Levi Strauss & Co Annual Report 2018

Plain-text annual report

2 0 1 8 A N N U A L R E P O R T Dear Shareholders, Looking back at ﬁscal 2018, I feel tremendous pride about what we accomplished as a company. It was an outstanding 12 months in which we continued to build momentum against our proﬁtable growth drivers and positioned ourselves to truly shape our future. As a result, I’m more optimistic than ever. Our business is stronger than it’s been in decades, and we are at the vanguard of purpose-driven leadership. We’ve been successful because of the combination of our brands, our people, our values and our ability to execute. These competitive advantages will serve as our bedrock as we create responsible, sustainable growth in the years ahead. This spring, we returned to the public market, and I’m delighted to welcome our new shareholders to the LS&Co. family. We intentionally postponed the release of this report and our annual shareholder meeting (both of which typically occur in April) due to the timing of our IPO. Fiscal 2018 Results* In ﬁscal 2018, we delivered revenues of $5.6 billion, up 14 percent on a reported basis (13 percent in constant currency). This was our highest rate of growth in more than 25 years, and it came on the back of 8 percent reported growth in ﬁscal 2017. Our growth was broad-based with notable gains across channels, regions and categories. We grew beyond even our own expectations and outpaced our peers, and we did so proﬁtably, with Adjusted EBIT up 13 percent for the year in reported dollars. Our disciplined approach to capital allocation contributed to our strong performance as we deployed capital of $159 million, primarily behind initiatives to grow the business, including direct-to-consumer investments in eCommerce and omnichannel technology capabilities, as well as the opening of 115 company-operated stores on a gross basis. We also paid $90 million in dividends — a 29 percent increase from the prior year. Chip Bergh President and Chief Executive Ofﬁcer of Levi Strauss & Co. * All ﬁgures are revenues presented in constant currency unless stated otherwise. For more information regarding constant-currency revenues, Adjusted EBIT and the other non-GAAP ﬁnancial measures discussed in this annual report, see the discussion and reconciliations provided at the end of this annual report. LEVI STRAUSS & CO. 2018 ANNUAL REPORT 1 Diversiﬁcation Continues to Pay Off Our business is more diversiﬁed than ever as we expand the reach of our brands across markets, channels and product categories. Since ﬁscal 2015, our international business, led by Europe, has grown double digits and now comprises 54 percent of our total revenue. Our direct-to-consumer business (both brick and mortar and eCommerce) has also grown double digits for three years in a row and is now a $2 billion business. We are broadening our product categories beyond men’s bottoms as women’s, which has grown consecutively since ﬁscal 2015, is now nearly one-third of our total revenue. And our tops business, which continues to grow double digits, has more than doubled over the last three ﬁscal years. We will continue to drive diversiﬁcation through high-growth, high-margin businesses while protecting and growing our proﬁtable core. In short, our strategic choices continue to pay off, and our values-driven leadership continues to differentiate us in a crowded marketplace. Our Strategic Choices Our ﬁrst strategic choice is to grow our proﬁtable core business, which includes Levi’s® men’s bottoms globally, the Dockers® brand in the United States, key wholesale accounts and our ﬁve largest mature markets: the United States, France, Germany, Mexico and the United Kingdom. Total men’s bottoms — our biggest business — grew 3 percent for the year. Our U.S. wholesale business grew 7 percent for the year despite the signiﬁcant market challenges this channel continues to face, and our top 10 wholesale customers grew 10 percent for the year. From a regional perspective, Europe led the pack, with revenue growth of 21 percent for the year. U.S. revenues were up 8 percent for the year, and our next four largest markets grew 10 percent collectively. When this group of proﬁtable core businesses grows, it generates cash that we can invest in our other strategic choices. Our second strategic choice is to diversify the business by “expanding for more” into categories where we are underpenetrated and have outsized growth opportunities. Our total women’s business grew 28 percent in ﬁscal 2018, exceeding $1.6 billion in revenue. We have grown our women’s bottoms business every quarter since it was relaunched in mid-ﬁscal 2015, with the last eight quarters growing double digits. We’re proud of the progress we’re making to grow our share of women’s closets around the world and are well-positioned to drive even more growth in the years ahead. 