Levi Strauss & Co
Annual Report 2019

Plain-text annual report

222222222222222220000000000000001111111111199999999999999 AAAAAAAAAAAAANNNNNNNNNNNNNNNNNNNNNNNNNNNNUUUUUUUUUUUUUUUUAAAAAAAAAAAAAAALLLLLLLLLL RRRRRRRRRRRRRREEEEEEEEEEEEEPPPPPPPPPPPPPOOOOOOOOOOORRRRRRRRRRRRRTTTTTTTTTTT Dear Shareholders, Fiscal 2019 was a historic year for the company. After returning to the public markets with our IPO, we have continued to execute against our strategies, delivering profitable growth despite a chal- lenging environment and making significant progress toward becoming a leading global lifestyle brand. Since we laid out a new strategy for growth in 2011, we have transformed our business, further diversifying across channels, categories and geographies, innovating with new technologies and processes and anticipating consumer preferences. From leading products to bold marketing to creative new retail experiences, we are leading in our industry. Fiscal 2019 Results* Building on last year’s double-digit growth, we delivered revenues of $5.8 billion in 2019, up 3 percent on a reported basis and 6 percent in constant currency. And we did this despite facing several challenges, both expected and unexpected, including the lack of a Black Friday in the fiscal year, as well as unrest in Hong Kong and parts of Europe. In our first year as a public company, we delivered at the high end of our constant-currency long-term growth algorithm: revenue grew 6 percent, adjusted EBIT was up 8 percent and adjusted net income was up 14 percent. We also paid $114 million in dividends, ref lecting a 27 percent increase from the prior year and a dividend yield of nearly 2 percent. CHIP BERGH President and Chief Executive Officer * All figures are 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, please refer to the discussion and reconciliations included within the “Non-GAAP Financial Measures” section in Item 7 of Part II of the accompanying Annual Report on Form 10-K. 2 LEVI STRAUSS & CO. 2019 ANNUAL REPORT Transforming through Diversification (cid:50)(cid:88)(cid:85)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:71)(cid:85)(cid:76)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:192)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3) by geography, category and channel. Our growth internationally was broad-based, with Europe growing 13 per- cent and Asia 10 percent. Direct-to-consumer grew 10 percent and within that, ecommerce grew 18 percent. Women’s and tops were particularly strong — each up 14 percent for the year. This was the fourth consecutive year of double-digit growth across our direct-to-consumer, women’s and tops businesses. Our strategies to diversify our global business are clearly working. Our international business is approaching 60 percent of total revenues. Direct- to-consumer is heading to 40 percent. Women’s is nearly one-third of total revenues and tops is almost one-fourth. In each of these areas, there remains a long runway for growth. As we continue to emphasize diversification across geographies, channels and categories, we are protecting and growing our core businesses, sustaining top- and bottom-line growth and maintaining solid operational results and strong returns. Our Strategic Choices Our first strategic choice is to drive our profitable core business, which includes men’s bottoms globally, our top 10 wholesale customers and our five largest mature markets: the United States, France, Germany, Mexico and the United Kingdom. Our top 10 global wholesale customers collectively grew 2 percent, despite a volatile wholesale channel, and our top 5 mature markets collectively grew 2 percent. This is a notable achievement when you consider the U.S., our largest market, was down 1 percent for the year. Levi’s remains the number one denim brand in the world by a mile and we are holding our share leadership position by putting the consumer at the center of everything we do. $5.8 billion net revenue $114 million dividends paid 10% growth direct-to-consumer LEVI STRAUSS & CO. 2019 ANNUAL REPORT 3 14% growth women’s business We saw exceptional results this year with our efforts to diversify our business Our second strategic choice is to “expand for more” into categories and geographies where we have outsized growth opportunities. We saw exceptional results this year with our efforts to diversify the business. Our total women’s business grew 14 percent in 2019, approaching $1.8 billion. We also continued to grow our market share in women’s, including in the U.S., where we are now the number two brand for women’s denim bottoms. We are leading in trends and innovation in the category demonstrated by the rapid growth of our fashion fits, including high-rise styles like the Ribcage and looser fitting bottoms like our new Balloon jean. Our total tops business grew 14 percent, driven by the success of a spectrum of tops, including tees, f leece, outerwear and trucker jackets. Each of our emerging markets of India, Russia and Brazil posted strong double-digit growth; and though modest at 2 percent, China was back to growth. Our third strategy is to become a world-class omnichannel retailer. Our direct-to-consumer business grew 10 percent in 2019. Revenue growth from our brick-and-mortar stores was up 8 percent globally. Performance of existing stores improved both internationally and in the U.S., in our outlets