       2,562,729       2,329,012       2,268,981       2,348,440  

Selling, general and administrative expenses(2)

    2,460,915       2,095,560       1,866,493       1,823,863       1,906,164  

Restructuring, net

                312       14,071       128,425  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    537,060       467,169       462,207       431,047       313,851  

Interest expense

    (55,296     (68,603     (73,170     (81,214     (117,597

Loss on early extinguishment of debt

          (22,793           (14,002     (20,343

Other income (expense), net

    18,258       (26,992     18,223       (25,433     (22,057
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    500,022       348,781       407,260       310,398       153,854  

Income tax expense

    214,778       64,225       116,051       100,507       49,545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    285,244       284,556       291,209       209,891       104,309  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest

    (2,102     (3,153     (157     (455     1,769  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

  $ 283,142     $ 281,403     $ 291,052     $ 209,436     $ 106,078  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share attributable to common stockholders:

         

Basic

  $ 0.75     $ 0.75     $ 0.78     $ 0.56     $ 0.28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.73     $ 0.73     $ 0.76     $ 0.55     $ 0.28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

         

Basic

    377,139,847       376,177,350       375,141,560       374,831,820       374,773,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    388,607,361       384,338,330       382,852,950       384,122,020       380,596,080  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data:

         

Net cash flow provided by (used for):

         

Operating activities

  $ 420,371     $ 525,941     $ 306,550     $ 218,332     $ 232,909  

Investing activities

    (179,387     (124,391     (68,348     (80,833     (71,849

Financing activities

    (148,224     (151,733     (173,549     (94,895     (341,676

 

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(1)

Currency translation unfavorably impacted net revenues growth for fiscal years 2014 to 2018. The net revenues CAGR from fiscal year 2014 to fiscal year 2018 of 4% as reported was 6% on a constant-currency basis.

(2)

The period ended November 26, 2017 includes an out-of-period adjustment that increased selling, general and administrative expenses by $8.3 million and decreased income tax expense and net income by $3.2 million and $5.1 million, respectively. Basic and diluted earnings per common share attributable to common stockholders both decreased by $0.01 per share as a result of this adjustment. This item, which originated in prior years, relates to the correction of the periods used for the recognition of stock-based compensation expense associated with employees eligible to vest in awards after retirement. We have evaluated the effects of this out-of-period adjustment, both qualitatively and quantitatively, and concluded that the correction of this amount was not material to the current period or the periods in which they originated, including quarterly reporting.

 

     As of  
     November 25,
2018
     November 26,
2017
     November 27,
2016
     November 29,
2015
     November 30,
2014
 
     (in thousands)  

Consolidated Balance Sheet Data:

              

Cash and cash equivalents

   $ 713,120      $ 633,622      $ 375,563      $ 318,571      $ 298,255  

Working capital

     1,235,860        1,118,157        942,019        681,982        603,202  

Total assets

     3,542,660        3,357,838        2,995,470        2,884,395        2,906,901  

Total debt, excluding capital leases

     1,052,154        1,077,311        1,045,178        1,152,541        1,209,624  

Temporary equity

     299,140        127,035        79,346        68,783        77,664  

Total Levi Strauss & Co. stockholders’ equity

     660,113        696,910        509,555        330,268        153,243  

Non-GAAP Financial Measures

To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management’s view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

However, 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. 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, our consolidated financial statements prepared and presented in accordance with GAAP.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
    

(dollars in thousands)

 

Net income margin(1)

     5.1     5.8     6.4     4.7     2.2

Adjusted EBIT

   $ 586,402     $ 488,949     $ 479,566     $ 479,180     $ 507,611  

Adjusted EBIT margin

     10.5     10.0     10.5     10.7     10.7

Adjusted EBITDA

   $ 706,607     $ 606,336     $ 583,444     $ 581,224     $ 617,085  

Adjusted net income

   $ 418,478     $ 320,928     $ 303,621     $ 251,894     $ 249,466  

Adjusted net income margin

     7.5     6.5     6.7     5.6     5.2

Adjusted free cash flow

   $ 94,945     $ 284,386     $ 158,212     $ 74,298     $ 118,012  

Net debt

   $ 339,034     $ 443,689     $ 669,615     $ 833,970     $ 911,369  

Leverage ratio

     1.5x       1.8x       1.8x       2.0x       2.0x  

 

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(1)

Net income margin, a GAAP financial measure, is presented for comparison with the Adjusted EBIT margin and adjusted net income margin.

Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Margin

We define Adjusted EBIT, a non-GAAP financial measure, as net income excluding income tax expense, interest expense, loss on early extinguishment of debt, other expense (income), net, charges related to the transition to being a public company, impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and asset impairment charges, net, and pension and postretirement benefit plan curtailment and net settlement losses (gains). We define Adjusted EBIT margin as Adjusted EBIT as a percentage of net revenues. We define Adjusted EBITDA as Adjusted EBIT excluding depreciation and amortization expense. We define adjusted net income, a non-GAAP financial measure, as net income excluding loss on early extinguishment of debt, charges related to the transition to being a public company, impact of changes in fair value on cash-settled stock-based compensation, restructuring and related charges, severance and asset impairment charges, net, pension and postretirement benefit plan curtailment and net settlement losses (gains) and, in fiscal year 2018, a $95.6 million re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as a result of the Tax Act, adjusted to give effect to the income tax impact of such adjustments. To calculate the income tax impact of such adjustments, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, each as reflected in our statement of operations for the relevant period, except that in fiscal year 2018 we excluded from income tax expense the effect of the $95.6 million re-measurement described above. We define adjusted net income margin as adjusted net income as a percentage of net revenues. We believe Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income and adjusted net income margin are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance.

Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, adjusted net income and adjusted net income margin have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include:

 

   

Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness, which reduces cash available to us;

 

   

Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect income tax payments that reduce cash available to us;

 

   

Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other expense (income) net, which has primarily consisted of realized and unrealized gains and losses on our forward foreign exchange contracts and transaction gains and losses on our foreign exchange balances, although these items affect the amount and timing of cash available to us when these gains and losses are realized;

 

   

all of these non-GAAP financial measures exclude restructuring and related charges, severance and asset impairment charges and pension and postretirement benefit claim

 

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curtailment and net settlement losses, each of which can affect our current and future cash requirements;

 

   

all of these non-GAAP financial measures exclude the expense resulting from the impact of changes in fair value on our cash-settled stock-based compensation awards, even though, prior to consummation of this offering, such awards were required to be settled in cash;

 

   

the expenses and other items that we exclude in our calculations of all of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from all of these non-GAAP financial measures or similarly titled measures;

 

   

Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of property and equipment and, although these are non-cash expenses, the assets being depreciated may need to be replaced in the future; and

 

   

Adjusted net income and adjusted net income margin do not include all of the effects of income taxes and changes in income taxes reflected in net income.

Because of these limitations, 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.

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.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
    

(dollars in thousands)

 

Net income

   $ 285,244     $ 284,556     $ 291,209     $ 209,891     $ 104,309  

Income tax expense

     214,778       64,225       116,051       100,507       49,545  

Interest expense

     55,296       68,603       73,170       81,214       117,597  

Loss on early extinguishment of debt

           22,793             14,002       20,343  

Other (income) expense, net

     (18,258     26,992       (18,223     25,433       22,057  

Charges related to the transition to being a public company(1)

   $ 140                          

Impact of changes in fair value on cash-settled stock-based compensation(2)

    
44,007
 
    8,187       (164     540       7,094  

Restructuring and related charges, severance and asset impairment charges, net

     5,259       13,361       17,614       46,982       152,653  

Pension and postretirement benefit plan curtailment and net settlement losses (gains)(3)

     (64     232       (91     611       34,013  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBIT(4)

   $ 586,402     $ 488,949     $ 479,566     $ 479,180     $ 507,611  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

     120,205       117,387       103,878       102,044       109,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 706,607     $ 606,336     $ 583,444     $ 581,224     $ 617,085  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income margin

     5.1     5.8     6.4     4.7     2.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBIT margin

     10.5     10.0     10.5     10.7     10.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes fees and expenses in connection with our transition to being a public company, including incremental consulting fees associated with being a public company.