2 LEVI STRAUSS & CO. 2018 ANNUAL REPORT Our total tops business grew 37 percent and surpassed the $1 billion mark, driven by a wide variety of tops for men and women — from graphic tees and ﬂeece to trucker jackets. We have a long runway for more growth ahead of us as we expand the global reach of our brands. Overall, Asia was up 8 percent, with nearly every market up double digits. China was ﬂat for the ﬁscal year as we closed unproﬁtable franchise doors and began restructuring the business for growth. We’re focused on growing our business in China and shaping a successful future in this important market. And our value brands, Signature by Levi Strauss & Co.™ and Denizen®, continued to gain ground with this important consumer segment in the United States and internationally. Our third strategy is to become a world-class omnichannel retailer. Our direct-to-consumer business grew 16 percent in ﬁscal 2018, with the fourth quarter of ﬁscal 2018 marking 11 consecutive quarters of double-digit growth for this business. We opened new ﬂagship stores in Mexico City, Toronto and New York’s Times Square, each showcasing new and innovative retail concepts to engage and delight consumers — from Tailor Shops offering endless customization opportunities to 360-degree virtual tours for online consumers. We also rolled out RFID technology to our global ﬂeet of Levi’s stores, putting us one step closer to ensuring we are always in stock with the products our consumers want. Our eCommerce business, which grew 16 percent in ﬁscal 2018, continued to drive excitement and engagement with consumers around the world and is an important contributor to our direct-to- consumer success. Our fourth strategic choice is to achieve operational excellence. In February 2018, we launched Project F.L.X., a laser-based innovation that is fundamentally transforming the way our products are designed, made and sold. Project F.L.X. dramatically shortens the time it takes to ﬁnish jeans and reduces the number of chemicals required in the process. LEVI STRAUSS & CO. 2018 ANNUAL REPORT 3 Proﬁts Through Principles There’s more about Project F.L.X. and other highlights from ﬁscal 2018 in the pages that follow, but I want to stress that we achieved all that we did last year without compromising our commitment to doing right by people and the planet. We had our sights set on the future as we embraced ambitious new targets for combating climate change, took bold stands on important social issues such as immigration and gun violence prevention and contributed approximately $11 million to community partners around the globe. As we made the transition to public ownership, I reinforced over and over to investors and other stakeholders that we will continue to be as active and outspoken as we’ve been throughout our history. Our values-driven leadership is central to who we are as a company, our relationship with our consumers and our incredibly powerful brands – and it’s an important part of how we’ll operate in the future. And while this type of leadership may be more popular than ever, for us, it’s how we’ve always done things. Although I can’t say deﬁnitively that leading with purpose has driven our business growth, I can say that our business is as strong as ever. We recorded our highest revenue growth in more than two decades in ﬁscal 2018, a year in which we took on some of the most pressing and complex issues of our time. It’s been inspiring to see how our leadership on issues that we care about can complement our business success. Going forward, we expect our business momentum to continue. We know there will be headwinds to navigate ahead, including ongoing challenges in U.S. wholesale, geopolitical risks and the absence of a 2019 Black Friday sales bump given the structure of our ﬁscal calendar. But we’re conﬁdent that we have the strategies and people in place to overcome these and additional challenges, and to continue to thrive as a company. As before, we will be guided by our four strategic choices, our purpose and our aspiration to be the world’s best apparel company and one of the best-performing companies in any industry. That’s what got us here, and that’s what will take us forward as we make our audacious vision for the future a reality. Sincerely, 4 LEVI STRAUSS & CO. 2018 ANNUAL REPORT LS&Co. Fiscal Year 2018* +12.7% 53.8% 49.4% 50.5% 51.2% 52.3% +7.0% +2.6% +1.2% +3.1% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 NET REVENUE (Constant currency) GROSS MARGIN (Reported) $504M $479M $480M $481M +13.0% $542M $284M $158M $95M $118M $74M 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 ADJUSTED EBIT (Reported) FREE CASH FLOW (Reported) * For more information regarding constant-currency revenues, Adjusted EBIT, free cash ﬂow and the other non-GAAP ﬁnancial measures discussed in this annual report, see the discussion and reconciliations provided at the end of this annual report. LEVI STRAUSS & CO. 2018 ANNUAL REPORT 5 Snapshot of Our Business Today 74% 20% 4% ECOMMERCE (Company-Operated) TOPS BOTTOMS 6% FOOTWEAR & ACCESSORIES FY18 NET REVENUE $5.6B ASIA, MIDDLE EAST & AFRICA 16% 29% 55% EUROPE AMERICAS 31% RETAIL (Company-Operated) 65% WHOLESALE (Including 7% Franchise) 29% WOMEN’s** 69% MEN’s** 86% 7% 7% 15,100 EMPLOYEES 50,000 RETAIL LOCATIONS 5,000+ TRADEMARK REGISTRATIONS & PENDING APPLICATIONS 110+ COUNTRIES ~3,000 BRAND-DEDICATED STORES & SHOP-IN-SHOPS 6 LEVI STRAUSS & CO. 2018 