Levi Strauss & Co
Annual Report 2016

Plain-text annual report

GROWING WITH PURPOSE 2016 ANNUAL REPORT OUR ASPIRATION At Levi Strauss & Co., we aspire to be, and be seen as, the world’s best apparel company and one of the best-performing companies in any industry. Over the past five years, we’ve set LS&Co. on a transformative path toward sustained, profitable growth while preserving the values and industry-leading standards that have allowed our company to thrive. We embrace our rich heritage — more than 160 years of creating some of the world’s most-loved, iconic apparel — and look to our future by putting our consumers’ needs firmly at the center of everything we do. OUR BRANDS CHIP BERGH President and Chief Executive Officer DEAR SHAREHOLDERS, CUSTOMERS, EMPLOYEES AND OTHER STAKEHOLDERS, Five years ago we set out an ambitious plan to transform Levi Strauss & Co., an industry icon, from an inconsistently performing company to a disciplined one focused on reliable, profitable growth. Our goal is “to be, and be seen as, the world’s best apparel company and one of the best-performing companies in any industry.” Within the first six months, we put in place four long-term strategic choices that have served us well: (1) grow the profitable core business, (2) “expand for more” by driving under-developed segments and geographies, (3) become a leading omni-channel retailer and (4) drive improved productivity to fuel growth. At the same time, we built what I believe is the strongest leadership team in the industry. Today, we are well on our way to achieving our aspiration. We have moved from being a consistent bottom-quartile performer in the industry to a top-quartile performer benchmarked against our industry peers based on total shareholder return. LS&Co. is a more sound and more diversified business today than it has been in more than a decade. In short, LS&Co. is fundamentally healthier than when we started this chapter. In 2016, we delivered our fourth consecutive year of top- and bottom-line growth excluding foreign currency impacts (or “constant currency”). Our revenue growth rate accelerated, with revenue up 3 percent on a constant- currency basis. Adjusted EBIT also grew 2 percent on a constant currency basis, and we generated free cash flow of roughly double the prior year. These results distinguish us from most of our peers and are especially remarkable given the unprecedented external challenges the industry has faced, particularly in our biggest market, the U.S. Based on these results and the board of directors’ continued confidence in our business, we announced a $70 million dividend, a 17 percent increase versus prior year. Here are the highlights of 2016: FISCAL YEAR 2016 FINANCIAL HIGHLIGHTS1 • • • • • • • Net revenue was $4.6 billion, up 1 percent in reported dollars and up 3 percent on a constant-currency basis, both versus prior year. Gross margins were 51.2 percent on a reported basis, up from 50.5 percent last year. Net income grew approximately 40 percent over the prior year, to $291 million from $209 million, primarily reflecting the higher gross margins, lower restructuring and related charges and debt reduction. Adjusted EBIT of $480 million was flat on a reported basis but grew 2 percent versus prior year on a constant-currency basis. Net debt declined to $670 million from $834 million last year. Free cash flow was $161 million, nearly double the $81 million we reported last year, reflecting lower restructuring and related payments, lower cash interest and taxes. Our shareholder dividend of $70 million, a $10 million increase over last year, will be paid in two $35 million installments in 2017. Our company is healthiest when our largest business, the Levi’s® brand, is strong, and last year the brand grew a solid 3 percent in constant currency. We also made progress diversifying the brand by expanding our women’s and lifestyle portfolio. Women’s grew 11 percent and is now close to $1 billion in sales, and our tops business grew 22 percent, including a 50 percent growth in Trucker jackets, all in constant dollars. We also gained momentum outside the U.S., with revenue in our Europe region growing 10 percent and revenue in our Asia, Middle East and Africa region up 6 percent for the year, both excluding impacts of foreign currency. These two regions now represent 41 percent of our revenue, and our strategic focus on scale markets has helped us deliver strong results that offset the challenges in the U.S. wholesale market. 