 

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(2)

Includes the impact of the changes in fair value of Class B common stock following the grant date on cash-settled awards, which are classified as liabilities. After this offering, we anticipate that we will no longer grant cash-settled awards and will instead grant stock-settled awards to our employees. As a result, the liabilities and stock-based compensation expense subject to the variability of the fair market value at the end of each reporting period would be replaced by stock-based compensation expense based on the grant-date fair value of the awards.

(3)

Includes non-cash pension curtailment and settlement charges.

(4)

Currency translation unfavorably impacted Adjusted EBIT growth for fiscal years 2014 to 2018. The Adjusted EBIT CAGR from fiscal year 2014 to fiscal year 2018 of 4% as reported was 5% on a constant-currency basis.

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

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
     (in thousands)  

Net income

   $ 285,244     $ 284,556     $ 291,209     $ 209,891     $ 104,309  

Loss on early extinguishment of debt

           22,793             14,002       20,343  

Charges related to the transition to being a public company(1)

     140                          

Impact of changes in fair value on cash-settled stock-based compensation(2)

     44,007       8,187       (164     540       7,094  

Restructuring and related charges, severance and asset impairment charges, net

     5,259       13,361       17,614       46,982       152,653  

Pension and postretirement benefit plan curtailment and net settlement losses (gains)(3)

     (64     232       (91     611       34,013  

Remeasurement of deferred tax assets and liabilities(4)

     95,648                          

Tax impact of adjustments(5)

     (11,756     (8,201     (4,947     (20,132     (68,946
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 418,478     $ 320,928     $ 303,621     $ 251,894     $ 249,466  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes fees and expenses in connection with our transition to being a public company, including incremental consulting fees associated with being a public company.

(2)

Includes the impact of the changes in fair value of Class B common stock following the grant date on cash-settled awards, which are classified as liabilities. After this offering, we anticipate that we will no longer grant cash-settled awards and will instead grant stock-settled awards to our employees. As a result, the liabilities and stock-based compensation expense subject to the variability of the fair market value at the end of each reporting period would be replaced by stock-based compensation expense based on the grant-date fair value of the awards.

(3)

Includes non-cash pension curtailment and settlement charges.

(4)

Represents the impact of the re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future as a result of the Tax Act.

(5)

To calculate the income tax impact of such adjustments, we utilize an effective tax rate equal to our income tax expense divided by our income before income taxes, each as reflected in our statement of operations for the relevant period, except that in fiscal year 2018 we exclude from income tax expense the effect of the $95.6 million re-measurement described in footnote (4) above. The effective tax rates reflected above are: 23.8% for fiscal year 2018, 18.4% for fiscal year 2017, 28.5% for fiscal year 2016, 32.4% for fiscal year 2015 and 32.2% for fiscal year 2014.

Leverage Ratio and Net Debt

We define leverage ratio, a non-GAAP financial measure, as the ratio of total debt to the last 12 months Adjusted EBITDA. We define net debt, a non-GAAP financial measure, as total debt, excluding capital leases, less cash and cash equivalents. Our management believes that leverage ratio and net debt are important measures to monitor our financial flexibility and evaluate the strength of our balance sheet. Leverage ratio and net debt have limitations as analytical tools and may vary from similarly titled measures used by other companies. Leverage ratio and net debt should not be

 

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considered in isolation or as substitutes for an analysis of our results prepared and presented in accordance with GAAP.

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

 

     Year Ended  
     November 25,
2018
     November 26,
2017
     November 27,
2016
     November 29,
2015
     November 30,
2014
 
    

(dollars in thousands)

 

Total debt, excluding capital leases

   $ 1,052,154      $ 1,077,311      $ 1,045,178      $ 1,152,541      $ 1,209,624  

Cash and cash equivalents

     713,120        633,622        375,563        318,571        298,255  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net debt

   $ 339,034      $ 443,689      $ 669,615      $ 833,970      $ 911,369  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 706,607      $ 606,336      $ 583,444      $ 581,224      $ 617,085  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Leverage Ratio

     1.5x        1.8x        1.8x        2.0x        2.0x  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, less payments (plus proceeds) on settlement of forward foreign exchange contracts not designated for hedge accounting, and less payment of debt extinguishment costs, repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises, and cash dividends to stockholders. 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 and invest in future growth.

Our use of adjusted free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. First, adjusted free cash flow is not a substitute for net cash flow from operating activities. Second, other companies may calculate adjusted free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of adjusted free cash flow as a tool for comparison. Additionally, the utility of adjusted free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, adjusted free cash flow should be considered along with net cash flow from operating activities and other comparable financial measures prepared and presented in accordance with GAAP.

 

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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.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
    November 29,
2015
    November 30,
2014
 
    

(in thousands)

 

Net cash flow provided by operating activities

   $ 420,371     $ 525,941     $ 306,550     $ 218,332     $ 232,909  

Purchase of property, plant and equipment

     (159,413     (118,618     (102,950     (104,579     (73,396

(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting

     (19,974     (5,773     17,175       14,720       (6,184

Payment of debt extinguishment costs

           (21,902                  

Repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises

     (56,039     (25,102     (2,563     (4,175     (5,314

Dividends to stockholders

     (90,000     (70,000     (60,000     (50,000     (30,003
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted free cash flow

   $ 94,945     $ 284,546     $ 158,212     $ 74,298     $ 118,012  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flow used in financing activities

   $ (148,224   $ (151,733   $ (173,549   $ (94,895   $ (341,676

Net cash flow used in investing activities

     (179,387     (124,391     (68,348     (80,833     (71,849

Constant-Currency

We report our operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of our results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates we use to translate our operating results for all countries where the functional currency is not the U.S. Dollar into U.S. Dollars. Because we are a global company, foreign currency exchange rates used for translation may have a significant effect on our reported results. In general, our reported 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 we conduct our business. References to our operating results on a constant-currency basis mean our operating results without the impact of foreign currency exchange rate fluctuations.

We believe disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of our results by increasing the transparency of our underlying performance by excluding the impact of fluctuating foreign currency exchange rates. We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period.

Our constant-currency results do not eliminate the transactional currency impact of purchases and sales of products in a currency other than the functional currency.

 

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The following table sets forth the calculation of net revenues for each of our regional operating segments on a constant-currency basis for each of the periods presented.

 

    Year Ended  
    November 25,
2018
    % Increase
(Decrease)

(Over Prior
Year)
    November 26,
2017
    % Increase
(Decrease)

(Over Prior
Year)
    November 27,
2016
    % Increase
(Decrease)
(Over Prior
Year)
    November 29,
2015
    % Increase
(Decrease)
(Over Prior
Year)
    November 30,
2014
    % Increase
(Decrease)
(Over Prior
Year)
    November 24,
2013
 
    (dollars in millions)  

Net revenues:

                     

Total Revenues

                     

As reported

  $ 5,575.4       13.7   $ 4,904.0       7.7   $ 4,552.7       1.3   $ 4,494.5       (5.5 )%    $ 4,754.0       1.5   $ 4,681.7  

Impact of foreign currency exchange rates

          *       44.0       *       10.5       *       (77.4     *       (311.6     *       (46.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant-currency

  $ 5,575.4       12.7   $ 4,948.0       7.5   $ 4,563.2       3.1   $ 4,417.1       1.2   $ 4,442.4       2.6   $ 4,635.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Americas

                     

As reported

  $ 3,042.7       9.7   $ 2,774.0       3.4   $ 2,682.9       (1.6 )%    $ 2,726.5       (4.8 )%    $ 2,862.9       0.4   $ 2,851.0  

Impact of foreign currency exchange rates

          *       (7.3     *       (0.4     *       (35.3     *       (61.4     *       (15.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant-currency

  $ 3,042.7       10.0   $ 2,766.7       3.4   $ 2,682.5       (0.3 )%    $ 2,691.2       (2.7 )%    $ 2,801.5       1.0   $ 2,835.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Europe

                     

As reported

  $ 1,646.2       25.4   $ 1,312.3       20.2   $ 1,091.4       7.4   $ 1,016.4       (11.1 )%    $ 1,143.3       3.6   $ 1,103.5  

Impact of foreign currency exchange rates

          *     $ 49.9       *     $ 12.8       *       (24.2     *       (201.2     *       (4.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant-currency

  $ 1,646.2       20.8   $ 1,362.2       18.8   $ 1,104.2       10.0   $ 992.2       7.8   $ 942.1       4.1   $ 1,098.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asia

                     

As reported

  $ 886.5       8.4   $ 817.7       5.1   $ 778.4       3.6   $ 751.6       0.5   $ 747.8       2.8   $ 727.2  

Impact of foreign currency exchange rates

          *       1.4       *       (1.9     *       (17.9     *       (49.0     *       (26.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Constant-currency

  $ 886.5       8.2   $ 819.1       5.3   $ 776.5       6.1   $ 733.7       7.7   $ 698.8       6.7   $ 701.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Not Meaningful

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.