and full-priced stores and we continued to build out our store network, which grew by a net of 81 stores in 2019. Global e-commerce was up 18% for the year, with strong growth and increased traffic in all three regions. We continue to enhance our omnichannel capabilities. We have accelerated the U.S. rollout of Ship from Store due to strong performance and we are leveraging RFID technology in more than 600 doors — across 17 countries and growing, including all of our company-operated mainline doors in China — to provide inventory visibility and meet consumer demand in real-time. Our fourth strategic choice is to achieve operational excellence. We made great strides in recent years through the rollout of Project F.L.X., diversi- fying our supply chain, investments in our ERP and investing in data and technology to reduce costs and streamline operations. For example, we are using artificial intelligence and machine learning to automate more of our basic business and financial processes. 4 LEVI STRAUSS & CO. 2019 ANNUAL REPORT Profits Through Principles Our longstanding commitment to profits through principles remained the backbone of our success in fiscal 2019. We reaffirmed our commitment to the Paris Agreement to address climate change, pioneered a contextual approach to water use that prioritizes saving water in areas that need it most and encouraged others in our industry to commit to science-based targets on climate. We also reached more than 200,000 workers with our Worker Well-being program, meeting our target half a year early and supporting the financial empowerment, well-being and equality of the people who make our products. This was a pivotal year for LS&Co., one that saw us perform well fiscally, as well as position the company for future growth and enhanced shareholder returns. In February 2020, our Board of Directors authorized up to $100 million in share buybacks and committed to increase the return of capital to shareholders through an estimated $130 million in dividend payments — a 14 percent increase over fiscal 2019. LS&Co. has been on a journey of transformation for the past eight years. Today, we have the right people, strategies and initiatives in place to continue our momentum and deliver profitable, sustainable growth in 2020 and beyond. Sincerely, LEVI STRAUSS & CO. 2019 ANNUAL REPORT 5 LS&Co. Fiscal Year 2019 +12.7% +7.0% +6% 55 ¢ 97¢ 76 ¢ 73 ¢ 73 ¢ +3.1% +1.2% 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 net revenue growth (constant currency) diluted earnings per share (reported currency) +4% $590M $611M $502M $493M $502M $114M $90M $70M $60M $50M 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 adjusted ebit (reported currency) shareholder dividends (reported currency) 6 LEVI STRAUSS & CO. 2019 ANNUAL REPORT Snapshot of Our Business Today revenue share wholesale company o&o stores ecommerce shop-in-shops Americas Europe Asia, Middle East & Africa 6% 7% 87% 5%4% 64% 27% 16% 53% 31% $5.8 billion FY19 net revenue $116 million FY19 adjusted free cash flow approx 15,800 employees 50,000+ retail locations 3,000+ brand-dedicated stores & shop-in-shops LEVI STRAUSS & CO. 2019 ANNUAL REPORT 7 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. #1 Maintained our share leadership position in men’s denim 2% Top 5 mature markets 2% Top 10 wholesale accounts Expand for more We know that a diverse and well-balanced portfolio is critical to future-proofing the company against market headwinds. ~60% 14% 14% #2 of our business is now International Growth in overall tops business Growth in women’s business Grew to #2 in U.S. women’s denim Become a leading omnichannel retailer We want to be where our consumers are and deliver a seamless experience across channels. 10% DTC business +81 stores O&O stores globally (net) 18% ecommerce 600+ Stores equipped with RFID technology Achieve operational excellence We continue to look for ways to improve productivity and drive a high-margin business. +60 bps Gross margin vs. PY (excluding currency**) 10.6% <2% Adjusted EBIT margin (reported) China imports represent less than 2 percent of U.S. imports * All figures are 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, please refer to the discussion and reconciliations included within the “Non-GAAP Financial Measures” section in Item 7 of Part II of the accompanying Annual Report on Form 10-K. ** Year-over-year margin expansion excluding all currency effects, both translation and transaction 8 LEVI STRAUSS & CO. 2019 ANNUAL REPORT Iconic Brands Set us Apart There is an undeniable link between the iconic status of our brands and our long-term success. Our brands continue to evolve to be relevant with consumers, through bold marketing, leading products and new retail experiences. At the same time, we continue to use our brand strength to stand up for key issues that matter in our world today. “ Levi’s clout in the denim game cannot be overstated… Levi’s is heritage. Levi’s is quality. Levi’s is reliable.” Esquire, September 2019 The Levi’s® brand continued its momentum in 2019, appealing to consumers across generations and geographies by staying at the center of culture. This year, Levi’s asserted its leadership as the inventors of the blue jean and the leader of the category. In men’s, we continued to hold our share leadership position world- wide. We also expanded our women’s business, growing our