1 See our fourth quarter and fiscal year 2016 earnings release for a reconciliation of GAAP financial measures to the following non-GAAP financial measures: adjusted EBIT, net debt and free cash flow. Our direct-to-consumer business delivered 12 percent revenue growth and represented more than a quarter of our net revenue for the year. We grew our brick-and-mortar retail stores by high single digits and our global ecommerce business double digits. We have potential for more investment and growth since this is an underdeveloped channel for LS&Co. We’ll continue to invest in new stores around the world and expect to open net 80 doors in 2017 after opening nearly 70 in 2016, and we will continue to in ecommerce and building true omni-channel invest capabilities. While we are pleased with our performance in 2016, we still have more work to do if we are to achieve our aspiration of being the world’s best apparel company. We have three major focus areas to help us drive accelerated growth. First is to return our U.S. wholesale business, which is our single biggest and most profitable business, to growth. That’s no small task, given the challenges that some of our biggest customers are facing, but our view is that their challenges are our opportunity. Second, and related, is to stabilize the Dockers® brand and exit the year stronger than we started, particularly in U.S. wholesale. And finally, we have opportunity to accelerate growth with our franchise partners around the world. GROWING WITH PURPOSE We’ve remained deeply committed to LS&Co.’s sustained, profitable growth while embracing the innovative, values- based approach that has helped us become the iconic company we are today. We’re best known for inventing the blue jean, but we also have built a reputation for making a difference in the world. We would not be the company we are today if it weren’t for our founder Levi Strauss’ unwavering belief in doing well by doing good. He donated some of his first profits to an orphanage in San Francisco — which we still support today — establishing a tradition of giving back that endures more than 160 years later. At LS&Co., our founder’s commitment to giving back is the inspiration for our deep-rooted sense of responsibility to our communities, our shareholders and our employees. Our belief in profits through principles is what continues to help us grow with purpose. In 2016, we continued to push the industry forward by significantly expanding our Worker Well-being program — a framework for our third-party factories to invest in 2 Source: BSR HERproject 2011 programs benefiting their workers, from improving financial literacy to providing access to women’s health education. The program has had a demonstrable financial impact on suppliers — delivering up to a 4:1 return on investment2 — and now reaches 100,000 primarily female workers around the world. Given its success, the Levi Strauss Foundation is partnering with the Harvard School of Public Health to further validate the business case and track the progress of the Worker Well-being program. We also open-sourced the program so our learnings can reach far beyond our direct influence. Finally, in terms of direct charitable support, we were able to contribute $9 million in fiscal 2016, thanks to our strong financial results. OUR EXPECTATIONS FOR 2017 Our solid progress in 2016 gives us a strong foundation to build on this year. As before, we will be guided by our four key strategies which we expect to deliver profitable growth. We are starting 2017 with more uncertainty and headwinds than we anticipated just a few months ago — the political climate, challenges facing the U.S. retail environment and our shifting structural economics are challenges that we will continue to navigate thoughtfully. I believe there are moments that matter more than others — times when our values will be tested; when our words and actions will carry more weight. We are at an unequal moment in time today, with challenges around the world to immigration, equality, basic human rights, inclusion and free trade. I recognize the responsibility that comes with leading this great company, and I am more determined than ever to ensure that LS&Co. remains true to the principles that made it iconic. We will continue to live the values that have shaped us over the past 163 years, and we’ll continue to be a courageous voice on the important issues of our time. Our consumers, our employees and our peers have come to expect bold, responsible innovation from LS&Co., and we are committed to delivering on that. With all this momentum, we’re confident that the best is yet to come. 2016 ANNUAL REPORT LS&CO. BY THE NUMBERS NET REVENUE: 85% 10% 5% EMPLOYEES 13,200 TRADEMARKS 5,000 RETAIL DOORS 50,000 COUNTRIES 110 BRAND DEDICATED STORES 2,900 FY16 REVENUE $4.6B AMERICAS EUROPE ASIA, MIDDLE EAST & AFRICA 17% 24% 59% WHOLESALE VS. DIRECT-TO-CONSUMER