We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest to November 30 of that year. See “—Financial Information Presentation—Fiscal Year.”

Overview

We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began in San Francisco, California in 1853 as a wholesale dry goods business. We invented the blue jean 20 years later. Today we design, market and sell products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. With $5.6 billion in net revenues, and sales in more than 110 countries in fiscal year 2018, we are one of the world’s leading apparel companies, with the Levi’s brand having the highest brand awareness in the denim bottoms category globally.

Our business is operated through three geographic regions that comprise our three reporting segments: the Americas; Europe; and Asia, which includes the Middle East and Africa. We service consumers through our global infrastructure, developing, sourcing and marketing our products around the world. Our Americas, Europe and Asia segments contributed 55%, 29% and 16%, respectively, of our net revenues and 59%, 32% and 9%, respectively, of our total regional operating income in fiscal year 2018.

Our iconic, enduring brands are brought to life every day around the world by our talented and creative employees and partners. The Levi’s brand epitomizes classic, authentic American style and effortless cool. We have cultivated Levi’s as a lifestyle brand that is inclusive and democratic in the eyes of consumers while offering products that feel exclusive, personalized and original. This approach has enabled the Levi’s brand to evolve with the times and continually reach a new, younger audience, while our rich heritage continues to drive relevance and appeal across demographics. The Dockers brand helped drive “Casual Friday” in the 1990s and has been a cornerstone of casual menswear for more than 30 years. The Signature by Levi Strauss & Co. and Denizen brands, which we developed for value-conscious consumers, offer quality craftsmanship and great fit and style at affordable prices.

We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, leading third-party eCommerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers through a variety of formats, including our own company-operated mainline and outlet stores, company-operated eCommerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As of January 30, 2019, our products were sold in over 50,000 retail locations, including approximately 3,000 brand-dedicated stores and shop-in-shops. As of January 30, 2019, we had 831 company-operated stores and approximately 500 company-operated shop-in-shops. The remainder of

 

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our brand-dedicated stores and shop in-shops were operated by franchisees and other partners. Our wholesale channels generated 65% and 66% of our net revenues in fiscal years 2018 and 2017, respectively. In fiscal years 2018 and 2017, franchise stores (which are part of the wholesale channels) generated 7% and 8%, respectively, of our net revenues. Our DTC channel generated 35% and 34% of our net revenues in fiscal years 2018 and 2017, respectively, with our company operated eCommerce sites representing 13% of DTC channel net revenues in fiscal years 2018 and 2017 and 4% of total net revenues in fiscal years 2018 and 2017.

Our Europe and Asia businesses, collectively, contributed 45% of our net revenues and 41% of our regional operating income in fiscal year 2018, as compared to 43% of our net revenues and 34% of our regional operating income in fiscal year 2017. Sales of Levi’s brand products represented approximately 86% of our total net sales in both fiscal years 2018 and 2017. Pants represented 68% of our total units sold in fiscal year 2018, as compared to 72% of our total units sold in fiscal year 2017, and men’s products generated 69% of our total net sales in fiscal year 2018 as compared to 72% in fiscal year 2017.

Our Objectives

Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth and generate industry leading shareholder returns. Critical strategies to achieve these objectives include driving our profitable core business, expanding the reach of our brands globally and into new categories, leading in omni-channel and achieving operational excellence.

Factors Affecting Our Business

We believe the key business and marketplace factors that are impacting our business include the following:

 

   

Factors that impact consumer discretionary spending, which remains volatile globally, continue to create a complex and challenging retail environment for us and our customers, characterized by unpredictable traffic patterns and a general promotional environment. In developed economies, mixed real wage growth and shifting in consumer spending also continue to pressure global discretionary spending. Consumers continue to focus on value pricing and convenience with the off-price retail channel remaining strong and increased expectations for real-time delivery.

 

   

The diversification of our business model across regions, channels, brands and categories affects our gross margin. For example, if our sales in higher gross margin business regions, channels, brands and categories grow at a faster rate than in our lower gross margin business regions, channels, brands and categories, we would expect a favorable impact to aggregate gross margin over time. Gross margin in Europe is generally higher than in our other two regional operating segments. Sales directly to consumers generally have higher gross margins than sales through third parties, although these sales typically have higher selling expenses. Value brands, which are focused on the value-conscious consumer, generally generate lower gross margin. Enhancements to our existing product offerings, or our expansion into new products categories, may also impact our future gross margin.

 

   

More competitors are seeking growth globally, thereby increasing competition across regions. Some of these competitors are entering markets where we already have a mature business such as the United States, Mexico, Western Europe and Japan, and may provide consumers discretionary purchase alternatives or lower-priced apparel offerings.

 

   

Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from eCommerce shopping, pricing transparency

 

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enabled by the proliferation of online technologies and vertically-integrated specialty stores. Retailers, including our top customers, have in the past and may in the future decide to consolidate, undergo restructurings or rationalize their stores, which could result in a reduction in the number of stores that carry our products.

 

   

Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and eCommerce distribution and consumer-facing technologies, which has increased competition in the retail market.

 

   

Competition for, and price volatility of, resources throughout the supply chain have increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include the proliferation of lower-cost sourcing alternatives, resulting in reduced barriers to entry for new competitors, and the impact of fluctuating prices of labor and raw materials as well as the consolidation of suppliers. Trends such as these can bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices.

 

   

Foreign currencies continue to be volatile. Significant fluctuations of the U.S. Dollar against various foreign currencies, including the Euro, British Pound and Mexican Peso, will impact our financial results, affecting translation and revenue, operating margins and net income.

 

   

The current environment has introduced greater uncertainty with respect to potential tax and trade regulations. Most recently, the United States enacted new tax legislation, which is intended to stimulate economic growth and capital investments in the United States by, among other provisions, lowering tax rates for both corporations and individuals. In addition, the current domestic and international political environment, including changes to other U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. Such changes may require us to modify our current sourcing practices, which may impact our product costs and, if not mitigated, could have a material adverse effect on our business and results of operations.

These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies.

Seasonality

We typically achieve our largest quarterly revenues in the fourth fiscal quarter. In fiscal year 2018, our net revenues in the first, second, third and fourth quarters represented 24%, 22%, 25% and 29%, respectively, of our total net revenues for the year. In fiscal year 2017, our net revenues in the first, second, third and fourth quarters represented 22%, 22%, 26% and 30%, respectively, of our total net revenues for the year. In fiscal year 2016, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 26% and 29%, respectively, of our total net revenues for the year.

We typically achieve a significant amount of revenues from our DTC channel on the Friday following Thanksgiving Day, which is commonly referred to as Black Friday. Due to the timing of our fiscal year-end, a particular fiscal year might include one, two or no Black Fridays, which could impact our net revenues for the fiscal year. Each of fiscal years 2018, 2017 and 2016 included one Black Friday. Fiscal year 2019 will have no Black Friday, while fiscal year 2020 will have two Black Fridays.

