Levi Strauss & Co
Annual Report 2021

Plain-text annual report

Dear Shareholders, There’s no question that 2021 was a challenging year, with COVID-19 profoundly impacting all of us. Time and again, we experienced moments of false hope that the pandemic was behind us followed by heartbreaking reminders that it was still with us. Pandemic challenges were compounded by major supply chain issues, which were further complicated by labor shortages at distribution centers. And yet, the company successfully navigated it all and delivered outstanding results. This is the strongest the company has been in decades. At the beginning of the pandemic, we declared that we would emerge stronger from the COVID-19 crisis. In 2021, we beat all internal plans, delivered revenues ahead of pre-pandemic 2019, and the highest revenues since 1998, while also delivering record adjusted gross margins and adjusted EBIT margins. Our strategic initiatives accelerated the recovery, and our fiscal 2021 performance demonstrates the strength and resilience of our brands and the authentic connections we have with consumers. These results wouldn’t have been possible without dedicated and committed employees in stores, distribution centers and corporate offices working to deliver timeless products and unforgettable experiences to our fans around the world. In the face of unforeseen challenges, we persisted. CHIP BERGH President & Chief Executive Officer 1 LEVI STRAUSS & CO. 2021 ANNUAL REPORTOur Fiscal Year 2021 We generated robust financial performance in 2021, returning to pre-pandemic revenue levels. Despite ongoing business disruption from the pandemic, we have emerged stronger and are committed to driving profitable growth while optimizing value for our shareholders. We generated robust financial performance in 2021. $5.6 $5.8 $5.8 $1.47 $4.9 $4.6 $4.5 $1.08 $1.12 $.81 $.83 $.21 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 net revenue (in billions) adjusted diluted earnings per share $590 $611 $493 $502 $181 $713 51.2% 52.3% 53.8% 53.8% 54.4% 57.9% $285 $230 $158 $141 $116 $95 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 adjusted EBIT (reported currency, in millions) adjusted gross margin adjusted free cash flow (in millions) 2 LEVI STRAUSS & CO. 2021 ANNUAL REPORTFiscal 2021 Results Fiscal 2021 revenues were $5.8 billion, up 29% versus 2020 and slightly ahead of pre-pandemic 2019. Adjusted net income was $601 million, 32% above pre-pandemic 2019, while adjusted EBIT of $713 million was more than $100 million higher than 2019 on roughly the same level of revenue. Despite higher costs and supply chain disruptions, we delivered record adjusted gross margins of 57.9% and an adjusted EBIT margin of 12.4%. We accomplished this despite the impact of COVID-related store closures and soft retail traffic. The steps we took during the early days of the pandemic to improve our cost structure, pivot to be more digitally driven and invest in our brands has paid off. Our structural economics are stronger, the Levi’s® brand has grown share globally, and our strategic focus on driving Direct to Consumer (DTC) and continuing to diversify the business have driven our results. Our balance sheet is very strong, with approximately $800 million of cash and cash equivalents and $1.7 billion of liquidity. Our leverage ratio is the lowest it has been in decades at 1.2. During the year, we generated $737 million of operating cash flow. We continued to invest in our brands, technology and infrastructure, and also acquired the Beyond Yoga business, allowing us to authentically enter the activewear market, which is five times bigger than denim and growing at a faster rate. These investments are delivering the highest return on invested capital in a decade. Finally, we returned nearly $200 million to shareholders in the form of dividends and share buybacks. We have stayed ahead of shifts in consumer behavior and the global casualization trend. We have led a new denim cycle to looser, baggier fits — the first new cycle in over a decade. We invested in ecommerce, which is now a high-growth and profitable business. We deepened our omnichannel capabilities and also grew our brick-and-mortar footprint, primarily with the expansion of new, digitally enabled smaller format stores equipped with digital services, curbside pickup and mobile checkout. We opened 92 company-operated stores in 2021, ending the year with 1,083 company owned-and-operated stores. Net revenues through all digital channels grew nearly 60% versus 2019, representing 22% of total company net revenues for 2021, compared with 14% in 