Levi Strauss & Co
Annual Report 2013

Plain-text annual report

CHIP BERGH President and Chief Executive Officer DEAR SHAREHOLDERS, CUSTOMERS, EMPLOYEES AND OTHER STAKEHOLDERS, We are working to make Levi Strauss & Co. (LS&Co.) great, again. Our aspiration is to be and be seen as the world’s best apparel company and one of the best-performing companies in any industry. It’s an ambitious goal, but it wasn’t too long ago that this company held that spot, and I believe we can reclaim it. When I joined the company two and a half years ago, we had an enviable list of attributes that gave us every right to be great. We have one of the most iconic brands in the world, a deep and rich history, strong values, passionate employees and loyal consumers. These are what attracted me and so many others to LS&Co. But, despite this list of attributes, the company’s performance has been inconsistent for almost two decades. In my first 18 months, I focused on building a world- class leadership team. Nine of the 11 WLT mem- bers have joined since I started, and all come with great experience and background. Together, we’ve defined a set of strategic choices that focus on “where to play” and “how to win.” We also imple- mented a global organizational structure and oper- ating model, which we’re now further optimizing. We are making meaningful progress, but we still have more work in front of us than behind us. We’ve made tough, strategy-based choices that are now driving results. In late 2012 we discontin- ued the dENiZEN® brand in Asia, and this posi- tively impacted our results in 2013. In fiscal 2013, we grew both revenues and profit (EBIT) at the same time for the first time in five years and only the fourth time in 20 years. We delivered strong cash flow, strengthened the balance sheet and paid down almost $200 million in debt. We ac- complished these results despite difficult external factors and a very challenging second half. Here are the financial highlights for 2013: • Net revenues grew 2 percent both on a reported and constant currency basis, driven by con- tinued growth in the Americas region and the strength of the Levi’s® men’s business. • Gross margin improved to 50 percent from 48 percent in 2012, primarily driven by lower cotton costs and the exit of the dENiZEN® brand from Asia. • Net income reached $229 million, up 59 percent from $144 million in 2012, as a result of our higher gross margin. • Cash flow from operations was $411 million, compared with $531 million for the same period last year, because of higher inventory and higher selling, general and administrative (SG&A) expenses. • Net debt declined to $1.1 billion after we paid down nearly $200 million in debt during the second quarter of 2013. • Our stock price was up 71 percent versus a year ago (as of December 31), and we were one of the best-performing companies in the apparel industry last year, adding more than $1 billion in shareholder value. Driving Profitable Growth We’re focused on creating long-term value for our shareholders by driving consistent, profitable growth through a key set of strategic choices. These key choices are: 1. Grow our profitable core businesses and core brands — these include the global Levi’s® brand men’s business, the Dockers® brand U.S. men’s business, our key wholesale accounts and our top five geographic markets. 2. Expand for more: Create a more balanced portfolio by growing underdeveloped segments such as the women’s business, tops and acces- sories; and grow in the key emerging markets of Russia, India, China and Brazil. 3. Become a leading, omni-channel retailer. 4. Make our cost structure more competitive. These four strategies provide us with a framework to measure our progress in 2013 and plot our course for 2014. 2013: Making Progress With What Matters Most We made meaningful progress in 2013 by concen- trating on driving the profitable core business. At key wholesale customers, we invested in new fixtures, displays and expanded assortments to show consumers how to put whole looks together. It paid off. Revenues from our top 10 wholesale customers increased 4 percent from 2012. The Levi’s® brand focused on creating modern interpretations of our iconic clothing. To celebrate the 140th anniversary of the Levi’s® 501® jean, we enhanced it for today and offered non-denim color choices for the first time. This refresh of our core products resonated with fans around the world. The Dockers® brand grew 3 percent, driven by the strength of the U.S. men’s business and an expanded product offering for both traditional and modern consumers. Alpha Khaki and Signature KhakiTM gained traction with consumers, and the brand’s sales grew each quarter this year. We also opened the Eureka Innovation Lab, located just a few blocks from our San Francisco head- quarters. Eureka gives us a dramatic step-change in product innovation capability, which will be more evident in market over the next 12 to 24 months. Our focus on retail productivity and our e-commerce expansion drove full-year retail sales growth of 9 percent. Our outlet stores were particularly strong in the Americas and Europe. E-commerce sales grew in every region. In the Americas, we launched new mobile sites for Levi.com and Dockers.com, and in Europe, we launched a new platform to connect with consumers. We’ll expand to other markets later this year. But we didn’t fire on all cylinders in 2013. Our Levi’s® brand Juniors and Misses business at wholesale in the U.S. declined significantly in the second half of the year. Performance in northern Europe lagged behind the industry as we exited the year, and China was a challenge due to inven- tory issues and a difficult environment. 