Effects of Inflation

We believe inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.

 

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Anticipated Changes to our Equity Compensation Program in Connection with this Offering

Equity-Settled Awards

Historically, we have granted stock-settled SARs and RSUs only to a small group of our senior executives and members of our board of directors. We recognize stock-based compensation expense for these share-based awards, which are classified as equity in our consolidated financial statements, based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. Prior to this offering, the holder of shares of Class B common stock issued upon exercise or settlement of these awards may require us to repurchase such shares at the then-current market value pursuant to a contractual put right. These put rights may only be exercised with respect to shares that have been held by the participant for at least six months since their issuance date, thus exposing the holder to risks and rewards of ownership for a reasonable period of time. Additionally, prior to an IPO, we have the right to repurchase the shares of our Class B common stock held by a participant at the then-current fair market value pursuant to a contractual call right. As with the put rights, call rights may only be exercised with respect to shares of Class B common stock that have been held by a participant for at least six months following their issuance date.

Because these equity-classified awards may be redeemed in cash at the option of the holder, they are presented on the balance sheet outside of permanent equity, within “temporary equity.” Temporary equity reflects the redemption value of these awards, which incorporates the elapsed service period since the grant date reflecting the pattern of compensation cost recognition, as well as the fair value of the common stock issued in accordance with our 2016 EIP. The increase in temporary equity from $127.0 million on November 26, 2017 to $299.1 million on November 25, 2018 was primarily due to appreciation in the fair value of our common stock, partially offset by $56.0 million used for repurchases of common stock, including shares surrendered for tax withholdings on equity award exercises. These changes in value reflected in temporary equity have no impact on our compensation expense or net income.

In accordance with the terms of our 2016 EIP and these awards, the contractual put and call arrangements will terminate upon the completion of this offering. As a result, equity-classified awards will be classified as a component of permanent equity and we will no longer present any equity-classified awards as temporary equity upon the completion of this offering.

Cash-Settled Awards

Cash-settled awards, which include cash-settled RSUs, which we also refer to as phantom stock, have historically been granted to various levels of our management who are not executive officers. Because these awards may only be settled in cash, these awards are classified as liabilities, and included within “Accrued salaries, wages and employee benefits” or “Other long-term liabilities” in our consolidated balance sheets.

For these cash-settled awards, stock-based compensation is measured using the fair market value at the end of each reporting period until settlement. As of November 25, 2018, $51.5 million was reflected as a current liability and expected to be settled in the first quarter of fiscal year 2019 and $43.0 million was reflected as a long-term liability and expected to be settled in fiscal years 2020 through 2022. Our stock-based compensation expense related to these awards increased to $71.4 million in fiscal year 2018 from $31.3 million in fiscal year 2017, mostly as a result of an increase in the fair value of our common stock at the end of each reporting period. Our stock-based compensation expense related to these awards increased to $31.3 million in fiscal year 2017 from $11.0 million in fiscal year 2016, most of which increase was recorded in the second half of fiscal year 2017 as a result of an increase in the fair value of our common stock.

 

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As permitted by our 2016 EIP and in connection with this offering, we expect to cancel our outstanding cash-settled awards in March 2019 and replace them in total with comparable RSUs that settle in stock. In addition, after this offering, we anticipate that we will no longer grant cash-settled awards and will instead grant stock-settled awards to our management employees. As a result, the liabilities and stock-based compensation expense subject to the variability of the fair market value at the end of each reporting period would be replaced with stock-based compensation expense based on the grant-date fair value of the awards and recorded as an increase to equity.

Financial Information Presentation

Fiscal Year

We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest to November 30 of that year. Certain of our foreign subsidiaries have fiscal years ending on November 30. Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Each of fiscal years 2019, 2018, 2017 and 2016 included or will include 52 weeks of operations, and each quarter of fiscal years 2019, 2018, 2017 and 2016 consisted or will consist of 13 weeks. Fiscal year 2020 will include 53 weeks of operations, with the fourth quarter consisting of 14 weeks and each other quarter consisting of 13 weeks.

Segments

We manage our business according to three regional operating segments: the Americas; Europe; and Asia, which includes the Middle East and Africa.

Classification

Our classification of certain significant revenues and expenses reflects the following:

 

   

Net revenues comprise net sales and licensing revenues. Net sales include sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores and shop-in-shops located within department stores and other third-party locations, as well as company-operated eCommerce sites. Net revenues include discounts, allowances for estimated returns and incentives. Licensing revenues, which include revenues from the use of our trademarks in connection with the manufacturing, advertising and distribution of trademarked products by third-party licensees, are earned and recognized as products are sold by licensees based on royalty rates as set forth in the applicable licensing agreements.

 

   

Cost of goods sold primarily comprises product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. On both a reported and constant-currency basis, cost of goods sold reflects the transactional currency impact resulting from the purchase of products in a currency other than the functional currency.

 

   

Selling expenses include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our eCommerce operations.

 

   

We reflect substantially all distribution costs in selling, general and administrative expenses, or SG&A, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling and certain other activities associated with our distribution network.

 

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Constant-Currency

We report our operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of our results without regard to the impact of fluctuating foreign currency exchange rates. For additional information regarding our constant-currency results, which are non-GAAP financial measures, see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

Results of Operations

Comparison of Fiscal Years 2018 and 2017

The following table sets forth, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues.

 

     Years Ended  
     November 25,
2018
    November 26,
2017
    % Increase
(Decrease)
    November 25,
2018 % of Net
Revenues
    November 26,
2017 % of Net
Revenues
 
     (dollars in millions)  

Net revenues

   $ 5,575.4     $ 4,904.0       13.7     100.0     100.0

Cost of goods sold

     2,577.4       2,341.3       10.1       46.2       47.7  
  

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

     2,998.0       2,562.7       17.0       53.8       52.3  
        

 

 

   

 

 

 

Selling, general and administrative expenses

     2,460.9       2,095.5       17.4       44.1       42.7  
  

 

 

   

 

 

       

Operating income

     537.1       467.2       15.0       9.6       9.5  

Interest expense

     (55.3     (68.6     (19.4     (1.0     (1.4

Loss on early extinguishment of debt

           (22.8     (100.0           (0.5

Other income (expense), net

     18.3       (27.0     *       0.3       (0.6
  

 

 

   

 

 

     

 

 

   

 

 

 

Income before income taxes

     500.1       348.8       43.4       9.0       7.1  

Income tax expense

     214.8       64.2       *       3.9       1.3  
  

 

 

   

 

 

       

Net income

     285.3       284.6       0.2       5.1       5.8  
  

 

 

   

 

 

     

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     (2.1     (3.2     (34.4           (0.1
  

 

 

   

 

 

     

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

   $ 283.2     $ 281.4       0.6     5.1     5.7
  

 

 

   

 

 

     

 

 

   

 

 

 

 

*

Not meaningful

 

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Net Revenues

The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.

 

     Year Ended  
                   % Increase (Decrease)  
     November 25,
2018
     November 26,
2017
     As
Reported
    Constant
Currency
 
     (dollars in millions)  

Net revenues:

          

Americas

   $ 3,042.7      $ 2,774.0        9.7     10.0

Europe

     1,646.2        1,312.3        25.4       20.8  

Asia

     886.5        817.7        8.4       8.2  
  

 

 

    

 

 

    

 

 

   

Total net revenues

   $ 5,575.4      $ 4,904.0        13.7     12.7
  

 

 

    

 

 

    

 

 

   

As compared to the same period in the prior year, total net revenues were affected favorably by changes in foreign currency exchange rates.

Americas.    On both a reported basis and constant-currency basis, net revenues in our Americas region increased for fiscal year 2018. Currency translation had an unfavorable impact on net revenues of approximately $7 million for the year. Constant-currency net revenues increased as a result of broad-based growth in the region. Wholesale revenues grew in the region, largely due to the continued growth in performance and expansion of Signature, by Levi Strauss & Co. products and Levi’s women’s products as well as growth in Mexico. DTC revenues grew due to strong performance of our company-operated retail outlet and eCommerce businesses driven by increased traffic and conversion, as well as 21 more company-operated retail stores in operation as of November 25, 2018 as compared to November 26, 2017.