share in the U.S., our largest market. And we contin- ued to evolve into a lifestyle brand, growing both the tops and accessories categories double digits in fiscal 2019. We advocated for our values of equality and inclusivity. We celebrated Pride with a global campaign and activations, we honored women change-makers globally such as activist Delaney Tarr for International Women’s Day in March and we launched our most ambitious Levi’s Music Project with Justin Timberlake to build a songwriting lab for high school students at Stax Music Academy in Memphis. Levi’s continued to be the partner of choice for inf lu- encers, artists and other top brands, as we unveiled creative collaborations with Star Wars, Hello Kitty and Stranger Things. We worked with Nike to launch an exclusive collection of co-branded footwear that promptly sold out and partnered with Google to create an updated version of Jacquard™ by Google, our “smart” Trucker Jacket that allows consumers to control their phone via gestures on the sleeve of their jacket. We celebrated cultural events and festivals around the world, including inf luential events like Coachella, which alone generated 9 billion global impressions for the brand. The Levi’s brand continued to find new ways to delight consumers through new retail experiences at our stores and pop-ups – all with an industry-leading focus on per- sonalization and customization that elevated our brand experience and helped us build deeper connections with our consumers. On Levi.com, we launched Future Finish, an online experience that makes it easy to create a cus- tom pair of Levi’s and puts the power of customization directly into consumers’ hands. All of that contributed to the brand’s 7 percent growth in constant currency in fiscal 2019, and powered a strong start to 2020. LEVI STRAUSS & CO. 2019 ANNUAL REPORT 11 The Dockers® brand continued to make progress in 2019, growing its innovation platform and bringing the brand back to the forefront of the modern workplace. Dockers created business casual in 1986 and continues to redefine modern workwear through its focus on product innovation. In 2019, Dockers launched a new campaign highlighting the Dockers Smart 360 product, part of our Smart Series innovation platform which has seen strong growth since its launch in 2017. We brought our cultural strengths from the Levi’s® brand into Dockers with new collaborations such as the x Karla collaboration, a dual gender collection with celebrity stylist Karla Welch, a partnership with L.A.-based design studio, Atelier & Repairs, as well as our second annual Pride collection, which featured an elevated take on the Dockers classic 1986 anchor logo. We added inf luential brand ambassadors such as CJ McCollum, the Portland Trail Blazers’ star shooting guard and philanthropist. In addition, we also fostered the entrepreneurial spirit that lies at the heart of the Dockers brand by supporting our Dockers Challengers, young entrepreneurs with outsized ambitions to have a positive impact on the world. The team’s ongoing investments in innovation and marketing have led to encouraging pockets of growth, particularly in Europe, where fiscal 2019 revenues were up 10 percent. Focusing on millennial-driven values will help put Dockers at the forefront of the modern work con- versation, while the brand’s commitments to innovation, west coast style and comfort will position Dockers as a go-to lifestyle brand. 12 LEVI STRAUSS & CO. 2019 ANNUAL REPORT Dockers is re-establishing brand strength in the U.S. and growing in Europe and other international markets. The Signature by Levi Strauss & Co.™ and Denizen® brands help position the company for success with value-conscious consumers seeking quality craftsmanship, great fit and style at affordable prices. Our value brands, driven by both product line and geo- graphic expansion, grew six percent in constant currency in fiscal 2019. The growing popularity of our value brands have allowed Signature and Denizen to expand into new categories such as girls, as well as internationally into new countries such as India, Japan and Mexico. We continued to carry innovations down through the Denizen product line with Denizen Forever Stretch and with Signature by Levi Strauss & Co. with our popular and fast-growing Signature Maternity offering. During fiscal 2019, our Totally Shaping Pull-on Skinny Jeans from Signature by Levi Strauss & Co. became a bestseller on Amazon, with our Signature at Amazon storefront becoming the brand’s fastest growing business. LEVI STRAUSS & CO. 2019 ANNUAL REPORT 15 Snapshot of Our Sustainability Programs and Progress Climate Industry-leading targets 90% BY 2025 WE WILL 40% 100% Reduce carbon emissions in owned-&-operated facilities Reduce carbon emissions across supply chain Renewable electricity in owned-&-operated facilities1 Innovating to deliver on our goals Following a successful pilot with six suppliers in four countries, we began expanding our partnership with the International Finance Corporation (IFC) and their Partnership for Cleaner Textiles (PaCT) program to our top 46 vendors in 10 countries, covering 80% of our volume. Water PARTNERSHIP FOR CLEANER TEXTILES (PACT) PROGRAM EXPANSION 10 46 countries vendors 80% production volume 68% 3.5B liters 5.7B+ liters 50% Levi’s® products made with Water

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