2014: Building on What’s Working and Addressing the Opportunities We still have a long way to go to get to “great” again. We’ll build on what worked last year, fix what’s not working and invest where we have more opportu- nity. We will focus on what’s within our control. Driving the Profitable Core Consumers know and love us for the timeless icons we create. From Levi’s® 501® jeans and trucker jackets to Dockers® khakis, our clothes have a spot in the closets of consumers around the world. But we can go even further. The Levi’s® brand and Dockers® brand teams will continue to focus on growing their share of closet, putting the consumer front and center as they develop innova- tive products and shopping experiences. The Levi’s® brand team is building on its successes by innovating through fabric, fits and finishes. Our attention to iconic pieces has never been stronger, and it spans all channels. Whether you walk into 2013 ANNUAL REPORT one of our stores or shop online, you’ll see our icons prominently displayed. in our on-floor presence so it’s easier for consum- ers to find and shop our brands. Over the past year we invested in building a much deeper understanding of our consumers globally. This will be reflected in the Levi’s® brand marketing that will launch later in 2014. The new marketing takes us back to our roots, is more commercially focused on driving traffic and sales, and has a strong product orientation. We are applying a “return on investment” mindset to our marketing. This, in part, is what led us to secure the naming rights for the new San Fran- cisco 49ers stadium, which will be called Levi’s® Stadium. This 20-year deal naturally unites two iconic San Francisco brands and gives us a way to connect with the 65,000 fans at every game, as well as the fans watching on TV and those who attend concerts and events at the stadium. The stadium will open in the summer, and Super Bowl L will be played there in February 2016. We have also extended our relationship with another San Francisco icon, the San Francisco Giants, by renewing our sponsorship of Levi’s® Landing in right field. Baseball, football and the Levi’s® brand: nothing could be more American, or more democratic, appealing to fans of every type. We will also continue to elevate the Levi’s® con- sumer experience at key wholesale accounts in the Americas and evolve from a pants brand to more of a lifestyle brand for both the Levi’s® brand and the Dockers® brand. We’ll prioritize investment Leveraging Progress in Retail At every touch point, our consumer experience must live up to the expectations set by our history, our reputation and our brands. We’re investing in retail systems and technology to support omni-channel shopping that drives brand loyalty and profitable retail growth. And by the end of 2014, you’ll see an upgraded e-commerce pres- ence in the U.S. We’re aiming to deliver a flagship- worthy online experience with better functionality and more exclusive products. Opportunities We’re focused on several priorities in 2014: our women’s business, Europe, Asia and cost manage- ment. These efforts will take time, but they will help us to grow profitably. We must improve our women’s business overall, and most importantly in U.S. wholesale. To do this, we need to simplify — our complexity has impeded our ability to be responsive. We need to improve how we present the brand on floor and in our mar- keting to make it easier for women to find perfect- fitting Levi’s® jeans in department stores. At our retail outlets, we’ll continue to emphasize our innovative approach to providing the best-fitting jeans by adding new colors and styles to Levi’s® Revel™ jeans. We’re encouraged by the positive response we received from wholesale customers Our hard work is gaining the attention of the industry. Fortune’s Most Admired Companies for 2014 came out in March, and we climbed three positions in the last year, to number five in the ap- parel category. This is up from number 10 only two years ago. A few weeks later, Ethisphere® named us one of its 2014 Most Ethical Companies. In addition, Fast Company recently named LS&Co. as one of the world’s Most Innovative Companies for our sustainability practices, including Levi’s® Water

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