Europe.    Net revenues in Europe increased on both reported and constant-currency bases, with currency translation affecting net revenues favorably by approximately $50 million. Constant-currency net revenues increased for fiscal year 2018 as a result of strong performance in all channels mostly due to traditional wholesale and company-operated retail. The widespread growth in all channels reflects the strength of the brand and expanded product assortment across the customer base, mainly in Levi’s® men’s and women’s products. Additionally, there were 17 more company-operated retail stores in operation as of November 25, 2018 as compared to November 26, 2017.

Asia.    Net revenues in Asia increased on both reported and constant-currency bases, with currency translation having a minimal impact on net revenues. On a constant-currency basis, the increase in net revenues was primarily due to the expansion and strong performance of our company-operated retail network, which included 36 more stores as of November 25, 2018 as compared to November 26, 2017. Wholesale revenues in 2018 increased, particularly in India, Japan, Australia and New Zealand.

 

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Gross Profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    % Increase
(Decrease)
 
     (dollars in millions)  

Net revenues

   $ 5,575.4     $ 4,904.0       13.7

Cost of goods sold

     2,577.4       2,341.3       10.1  
  

 

 

   

 

 

   

Gross profit

   $ 2,998.0     $ 2,562.7       17.0
  

 

 

   

 

 

   

Gross margin

     53.8     52.3  
  

 

 

   

 

 

   

Currency translation favorably impacted gross profit by approximately $32 million. Gross margin increased primarily due to increased DTC sales.

Selling, General and Administrative Expenses

The following table shows SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues.

 

     Year Ended  
     November 25,
2018
     November 26,
2017
     % Increase
(Decrease)
    November 25,
2018
% of Net
Revenues
    November 26,
2017

% of Net
Revenues
 
     (dollars in millions)  

Selling

   $ 1,043.0      $ 888.2        17.4     18.7     18.1

Advertising and promotion

     400.3        323.3        23.8       7.2       6.6  

Administration

     487.9        411.0        18.7       8.8       8.4  

Other

     529.7        473.0        12.0       9.5       9.7  
  

 

 

    

 

 

      

 

 

   

 

 

 

Total SG&A

   $ 2,460.9      $ 2,095.5        17.4     44.1     42.7
  

 

 

    

 

 

      

 

 

   

 

 

 

Currency translation affected SG&A expenses unfavorably by approximately $19 million as compared to the prior year.

Selling.    Currency translation impacted selling expenses unfavorably by approximately $11.0 million for the year ended November 25, 2018. Higher selling expenses primarily reflected costs associated with the expansion and performance of our DTC business, including increased investment in new and existing company-operated stores. We had 74 more company-operated stores as of November 25, 2018 than as of November 26, 2017.

Advertising and promotion.    Currency translation impacted advertising and promotion expense unfavorably by approximately $2.0 million for the year ended November 25, 2018. Advertising and promotion expenses increased due to planned incremental investments in advertising.

Administration.    Administration expenses include functional administrative and organization costs. Currency translation impacted administration expenses unfavorably by approximately $3.0 million for the fiscal year 2018. As compared to the same prior-year period, administration expenses in 2018 reflect higher stock-based and incentive compensation which increased $57.9 million, reflecting outperformance against our internally-set objectives. Our stock-based

 

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compensation expense related to cash-settled awards increased to $71.4 million for fiscal year 2018 from $31.3 million for the same prior-year period, mostly as a result of an increase in fair value of our common stock during the period. This increase was partially offset by an $8.3 million adjustment in 2017, which was for the correction of the periods used for the recognition of expense associated with employees eligible to vest in awards after retirement in the prior years.

Other.    Other SG&A expense include distribution, information resources, and marketing organization costs. Currency translation impacted other SG&A expenses unfavorably by approximately $3.0 million for the fiscal year 2018. The increase in SG&A other costs was primarily due to an increase in distribution costs as a result of higher volume.

Operating Income

The following table shows operating income by regional operating segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues.

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    % Increase     November 25,
2018
% of Net
Revenues
    November 26,
2017
% of Net
Revenues
 
     (dollars in millions)  

Operating income:

          

Americas

   $ 551.4     $ 529.3       4.2     18.1 %*      19.1 %* 

Europe

     292.9       198.7       47.4       17.8     15.1

Asia

     86.6       78.3       10.6       9.8     9.6
  

 

 

   

 

 

       

Total regional operating income

     930.9       806.3       15.5       16.7       16.4  

Corporate expenses

     393.8       339.1       16.1       7.1       6.9  
  

 

 

   

 

 

       

Total operating income

   $ 537.1     $ 467.2       15.0     9.6     9.5
  

 

 

   

 

 

       

Operating margin

     9.6     9.5      
  

 

 

   

 

 

       

 

*

Percentage of corresponding region net revenues

Currency translation affected total operating income favorably by approximately $13 million as compared to the prior year.

Regional Operating Income

 

   

Americas.    Currency translation did not have a significant impact on operating income in the region for fiscal year 2018. The increase in operating income was primarily due to higher net revenues and gross margin partially offset by higher SG&A selling expense due to store growth and an increased investment in advertising.

 

   

Europe.    Currency translation favorably affected operating income by approximately $14 million as compared to the prior year. The increase in operating income was due to higher net revenues across all channels, partially offset by higher SG&A selling expense to support growth and higher advertising and promotion expense.

 

   

Asia.    Currency translation did not have a significant impact on operating income in the region for fiscal year 2018. The increase in operating income for 2018 was due to higher net revenues and gross margins, partially offset by higher SG&A selling expense related to retail expansion.

Corporate.    Corporate expenses represent costs that management does not attribute to any of our regional operating segments. Included in corporate expenses are restructuring and restructuring-

 

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related charges, other corporate staff costs, and costs associated with our global inventory sourcing organization. Currency translation did not have a significant impact on corporate expenses. The increase in corporate expenses for 2018 was primarily due to an increase in administration expenses of $57.9 million relating to stock-based and incentive compensation reflecting outperformance against our internally-set objectives. This increase was partially offset by an $8.3 million adjustment in 2017, which was for the correction of the periods used for the recognition of expense associated with employees eligible to vest in awards after retirement in the prior years.

Interest Expense

Interest expense was $55.3 million for the year ended November 25, 2018, as compared to $68.6 million in the prior year. The decrease in interest expense was primarily due to lower average borrowing rates in 2018 resulting from our debt refinancing activities during the second quarter of 2017, and the reduction in deferred compensation interest due to changes to market conditions.

Our weighted-average interest rate on average borrowings outstanding for 2018 was 5.01%, as compared to 5.60% for 2017.

Loss on Early Extinguishment of Debt

For the year ended November 26, 2017, we recorded a $22.8 million loss on early extinguishment of debt as a result of our debt refinancing activities during the year. The loss included $21.9 million of tender and call premiums on the retirement of the debt.

Other Income (Expense), Net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 25, 2018, we recorded net other income of $18.3 million as compared to net other expense of $27.0 million for the prior year. The income in 2018 primarily reflected net gains on our foreign exchange derivatives and investment interest generated from money market funds, partially offset by net losses on our foreign currency denominated balances. The expense in 2017 primarily reflected net losses on foreign exchange derivatives, partially offset by net gains on our foreign currency denominated balances.

Income Tax Expense

Income tax expense was $214.8 million for the year ended November 25, 2018, compared to $64.2 million for the prior year. Our effective income tax rate was 43.0% for the year ended November 25, 2018, compared to 18.4% for the prior year.

The increase in the effective tax rate in 2018 as compared to 2017 was primarily driven by one-time tax charge related to the impact of the Tax Act and proportionately less tax benefit from the lower tax cost of foreign operations, partially offset by the lower U.S. federal statutory tax rate.