ANNUAL REPORT ** 2 percent of net revenues in ﬁscal 2018 were from non-gendered products. Our Business Strategies By the Numbers* Grow the core Our performance in these areas is what anchors the company and gives us the ﬂexibility to invest in our other strategic choices. MEN’S BOTTOMS +3% +8% U.S. MARKET TOP 10 WHOLESALE CUSTOMERS +10% +10% FOUR OTHER TOP LS&CO. MARKETS (COLLECTIVELY) Expand for more We know that a diverse and well-balanced portfolio is critical to future-prooﬁng the company against market headwinds. WOMEN'S BUSINESS +28% ~1/3 WOMEN’S NOW REPRESENTS ALMOST ONE-THIRD OF OUR BUSINESS +37% TOPS $1B TOPS HIT THE $1 BILLION MARK Become a leading omnichannel retailer We want to be where our consumers are and believe our owned channels represent the very best experience of the brand. +16% DIRECT-TO-CONSUMER +16% ECOMMERCE Achieve operational excellence We continue to look for ways to to improve productivity and drive a high-margin business. +150 bps GROSS MARGIN vs PY (Reported) * All ﬁgures and growth rates are revenues versus prior year presented in constant currency unless stated otherwise. For more information regarding constant- currency revenues and the other non-GAAP ﬁnancial measures discussed in this annual report, see the discussion and reconciliations provided at the end of this annual report. Brands Lead the Way Our diverse portfolio of iconic brands sets us apart, and in ﬁscal 2018 they put us squarely in the center of the cultural conversation. We made strong marketing plays, both in traditional advertising and through out-of-the-box partnerships with collaborators and inﬂuencers, which brought us plenty of positive attention. LEVI STRAUSS & CO. 2018 ANNUAL REPORT The Levi’s® brand stayed ﬁrmly in the spotlight in ﬁscal 2018, with a thought-provoking ad highlighting the importance of voting paired with a successful social campaign featuring celebrities in our VOTE T-shirt. The brand reinforced its longstanding connection to the music scene while establishing Levi’s as the go-to uniform for festivals like Coachella. Our collaborations are a testament to the breadth of the the brand’s appeal – from our popular partnership with Air Jordan to putting jeans on Mickey Mouse for the ﬁrst time (not to mention special collaborations with leading brands like Supreme and cultural icons from Lily Aldridge to Justin Timberlake). The brand continued to innovate to meet consumers’ needs, adding new ﬁts and styles like women’s high rise and men’s taper, and partnering with tech leaders like SNAP Inc. and Pinterest to develop new and compelling ways for consumers to connect with our brands and buy our products. We continue to ﬁnd new ways to break down the walls between brick-and-mortar and online and bring more customization features to our Levi’s eCommerce sites. All of that contributed to the brand’s 13 percent revenue growth in ﬁscal 2018, with especially impressive results for women’s and tops, each of which grew double digits, while the Levi’s men’s business grew 8 percent for the year. 9 The Dockers® brand is making progress and showed pockets of growth this year, especially in Europe, where ﬁscal 2018 revenues were up 16 percent. The Dockers team has been making strides in its mission to reinvigorate the brand, with eye-catching marketing like the “Always On” speaker series designed to connect with young entrepreneurs around the globe, and the partnership with inﬂuencer Zach King. Paired with investments in new products like Signature Khaki 2.0 and Smart 360 Flex and updated branding featuring the original Dockers logo, we are focused on bringing this brand back to growth. LEVI STRAUSS & CO. 2018 ANNUAL REPORT The Signature by Levi Strauss & Co.™ and Denizen® brands were developed for value-conscious consumers and offer quality craftsmanship and great ﬁt and style at affordable prices. This was a big year for our value brands, as combined revenues grew 29 percent in ﬁscal 2018. The growing popularity of Signature by Levi Strauss & Co. was a key driver behind the growth we saw in our U.S. wholesale business. The brand expanded its reach in the United States and Canada and also launched in Mexico and Brazil. The Denizen brand expanded its presence in the United States this year and launched in Mexico and India. 11 Innovating for the Future The ingenuity of our teams around the world was a key part of the successes that helped insulate us against market headwinds. And in ﬁscal 2018, we delivered a major breakthrough in jeans ﬁnishing — a process unchanged for more than half a century — with the launch of Project F.L.X. PROJECT F.L.X. WEWEWEWE’V’V’VVVVE EE BUBUBUILILILT T T T ANANANNNA EEEENDNDDD-T-TT-TO-O-OO--ENENEND D D DIDIDDD GIGIGIG TATATATAL L L PLPLPLPLP ATATATA FOOFOFOORMRMRMRM TTTTHAHAHAHAHH T T TTTT TRTRTRTRTT ANANANANSFSFSFS ORORORO MSMSMSM HHHHOWOWOWW JEJEJEJ ANANANSSSSS ARARRARA EE EE DEDEDDEESISISIGNGNGNNEDEDED,,,, MAMAMAMADEDEDD AAANDNDNDNDD SSSSOLOLOOLDDDD UsinUsinUsing adadg advanc moremoremoremo n bun bun bb ildildill a a sup ly cly cly chainhainaina supp and resprespresponsionsionsisible ble blebl supp and resresresr ponsponsponsiveiveve and vanced