WHOLESALE DIRECT-TO- CONSUMER 28% 72% 2016 ANNUAL REPORT RETAIL DOORS A LS&CO. FISCAL YEAR 2016* NET REVENUE** GROSS MARGIN +2.6% +1.2% +3.1% +1.8% 50.2% 49.4% 50.5% 51.2% 2013 2014 2015 2016 2013 2014 2015 2016 ADJUSTED EBIT FREE CASH FLOW $504M $479M $480M $467M $292M 49.1% $123M $81M $161M 2013 2014 2015 2016 2013 2014 2015 2016 * See our fourth quarter and fiscal year 2016 earnings release for a reconciliation of GAAP financial measures to the following non-GAPP financial measures; adjusted EBIT, net debt and free cash flow ** Reported rates. Adjusted EBIT has grown 11% CAGR in constant currency A “ WHILE SKINNY JEANS CONTINUE TO BE IMMENSELY POPULAR, THE MOST-SEARCHED JEANS BY U.K. SHOPPERS IN 2016 WERE STRAIGHT-LEG STYLES, WITH LEVI’S® ICONIC 501® BECOMING THE MOST-VIEWED PRODUCT ON LYST.COM.” — ELLE U.K. ** Reported rates. Adjusted EBIT has grown 11% CAGR in constant currency OUR LONG-TERM STRATEGIES Five years ago, LS&Co. put four long-term strategies in place to guide our business forward. Knowing that our core business — men’s pants and key markets — represents a majority of our profits, the priority was to make sure those businesses were healthy while diversifying the company through more product categories and retail outlets for the long run. Every year, we look at our progress against these priorities as key indicators for success. 1. GROW OUR PROFITABLE CORE BUSINESSES Our core businesses are Levi’s® men’s bottoms globally; Dockers® men’s bottoms in the U.S.; our top 10 wholesale customers and our five largest mature markets: the U.S., France, Germany, Mexico and the U.K. Collectively, our largest markets represent almost 70 percent of total company revenue. All men’s products generated approximately 76 percent of our total net sales in fiscal year 2016. From a product standpoint, we expanded on our icons and essentials. We drove innovation in the Levi’s® 501® family to include stretch, and now approximately two-thirds of our Levi’s® bottoms now include stretch, which reflects our focus on comfort, fit and performance. However, the continued softness in the U.S. wholesale environment contributed to lower-than-expected results for our Levi’s® men’s bottoms and the U.S. Dockers® businesses. Offsetting this was the strong performance of the other four mature markets, which collectively grew 10 percent compared with the prior year. GROW OUR PROFITABLE BUSINESSES EXPAND FOR MORE BECOME A LEADING OMNI-CHANNEL RETAILER ACHIEVE OPERATIONAL EXCELLENCE OUR VALUES: PROFITS THROUGH PRINCIPLES 2016 ANNUAL REPORT ‘THE WEDGIE’ WAS ALL OVER SOCIAL MEDIA AND A HUGE SALES SUCCESS. 2. EXPAND FOR MORE In 2016, we made strong progress building a more balanced portfolio and positioning Levi’s® as a lifestyle brand. We successfully grew our Levi’s® women’s and tops businesses, delivering on our strategy to expand for more. Combined, our men’s and women’s tops business grew double-digits. As product offerings expanded in 2016, so did distribution in our key growth markets of China, India and Russia; these markets collectively grew 4 percent in 2016. LEVI’S® WOMEN’S Our Levi’s® women’s business grew 11 percent in 2016, building on the momentum of the successful relaunch of our women’s business almost two years ago. We continue to make Levi’s® a coveted brand for women. Our women’s retail business in Europe has been exceptionally strong — up 28 percent over the prior year in constant currency — and we believe there is even more opportunity ahead. Last year, we introduced a new fit for women called the Wedgie, which built on the heritage of the iconic 505™ jean, and due to positive consumer response we are adding a straight leg version this year as well. TOPS AND T-SHIRTS What goes better with a pair of jeans than a great T-shirt? In 2016, our tops business grew 22 percent, with double- digit growth in both men’s and women’s — all in constant dollars. Trucker jackets also continue to be hot, with sales up almost 50 percent in constant currency this past year. And, for sports fans, Levi’s® introduced the MLB collection for select teams in 2016 and the NBA collection for select teams in 2017, which added to the full line of NFL apparel already available. We’ve extended our Levi’s® branded T-shirt offerings, which have delivered solid results and become a fashion item in several cities around the world. Consumers can also find a greater selection of button-down shirts, sweaters and sweatshirts, along with belts, scarves and other accessories, such as backpacks and leather goods. “ FOR THE EARLY DAYS OF FALL, A CASUAL-COOL DENIM JACKET IS ALL YOU NEED. LATER ON IT WILL BE AN ESSENTIAL LAYERING PIECE FOR TONS OF OUTFITS. THE LEVI’S® DENIM TRUCKER JACKET IS