For the year ended November 25, 2018, management reevaluated its historic assertion of indefinite reinvestment of $264 million of undistributed foreign earnings. These earnings, as well as other foreign earnings, were subject to the U.S. one-time mandatory transition tax and are eligible to be repatriated to the United States without additional U.S. federal tax under the Tax Act. As a result of this reevaluation, we have determined that any historical undistributed earnings through November 25, 2018 are no longer considered to be indefinitely reinvested and accordingly recognized a $10.3 million deferred tax expense associated with the future remittance of these undistributed earnings of foreign subsidiaries.

 

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The Tax Act was enacted in the United States on December 22, 2017 and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% and a deemed repatriation of foreign earnings. The enactment of the Tax Act resulted in a charge of $143.4 million to tax expense for the year ended November 25, 2018. This charge was comprised of a $95.6 million re-measurement of our deferred tax assets and liabilities based on the lower rates at which they are expected to reverse in the future, a $37.5 million one-time U.S. transition tax on undistributed foreign earnings and a $10.3 million charge related to foreign and state tax costs associated with the future remittance of undistributed earnings of foreign subsidiaries. We have completed our analysis and accounting with respect to these items. However, changes in law, interpretations and facts may result in adjustments to these amounts.

The Tax Act also includes a provision to tax global intangible low-taxed income, or GILTI, of foreign subsidiaries, which was effective for our company beginning in fiscal year 2019. In accordance with GAAP, we have made an accounting policy election to treat taxes due under the GILTI provision as a current period expense.

Comparison of Fiscal Years 2017 and 2016

The following table sets forth, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
     November 26,
2017
    November 27,
2016
    % Increase
(Decrease)
    November 26,
2017 % of Net
Revenues
    November 27,
2016 % of Net
Revenues
 
     (dollars in millions)  

Net revenues

   $ 4,904.0     $ 4,552.7       7.7     100.0     100.0

Cost of goods sold

     2,341.3       2,223.7       5.3       47.7       48.8  
  

 

 

   

 

 

     

 

 

   

 

 

 

Gross profit

     2,562.7       2,329.0       10.0       52.3       51.2  
        

 

 

   

 

 

 

Selling, general and administrative expenses

     2,095.5       1,866.5       12.3       42.7       41.0  

Restructuring, net

           0.3       *              
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     467.2       462.2       1.1       9.5       10.2  

Interest expense

     (68.6     (73.2     (6.3     (1.4     (1.6

Loss on early extinguishment of debt

     (22.8           (100.0     (0.5      

Other (expense) income, net

     (27.0     18.2       *       (0.6     0.4  
  

 

 

   

 

 

     

 

 

   

 

 

 

Income before income taxes

     348.8       407.2       (14.3     7.1       8.9  

Income tax expense

     64.2       116.0       (44.7     1.3       2.5  
  

 

 

   

 

 

     

 

 

   

 

 

 

Net income

     284.6       291.2       (2.3     5.8       6.4  
  

 

 

   

 

 

     

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     (3.2     (0.2     *       (0.1      
  

 

 

   

 

 

     

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

   $ 281.4     $ 291.0       (3.3 )%      5.7     6.4
  

 

 

   

 

 

     

 

 

   

 

 

 

 

*

Not meaningful

 

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Net Revenues

The following table presents net revenues by regional operating segment for the periods indicated and the changes in net revenues by operating segment on both reported and constant-currency bases from period to period:

 

     Year Ended  
                   % Increase  
     November 26,
2017
     November 27,
2016
     As
Reported
    Constant
Currency
 
     (dollars in millions)  

Net revenues:

          

Americas

   $ 2,774.0      $ 2,682.9        3.4     3.4

Europe

     1,312.3        1,091.4        20.2       18.8  

Asia

     817.7        778.4        5.0       5.3  
  

 

 

    

 

 

      

Total net revenues

   $ 4,904.0      $ 4,552.7        7.7     7.5
  

 

 

    

 

 

      

Total net revenues for fiscal year 2017 were affected favorably by changes in foreign currency exchange rates as compared to fiscal year 2016.

Americas.    On both a reported basis and constant-currency basis, net revenues in our Americas region increased for fiscal year 2017, with currency translation having a minimal impact on net revenues. Excluding the effects of currency, the increase in net revenues for fiscal year 2017 was due to the performance and expansion of our company-operated retail network, particularly company-operated outlets, and strong performance in our Signature by Levi Strauss & Co. and Denizen brands. This was offset by lower wholesale revenues in the United States in our Dockers brand.

Europe.    Net revenues in Europe increased for fiscal year 2017 on both reported and constant-currency bases, with currency translation affecting net revenues favorably by approximately $13 million. Constant-currency net revenues increased for fiscal year 2017 due to strong performance across all channels, primarily our company-operated retail network and wholesale channels.

Asia.    Net revenues in Asia, which includes the Middle East and Africa, increased for fiscal year 2017 on both reported and constant-currency bases, with currency translation affecting net revenues unfavorably by approximately $2 million. The increase in constant-currency net revenues was primarily due to the performance and expansion of our company-operated retail network, particularly company-operated outlets.

Gross Profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

     Year Ended  
     November 26,
2017
    November 27,
2016
    % Increase
(Decrease)
 
     (dollars in millions)  

Net revenues

   $ 4,904.0     $ 4,552.7       7.7

Cost of goods sold

     2,341.3       2,223.7       5.3  
  

 

 

   

 

 

   

Gross profit

   $ 2,562.7     $ 2,329.0       10.0
  

 

 

   

 

 

   

Gross margin

     52.3     51.2  
  

 

 

   

 

 

   

 

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Currency translation favorably impacted gross profit for fiscal year 2017 by approximately $8 million. Gross margin improved primarily due to company-operated retail network growth and international revenue growth.

Selling, General and Administrative Expenses

The following table shows our SG&A expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
     November 26,
2017
     November 27,
2016
     % Increase
(Decrease)
    November 26,
2017 % of Net
Revenues
    November 27,
2016 % of Net
Revenues
 
     (dollars in millions)  

Selling

   $ 888.2      $ 783.2        13.4     18.1     17.2

Advertising and promotion

     323.3        284.0        13.8       6.6       6.2  

Administration

     411.0        350.1        17.4       8.4       7.7  

Other

     473.0        442.0        7.2       9.7       9.7  

Restructuring-related charges

            7.2        (100.0           0.2  
  

 

 

    

 

 

      

 

 

   

 

 

 

Total SG&A expenses

   $ 2,095.5      $ 1,866.5        12.3     42.7     41.0
  

 

 

    

 

 

      

 

 

   

 

 

 

Currency translation affected SG&A expenses for fiscal year 2017 unfavorably by approximately $2 million as compared to fiscal year 2016.

Selling.    Currency translation did not have a significant impact on selling expenses for fiscal year 2017. Higher selling expenses primarily reflected costs associated with the growth of our company-operated store network. We had 53 more company-operated stores at the end of fiscal year 2017 than we did at the end of fiscal year 2016.

Advertising and Promotion.    Currency translation did not have a significant impact on advertising and promotion expense for fiscal year 2017. Advertising and promotion expenses increased due to a higher investment in advertising.

Administration.    Currency translation did not have a significant impact on administration expenses for fiscal year 2017. As compared to fiscal year 2016, administration expenses in fiscal year 2017 reflect higher costs relating to incentive compensation. Our stock-based compensation expense related to cash-settled awards increased to $31.3 million for fiscal year 2017 from $11.0 million for the same prior-year period; most of this increase was recorded in the second half of fiscal year 2017 as a result of an increase in fair value of our common stock during the period. In addition, incentive compensation costs increased reflecting improved achievement against our internally-set objectives in fiscal year 2017 as compared to fiscal year 2016 and an adjustment in the third quarter of fiscal year 2017. This adjustment, of which $8.3 million related to prior years, was for the correction of the periods used for the recognition of expense associated with employees eligible to vest in awards after retirement. The increase was also due to the recognition of a $7.0 million of benefit from the resolution of a vendor dispute settled in the prior-year period.