ted ted ttechnechnechnechnologologologoll y, wy, w e cae cae THE OLD PROCESS THE F.L.X. PROCESS DIGITAL FINISH DESIGN 2 weeks or less to create a finish design using digital imaging tools LASER TECHNOLOGY Finishes applied using automated laser treatment A CLEANER JEAN Just a few dozen chemicals required MAKE WHAT YOU SELL Less inventory and reduced waste PHYSICAL PROTOTYPING Physical prototypes can take up to 8 weeks MANUAL PROCESS Labor-intensive process to finish 2-3 pairs of jeans per hour MANY CHEMICALS More than a thousand chemical formulations used to create finishes SELL WHAT YOU MAKE Long lead times of often more than six months Project F.L.X. is a disruptive tech- nology that allows us to create and sell-in new products without needing to produce a single sample. It brings the finishing process closer to the consumer, which can shorten lead times and lessen the amount of inventory we need to carry. It also uses far fewer chemicals than traditional ﬁnishing methods. As dramatic as it is, it was far from our only demonstration of the inventiveness of our people and the adaptability of our products. To take just one example: The Levi’s Commuter X Jacquard by Google jacket, representing one of our ﬁrst forays into connected apparel, received its ﬁrst update. But unlike a lot of tech these days, it didn’t require consumers to buy any- thing new, demonstrating that even cutting-edge fashion technology can still be built to last. With these advancements and more, including several that we plan to roll out in fiscal 2019, we know that our future success will be fueled by the vision and innovation we are building into everything we do. 12 LEVI STRAUSS & CO. 2018 ANNUAL REPORT Future Shapers In ﬁscal 2018, we made some im- portant changes to our leadership and organizational structure that will help us carry out the plans we have for the coming years. We consolidated our product and supply chain teams to create a new organization known as Global Product, led by Liz O’Neill. This move brought together the key product functions of design, merchandising, product development, innovation, sustainability and planning into a single team that’s responsible for the end-to-end view of the product lifecycle, from ideation to logistics to what ultimately shows up in stores and online. This further integrates our supply chain into the consumer journey and enhances our ability to fully leverage emerging innovations like Project F.L.X. technology. We also established a new Direct- to-Consumer organization led by Marc Rosen, who previously led our eCommerce business. This organization is charged with meeting and exceeding the expectations of today’s consumer by delivering a seamless experience across brick- and-mortar and eCommerce, and deepening our relationship with the people who purchase our products. And we established a new Strat- egy and Analytics organization, positioning ourselves to realize the potential of a previously untapped competitive advantage: our data. Katia Walsh, who had served as chief data and analytics ofﬁcer at Vodafone, took the helm of this organization in early ﬁscal 2019 as our Chief Strategy and Artiﬁcial Intelligence Ofﬁcer. LEVI STRAUSS & CO. 2018 ANNUAL REPORT 13 Proﬁts Through Principles The progress that we are making as a company is evident in our ﬁnancials – but our impact has been felt much more widely this year. We used our voice to champion the values that have driven our company since its founding and to stand up for the issues that are important to the communities where we live and work. We continued to act on the premise that it’s not just the products we make but how we make them that matters. Across product lines, we made progress toward achieving — and in some instances surpassing — our sustainability goals. Our use of more sustainable cotton from the Better Cotton Initiative and organic cotton growers nearly doubled, from 34 percent of our total cotton usage in ﬁscal 2017 to 67 percent in ﬁscal 2018. Through the Better Cotton program, we help farmers grow our key raw material using less water and fewer chemicals, which lessens the impact of the crop and makes it more proﬁtable for the farmers. On climate, we participated in the We Are Still In business coalition to uphold the goals of the Paris Agreement and launched our new, science-based Climate Action Strategy (in part because we met our last set of targets three years ahead of schedule). Through this industry-leading strategy, we committed to reducing our carbon footprint in our facilities by 90 per-rr cent and across our supply chain by 40 percent by ﬁscal 2025. To help CLIMATE Science-Based Targets for 2025: (cid:5)(cid:3)Carbon emissions down 90% in owned-and- operated facilities (cid:5)(cid:3)Carbon emissions down 40% across supply chain (cid:5)(cid:3)100% renewable electricity in owned-and-operated facilities COTTON 67% cotton sourced from Better Cotton Initiative growers, organic cotton farms or recycled cotton suppliers (cid:5)(cid:3)Goal of 75% in 2019 (cid:5)Goal of (cid:3)100% by 2020 WATER 67% of Levi’s products made with Water

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