2019. Overall, we are entering fiscal 2022 with great momentum. Our Strategic Choices $5.8 billion FY21 revenues $601 million adjusted net income 12.4% adjusted EBIT margin 3 LEVI STRAUSS & CO. 2021 ANNUAL REPORTSnapshot of Our Business Today $5.8 billion FY21 net revenue ~$200 million FY21 capital return to shareholders in dividends and share buybacks FY21 revenue share approx 16,600 employees approx 50,000 retail locations approx 3,100 brand-dedicated stores & shop-in-shops 5% 8% 8%3% 64% 25% 5% 20% 5% 14% 30% Americas Europe Asia 75% Other brands* *comprising Beyond Yoga and Dockers® wholesale Including franchise company- operated stores ecommerce Company-operated only shop-in-shops bottoms tops footwear & accessories 87% 51% 4 LEVI STRAUSS & CO. 2021 ANNUAL REPORTThe pandemic sharpened our focus on the strategic initiatives that will underpin future success. Our strategies double down on our differentiators and most critical growth drivers. Brand-Led The Levi’s® brand is our greatest asset; it bolsters our financial performance and has an influence and impact that reaches far beyond our industry. On a global basis, Levi’s® is the #1 denim brand in both men’s and women’s. In 2021, we grew share overall and are bigger than the next three brands combined. In the U.S., the world’s biggest denim market, we were the #1 brand in men’s and the #2 brand in women’s, and the only brand among the top five that gained share with the 18- to 30-year-old consumer. Buoyed by a new denim cycle, which we led with the introduction of looser silhouettes, the brand had another very strong year: up 30% versus 2020, and slightly ahead of 2019. Advertising campaigns such as “Buy Better, Wear Longer” and the Levi’s® SecondHand re-commerce initiative resonate with consumers, demonstrate the brand’s values and are arguably something “only Levi’s® can do” authentically. The Levi’s® brand is our greatest asset. Dockers® had a good year, with sales improving each quarter of 2021. The brand has a healthier, more diverse sales mix and its “California casual lifestyle” aesthetic is winning new and younger consumers, increasingly via DTC, digital and international markets. The Dockers® brand continues to evolve, with international com- prising nearly 50% of sales. A few years ago, Dockers® was almost entirely a U.S. wholesale business; today, almost 30% of its business is from DTC and growing. Beyond Yoga, acquired in September, is off to a strong start. In 2022, we anticipate expanding its men’s and maternity businesses, and we will be opening Beyond Yoga’s first retail doors. Levi’s® #1 denim brand globally #1 denim brand for men in the U.S. #2 denim brand for women in the U.S. 5 LEVI STRAUSS & CO. 2021 ANNUAL REPORT21% ecommerce growth Direct to Consumer (DTC) Focus Our continued investment in DTC generates higher margins, brings us closer to the consumer and allows us to deliver the best brand experience. Our company-operated brick-and-mortar stores rebounded in 2021, improving each quarter despite on-going pandemic challenges. We continue to invest in our ecommerce experience and creating highly personalized recommendations for online shoppers. Our loyalty program and mobile app are seeing strong acquisition rates, meaningful growth in performance and productivity of existing members. Our ecommerce business grew 21% for the year and is profitable. Our company-operated brick-and-mortar stores rebounded in 2021. We announced earlier this year that our distribution center in Henderson, Nevada, became our first owned-and-operated facility to fulfill orders for ecommerce, retail and wholesale channels. This facility is a part of our ongoing efforts to enhance omnichannel capabilities with owned-and-operated distribution centers which will accelerate lead times, reduce reliance on third-party logistics providers, and lead to long-term cost savings. We are building highly automated, sustainable, owned-and-operated distribution centers to serve the east coast of the United States and Europe. 