Other.    Currency translation did not have a significant impact on other SG&A expenses for fiscal year 2017. The increase in SG&A other costs is primarily due to higher marketing and information technology expenses. Additionally, we recorded a gain in the second quarter of fiscal year 2016 in conjunction with the sale-leaseback of our distribution center in the United Kingdom.

Restructuring-Related Charges.    Restructuring-related charges consist primarily of consulting fees incurred for our centrally-led cost-savings initiatives, productivity projects and transition-related projects, which were implemented through the end of fiscal year 2016.

 

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Operating Income

The following table shows operating income by regional operating segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
     November 26,
2017
    November 27,
2016
    % Increase
(Decrease)
    November 26,
2017 % of Net
Revenues
    November 27,
2016 % of Net
Revenues
 
     (dollars in millions)  

Operating income:

          

Americas

   $ 529.3     $ 507.8       4.2     19.1 %*      18.9 %* 

Europe

     198.7       154.8       28.4       15.1     14.2

Asia

     78.3       80.9       (3.2     9.6     10.4
  

 

 

   

 

 

       

Total regional operating income

     806.3       743.5       8.4       16.4       16.3  

Corporate:

          

Restructuring, net

           0.3       (100.0            

Restructuring-related charges

           7.2       (100.0           0.2  

Other corporate staff costs and expenses

     339.1       273.8       23.8       6.9       6.0  
  

 

 

   

 

 

       

Corporate expenses

     339.1       281.3       20.5       6.9       6.2  
  

 

 

   

 

 

       

Total operating income

   $ 467.2     $ 462.2       1.1     9.5     10.2
  

 

 

   

 

 

       

Operating margin

     9.5     10.2      

 

*

Percentage of corresponding region net revenues

Currency translation favorably affected total operating income for fiscal year 2017 by approximately $6 million as compared to fiscal year 2016.

Regional Operating Income

 

   

Americas.    Currency translation did not have a significant impact on operating income in the region for fiscal year 2017. The increase in operating income was primarily due to higher net revenues and gross margin partially offset by higher SG&A selling expense due to retail expansion.

 

   

Europe.    Currency translation favorably affected operating income for fiscal year 2017 by approximately $7 million as compared to fiscal year 2016. The increase in operating income was due to higher net revenues and gross margin partially offset by higher SG&A selling expense to support growth and higher advertising and promotion expense.

 

   

Asia.    Currency translation did not have a significant impact on operating income in the region for fiscal year 2017. The decrease in operating income for fiscal year 2017 was due to higher SG&A selling expense related to our retail network to support growth, partially offset by higher net revenues.

Corporate.    Currency translation did not have a significant impact on corporate expenses. The increase in corporate expenses for fiscal year 2017 was primarily due to an increase in administration expenses relating to incentive compensation. Incentive compensation costs increased reflecting improved achievement against our internally-set objectives in fiscal year 2017 as compared to fiscal year 2016 and an adjustment in the third quarter of fiscal year 2017. This adjustment, of which

 

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$8.3 million related to prior years, was for the correction of the periods used for the recognition of expense associated with employees eligible to vest in awards after retirement. Operating expenses also increased due to purchasing price variances related to our global sourcing organization’s procurement of inventory on behalf of our regions.

Interest Expense

Interest expense was $68.6 million for fiscal year 2017, as compared to $73.2 million for fiscal year 2016. The decrease in interest expense was primarily due to lower average borrowing rates in fiscal year 2017 resulting from our debt refinancing activities during the year.

Our weighted-average interest rate on average borrowings outstanding for fiscal year 2017 was 5.60%, as compared to 6.37% for fiscal year 2016.

Loss on Early Extinguishment of Debt

For fiscal year 2017, we recorded a $22.8 million loss on early extinguishment of debt as a result of our debt refinancing activities during the year. The loss included $21.9 million of tender and call premiums on the retirement of the debt.

Other Income (Expense), Net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For fiscal year 2017, we recorded net expense of $27.0 million as compared to net other income of $18.2 million for fiscal year 2016. The expense in fiscal year 2017 primarily reflected net losses on our foreign exchange derivatives, which economically hedge future foreign currency cash flow rights and obligations, partially offset by net gains on our foreign currency denominated balances. The income in fiscal year 2016 primarily reflected net gains on foreign exchange derivatives partially offset by losses on our foreign currency denominated balances.

Income Tax Expense

Income tax expense was $64.2 million for fiscal year 2017, compared to $116.1 million for fiscal year 2016. Our effective income tax rate was 18.4% for fiscal year 2017, compared to 28.5% for fiscal year 2016.

The decrease in the effective tax rate in fiscal year 2017 as compared to fiscal year 2016 was primarily due to additional foreign tax credits from repatriations from foreign operations as compared to fiscal year 2016 and the release of valuation allowance on deferred tax assets of foreign subsidiaries.

For fiscal year 2017, management asserted indefinite reinvestment on $264 million of undistributed foreign earnings, as management determined that this amount was required to meet ongoing working capital needs in certain foreign subsidiaries; no U.S. income taxes have been provided for such earnings. This was an increase as compared to fiscal year 2016, which reflects management’s realignment of the foreign subsidiary ownership structure. If we were to repatriate such foreign earnings to the United States, the deferred tax liability associated with such earnings would have been approximately $70 million.

Quarterly Results of Operations

The following tables set forth our historical consolidated statements of income and these items expressed as a percentage of net revenues for each of the quarters indicated. The information for each

 

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quarter has been prepared on the same basis as our audited consolidated financial statements and reflects, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the financial information presented. Our historical results are not necessarily indicative of future operating results, and our interim results are not necessarily indicative of the results to be expected for the full year or any other period. The quarterly financial data set forth below should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Fiscal Quarter Ended  
    November 25,
2018
    August 26,
2018
    May 27, 2018     February 25,
2018
    November 26,
2017
    August 27,
2017
    May 28, 2017     February 26,
2017
 
    (in millions)  

Net revenues(1)

  $ 1,591.8     $ 1,394.2     $ 1,245.7     $ 1,343.7     $ 1,465.8     $ 1,268.4     $ 1,067.9     $ 1,102.0  

Cost of goods sold

    744.4       652.6       574.8       605.6       682.6       611.7       509.5       537.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    847.4       741.6       670.9       738.1       783.2       656.7       558.4       564.5  

Selling, general and administrative expenses(2)

    719.5       583.0       594.4       564.0       633.3       510.3       495.7       456.2  

Restructuring, net

                                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    127.9       158.6       76.5       174.1       149.9       146.4       62.7       108.3  

Interest expense

    (9.7     (15.6     (14.5     (15.5     (16.3     (14.5     (17.9     (19.9

Loss on early extinguishment of debt(3)

                                        (22.8      

Other income (expense), net(4)

    17.3       (3.1     13.7       (9.6     5.4       (14.7     (18.1     0.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    135.5       139.9       75.7       149.0       139.0       117.2       3.9       88.8  

Income tax expense (benefit)(5)

    38.2       10.3       (1.3     167.6       21.7       27.7       (13.8     28.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    97.3       129.6       77.0       (18.6     117.3       89.5       17.7       60.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss (income) attributable to noncontrolling interest

    (0.1     0.5       (2.1     (0.4     (1.5     (1.5     (0.2      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Levi Strauss & Co.

  $ 97.2     $ 130.1     $ 74.9     $ (19.0   $ 115.8     $ 88.0     $ 17.5     $ 60.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Net revenues are impacted by seasonality, as we typically achieve our highest and lowest quarterly revenues in the fourth and second quarters of our fiscal year, respectively.

(2)

The increase in SG&A expenses generally reflects the expansion of our DTC channel (particularly in the fourth quarter of fiscal year 2017), higher advertising expenses and an increase in stock compensation expense due to the appreciation of the fair value of our common stock. Also included in SG&A expenses for the fiscal quarter ended August 27, 2017 is the recognition of $9.5 million relating to stock-based compensation expense, of which $8.3 million related to prior years, related to the correction of the periods used for the recognition of stock-based compensation expense associated with employees eligible to vest in awards after retirement.