THE INDISPUTABLE ICON IN THIS SEGMENT.” — BUSINESS INSIDER In 2016, the Levi’s® brand partnered with Pintrill to offer a line of pins and patches so consumers could personalize their Trucker jackets. There is a long history of customizing jackets — think punk, metal and slasher music fans — to tell a personal story. Our historian has an incredible collection and stories to tell that you can only find at Levi Strauss & Co. 3. BECOME A LEADING OMNI-CHANNEL RETAILER Building on the momentum we experienced over the last few quarters, the company is poised to accelerate its profitable growth in our direct-to-consumer channels. Our products are currently available in 110 countries and in more than 50,000 doors. Included in our retail network are 2,900 branded stores, nearly 700 of which are owned and operated by LS&Co., as well as both owned and wholesale-partner operated online platforms. In 2017, we will continue to invest for growth in this channel because we’ve seen strong results when we are in control. The rapidly evolving retail dynamics present in the apparel industry — namely the influence of mobile devices on the shopping experience — continue to create unprecedented opportunities to connect with consumers. Shoppers expect a seamless experience across all brand touchpoints. Nearly half of our online traffic is used as research for an in-store purchase, and in our stores, we see purchase intent and conversion is on the rise. That’s why, in 2016, we continued to invest in strengthening our overall direct-to-consumer and omni-channel experience, resulting in 12 percent growth in the direct-to-consumer business in the past fiscal year. Today, we are focused on delivering a broader product assortment, in the right size, as well as offering online exclusives to help drive traffic. Enhancing the in-store experience with highly trained stylists remains essential to meeting our shoppers’ individual needs. And we’re committed to delivering fluid online-to-retail storytelling, offering consumers inspiration when shopping with us. Looking ahead, diversification and direct-to-consumer expansion continues to be a priority. We aim to add another 80 net new stores in 2017, mainly to our retail footprint in Europe and Asia. Owned-and-operated retail will continue to present us with strong opportunities to tailor the consumer experience in key cities, and we will build key partnerships with likeminded wholesalers that are as dedicated as we are to investing in the future of retailing. 4. ACHIEVE OPERATIONAL EXCELLENCE In the past five years, we have focused on streamlining our business operations to free up cash to reinvest back into the business. One of the major initiatives over the past few years has been to simplify and improve productivity throughout our global supply chain. By putting the consumer at the center of our decisions, we’ve reduced our fabric base, rationalized our product offering and consolidated our strategic vendor base, among other changes. We have created fewer but better options that have significantly reduced our cost of goods sold. This has enabled us to invest in direct-to-consumer initiatives as well as in planning, product development and sourcing, distribution and sustainability. Simultaneously, in the last five years, we’ve shored up the structural economics of our business. In particular, we cut our debt in half — from nearly $2 billion to $1 billion — while delivering growth and solid profit margins. 2016 ANNUAL REPORT THE LEVI’S® BRAND RE-LAUNCHED THE 505TM FIT, FIRST INTRODUCED IN 1967 DURING THE SUMMER OF LOVE. OUR ICONIC BRANDS Levi Strauss & Co. invented the blue jean and launched the khaki pant revolution — and we continue to inspire how people dress every day. In 2016, the Levi’s® brand represented 85 percent of total net revenue. The Dockers® brand accounted for 10 percent of revenue, while Signature by Levi Strauss & Co.™ and Denizen® products delivered 5 percent of sales. Although we offer an assortment of apparel, we’re best known for pants across all our brands — including jeans, casual pants and dress pants — which represented approximately 77 percent of our total units sold this year. THE LEVI’S® BRAND Our products are versatile, customizable, essential and well-loved pieces of every wardrobe. We strive to create apparel that our consumers want to live in, that withstands the test of time and that inspires generation after generation to share our obsession for beautifully and responsibly made apparel. We want to be the item you grab every morning and know will look and fit great. Few brands have the power to evoke the same level of emotion that ours continues to spark. We’ve always been firmly at the center