6 LEVI STRAUSS & CO. 2021 ANNUAL REPORTDiversification We’re accelerating our momentum by diversifying across categories, channels and geographies. The chart below details our growth over the past five years. Continued diversification of our business represents significant growth opportunities — we remain underpenetrated in women’s, tops and internationally — as well as product expansion outside of denim. We will continue to invest in our stores and online platforms to expand our footprint and create exceptional and memorable connections — the kind that make loyal fans for life. 2016 VS 2021 Our Diversification Progress Percentages indicate % contribution to net revenues international sales 49% à 55% “other than denim” bottoms women’s 31% à 36% 22% à 33% digital ecosystem* Direct to Consumer 9% à 22% 32% à 36% * Our digital sales and those of our wholesale customers 7 LEVI STRAUSS & CO. 2021 ANNUAL REPORTBeyond Yoga Beyond Yoga plays a key role in each of our strategic priorities by diversifying our product offerings and complementing our growing women’s business. The casualization trends that began before the pandemic have accelerated and are here to stay. The acquisition of Beyond Yoga positions LS&Co. firmly in the fast-growing and high-margin premium activewear category with a successful and authentic brand rooted in body positivity, inclusivity, diversity and quality. Beyond Yoga offers premium performance activewear in luxuriously soft fabrics; and more than half their customers are under 35. The brand was women-founded in 2005 and has been profitable every year since. Today, 88% of their employees are female. All of the key leaders and the majority of the approximately 90 Beyond Yoga employees have remained with the brand and are now part of LS&Co. Beyond Yoga firmly positions LS&Co. in the fast-growing and high-margin premium activewear category. We purchased the brand for approximately $400 million and project that it will deliver more than $100 million in revenue in 2022, and the longer-term growth opportunity is significant. The Beyond Yoga team has great product and deep consumer insights; it’s primarily a women’s business that is sold through a largely digital ecosystem in the U.S. We plan to bring the Beyond Yoga brand to more consumers through DTC expansion, including brick-and-mortar retail; gender and category growth; and further development of the wholesale footprint with premium partners. We will invest in brand-building and driving awareness, while expanding Beyond Yoga to capitalize on the continued uptake of premiumization, casualization and wellness trends globally. 8 LEVI STRAUSS & CO. 2021 ANNUAL REPORTDigital Transformation We are adopting digital tools across the business to harness the competitive advantage our data provides, allowing us to make faster, more informed decisions and respond more quickly to market trends. We’re implementing a simplified and modernized digital core, and transforming everything we do to deliver a superior consumer experience, increase efficiency, reduce costs and drive profitable growth. We’re also leveraging data, AI and machine learning to engage with our customers and fans more deeply and meaningfully. We launched the industry’s first in-house machine learning bootcamp. To do this, we’re investing in upskilling our people. In 2021, we launched the industry’s first in-house machine learning boot- camp — an immersive training in coding, machine learning and agile ways of working uniquely designed to digitally upskill LS&Co. employees. More than 100 employees have completed the program and are applying newly acquired data science skills across the company to accelerate our digital transformation. 100+ employees completed the machine learning bootcamp 9 LEVI STRAUSS & CO. 2021 ANNUAL REPORT2025 Sustainability Goals and Current Progress Sustainability means operating and using resources in a way that can be continued in perpetuity without harming people, the planet or future generations. Our sustainability strategy, as articulated in our recent sustainability report, centers on three pillars — climate, consumption and community — that encompass where we are putting our energy and how we see our obligations. To achieve our ambitions and strengthen our business, we will continue fortifying each pillar, working with humility and transparency to deliver progress to all stakeholders. 90% reduction of greenhouse gas (GHG) emissions in owned-and- operated (scope 1 and 2) facilities, against 2016 baseline Progress Through 2020: 57% reduction in Scope 1 and 2 emissions from 2016 baseline 57% 100% renewable electricity in owned-and-operated facilities Progress Through 2020: 76% renewable electricity at our owned-and-operated facilities 76% 40% reduction of GHG emissions across supply chain (scope 3), against 2016 baseline 50% reduction of water use in manufacturing in areas of high water stress, against 2018 baseline Progress Through 2020: 14% reduction in Scope 3 emissions from 2016 baseline 14% Progress Through 2020: ~22% reduction in freshwater use in 2020 in high water-stressed locations 22% All key fabric and garment suppliers will meet their contextual Water

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