(3)

We recorded a $22.8 million loss on early extinguishment of debt as a result of our refinancing activities for the fiscal quarter ended May 28, 2017.

(4)

Other (expense) income, net primarily consists of gains and losses from foreign exchange management activities and transactions and can vary based on the effect of foreign currency fluctuations on our foreign currency denominated balances and the effect on our foreign exchange derivative contracts of changes in foreign currency exchange rates as compared to negotiated contract rates.

(5)

As a result of the Tax Act enacted on December 22, 2017, a provisional charge of $136 million is included in income tax expense (benefit) for the fiscal quarter ended February 25, 2018. The impact of the enactment on fiscal year 2018 was a charge of $143 million to tax expense, consisting of a $96 million re-measurement of our deferred tax assets and liabilities, a $37 million transition tax on

 

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  undistributed foreign earnings and a $10 million charge related to foreign and state tax costs associated with the future remittance of undistributed earnings of foreign subsidiaries.

 

    Fiscal Quarter Ended  
    November 25,
2018
    August 26,
2018
    May 27,
2018
    February 25,
2018
    November 26,
2017
    August 27,
2017
    May 28,
2017
    February 26,
2017
 
    (percentage of net revenues)  

Net revenues

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of goods sold

    46.8       46.8       46.1       45.1       46.6       48.2       47.7       48.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin(1)

    53.2       53.2       53.9       54.9       53.4       51.8       52.3       51.2  

Selling, general and administrative expenses(2)

    45.2       41.8       47.7       42.0       43.2       40.2       46.4       41.4  

Restructuring, net

                                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    8.0       11.4       6.1       13.0       10.2       11.5       5.9       9.8  

Interest expense

    (0.6     (1.1     (1.2     (1.2     (1.1     (1.1     (1.7     (1.8

Loss on early extinguishment of debt

                                        (2.1      

Other (expense) income, net

    1.1       (0.2     1.1       (0.7     0.4       (1.2     (1.7     *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

 

 

8.5

 

    10.0       6.1       11.1       9.5       9.2       0.4       8.1  

Income tax expense (benefit)

 

 

2.4

 

    0.7       (0.1     12.5       1.5       2.2       (1.3     2.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    6.1       9.3       6.2       (1.4     8.0       7.1       1.7       5.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to noncontrolling interest

    *             (0.2     *       (0.1     (0.1     *       *  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Levi Strauss & Co.

 

 

6.1

    9.3     6.0     (1.4 )%      7.9     6.9     1.6     5.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Not meaningful

(1)

Gross margin has generally increased over the past eight fiscal quarters as a result of lower negotiated product costs and streamlined supply chain operations, as well as international growth, and is also affected by transactional currency impact.

(2)

The increase in SG&A expenses in fourth quarter of fiscal year 2017 as a percentage of net revenues primarily reflects the planned acceleration of advertising investments, higher selling costs associated with the expansion of our DTC channel and an increase in stock compensation expense due to the appreciation of the fair value of our Class B common stock.

Liquidity and Capital Resources

Liquidity Outlook

We believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements. Our capital allocation priorities are (1) to invest in opportunities and initiatives to grow our business organically, (2) to return capital to our stockholders in the form of cash dividends, which we target to be equal to or greater than our most recent annual dividend of $110 million on an annual basis, as well as to potentially offset dilution from our equity incentive programs through stock repurchases, and (3) to pursue acquisitions that support our current strategies.

 

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Cash Sources

We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.

We are party to a second amended and restated credit agreement that provides for a senior secured revolving credit facility, or credit facility. Our credit facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under our credit facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.

As of November 25, 2018, we did not have any borrowings under our credit facility, unused availability under the facility was $805.2 million and our total availability of $850.0 million, based on collateral levels as defined by the agreement, was reduced by $44.8 million of other credit-related instruments.

As of November 25, 2018, we had cash and cash equivalents totaling $713.1 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.5 billion.

Cash Uses

Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our 2016 EIP and, if market conditions warrant, occasional investments in or acquisitions of business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.

Subsequent to the end of fiscal year 2018, on January 30, 2019, our board of directors declared two cash dividends of $55 million each. We paid the first dividend in the first quarter of fiscal year 2019 to the holders of record of our common stock at the close of business on February 8, 2019 and we expect to pay the second dividend in the fourth quarter of fiscal year 2019 to the holders of record of our common stock at the close of business on October 5, 2019.

The following table provides information about our significant cash contractual obligations and commitments as of November 25, 2018:

 

     Payments Projected Due by Period  
     Total      Less than
1 Year
     1-3 Years      3-5 Years      Thereafter  
     (in millions)  

Contractual and Long-term Liabilities:

              

Short-term and long-term debt obligations

   $ 1,064      $ 32      $      $      $ 1,032  

Interest(1)

     366        49        90        86        141  

Future minimum payments(2)

     1,064        216        339        228        281  

Purchase obligations(3)

     940        679        87        35        139  

Postretirement obligations(4)

     83        10        20        18        35  

Pension obligations(5)

     191        16        68        29        78  

Long-term employee related benefits(6)

     172        65        49        7        51  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,880      $ 1,067      $ 653      $ 403      $ 1,757  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1)

Interest obligations are computed using constant interest rates until maturity.

(2)

Amounts reflect contractual obligations relating to our existing leased facilities as of November 25, 2018, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Business— Properties.”

(3)

Amounts reflect estimated commitments of $574 million for inventory purchases, $184 million for sponsorship, naming rights and related benefits with respect to the Levi’s Stadium and $182 million for human resources, advertising, information technology and other professional services.

(4)

The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see the notes to our audited consolidated financial statements included elsewhere in this prospectus.

(5)

The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S. qualified plans, these estimates can exceed the projected annual minimum required contributions in an effort to level out potential future funding requirements and provide annual funding flexibility. The fiscal year 2019 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plan is at the beginning of our third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets. For more information, see the notes to our audited consolidated financial statements included elsewhere in this prospectus.

(6)

Long-term employee-related benefits primarily relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see the notes to our audited consolidated financial statements included elsewhere in this prospectus.

The above table does not include amounts related to our uncertain tax positions of $26.6 million as of November 25, 2018. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions. The table also does not include amounts related to potential cash settlement of SARs under the terms of our 2016 EIP. Based on the fair value of our stock and the number of shares outstanding as of November 25, 2018, future payments under the terms of the 2016 EIP could range up to approximately $159 million, which could become payable in 2019. These payments are contingent on our liquidity and the discretion of our board of directors. Information in the above table reflects our estimates of future cash payments for specified items. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in the above table. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.

Cash Flows

The following table presents, for the periods indicated, selected items in our consolidated statements of cash flows:

 

     Year Ended  
     November 25,
2018
    November 26,
2017
    November 27,
2016
 
     (in millions)  

Cash provided by operating activities

   $ 420.4     $ 525.9     $ 306.6  

Cash used for investing activities

     (179.4     (124.4     (68.3

Cash used for financing activities

     (148.2     (151.7     (173.5

Cash and cash equivalents at period end

     713.1       633.6       375.6  

 

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Comparison of Fiscal Years 2018 and 2017

Cash Flows from Operating Activities

Cash provided by operating activities was $420.4 million for 2018, as compared to $525.9 million for the same prior-year period. The decrease primarily reflects additional contributions to our pension plans, higher payments for inventory and SG&A expenses to support our growth and higher payments for income taxes, partially offset by an increase in cash received from customers.

Cash flows from investing activities

Cash used for investing activities was $179.4 million for 2018, as compared to $124.4 million for 2017. The increase in cash used for investing activities primarily reflects increased payments for capital expenditures.

Cash flows from financing activities

Cash used for financing activities was $148.2 million for 2018, as compared to $151.7 million for 2017. Cash used in 2018 primarily reflects the payments of $90 million for cash dividends and $56.0 million for equity award exercises. Cash used in 2017 primarily reflects the payment of $70.0 million for cash dividends as well as our refinancing activities and debt redu