of culture and style — worn and loved by musicians, artists, revolutionary thinkers and game- changing doers. From James Dean’s iconic look to the stages of SXSW and Coachella to the boardrooms of today’s most innovative startups, our brand has timeless appeal that has allowed generations of consumers to wear their favorite item of Levi’s® clothing and style it however they desire. The Levi’s® brand is at its best when it’s at the center of culture, and 2016 was no exception. There was no bigger stage to showcase our place in the zeitgeist than Levi’s® Stadium, which showed up in a major way for Super Bowl 50 and subsequently hosted some of the world’s biggest names in music, such as Beyoncé and Coldplay. In addition to the NFL, the venue also hosted the Copa America Centenario and the PAC 12 football championship game and has drawn crowds for music, sporting and other events. To build on that success, we launched the Levi’s® Lounge with Cumulus, an intimate performance space just a few blocks from our company headquarters in San Francisco that has welcomed acts like The Lumineers, Pete Yorn and Edward Sharpe and the Magnetic Zeros. Music and creativity were also the driving forces behind the brand’s re-launch of the 505™ fit, first introduced in 1967 during the Summer of Love. It became the uniform of counterculture by the early 1970s, when it appeared on album covers for The Rolling Stones and The Ramones and became the go-to stage attire for Debbie Harry. Today’s version, the 505™C, is built on this rock ‘n’ roll heritage but with a modern and slimmer fit that’s rapidly winning over a new generation of loyal fans. The Levi’s® iconic 501® fit also continued to command shoppers’ attention, debuting in both skinny and stretch. Another great example of consumer-driven innovation, we took a cue from our fans who wanted the same, iconic look of the original 501® jean with remastered details. SIGNATURE BY LEVI STRAUSS & CO.TM DOCKERS®, SIGNATURE BY LEVI STRAUSS & CO.™ AND DENIZEN® For a more buttoned-up look, the Dockers® brand offers an alternative to suits in the form of the khaki pant — an American essential. The Dockers® brand is a global leader in the casual pant category — which we created — while also providing tops and accessories for a complete head- to-toe look for all occasions. Dockers® celebrated its 30th anniversary in 2016, marking three decades of leading the casual revolution. Dockers® continues to evolve to engage today’s consumer, moving to more stretch and slimmer fits that remain a classic staple in every man’s wardrobe. Last year, we added stretch into our Signature Khaki product. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States, and primarily through department stores, specialty franchised or other brand-dedicated stores retailers, DOCKERS®, DENIZEN® AND SIGNATURE COMBINED ACCOUNT FOR 15% OF ALL LS&CO. REVENUE. and shop-in-shops outside of the United States. Levi’s® and Dockers® products are also sold through our brand- dedicated, company-operated retail stores and through the ecommerce sites we operate, as well as the ecommerce sites operated by some of our key wholesale customers and other third parties. For the value-conscious consumer, Signature by Levi Strauss & Co.™ and Denizen® products are available through mass channel retailers in the Americas. Within our value segment, we’ll continue to leverage the momentum we’ve seen in these brands, which grew double-digits in 2016. 2016 ANNUAL REPORT THE FIRST DENIM INNOVATION LAB Our Eureka Innovation Lab, located in San Francisco, is a collaboration hub for our designers, merchants and innovation experts. It’s also a place for our suppliers and partners to convene with us on the most cutting-edge and sustainable practices — most notably for 2016, the creation of a jean made with a portion of post-consumer waste, which we designed in partnership with Evrnu. team, The Eureka in partnership with Google, was instrumental in developing a Trucker jacket that incorporates wearable technology, called Project Jacquard. The team set out with a bold, practical idea to help bicyclists better navigate the streets using a simple interface on the sleeve of their jacket. With a concept and teamwork, the team created a beautiful, wearable jacket. Eureka is also where we work with other designers in the industry to create special collections. In 2016, we collaborated with Blonde Salad, OffWhite and Vetements, to name a few. Day in and day out, we’re innovating products based on four strategic pillars — Made for Her (Levi’s® women’s collection), Made for Performance (Commuter® and Skate), Made of Progress (WellThread® and Water

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