Levi Strauss & Co: Form 10-Q for the period ended Aug 25, 2024

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report and with our audited financial statements and related notes in our Annual Report on Form 10-K for the year ended November 26, 2023, filed with the Securities and Exchange Commission on January 25, 2024. Some of the information contained in this discussion and analysis in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements. We use a 52- or 53-week fiscal year, with each fiscal year ending on the Sunday that is closest to November 30 of that year. References to 2023 and 2024 below in this section are references to our fiscal years ending in November 2023 and December 2024, respectively. See “Financial Information Presentation.”

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.

To supplement our consolidated financial statements prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures throughout this Quarterly Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP financial measures to assist investors in seeing our financial performance from management’s point of view and because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP. For more information on our calculation of non-GAAP measures and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP, see “Non-GAAP Financial Measures.”

Overview

We are an iconic American company with a rich history of profitable growth, quality, innovation and corporate citizenship. Our story began in San Francisco, California, in 1853 as a wholesale dry goods business. We created the first riveted blue jean 20 years later. Today, we design, market and sell products that include jeans, casual and dress pants, activewear, tops, shorts, skirts, dresses, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Levi Strauss Signature™, Denizen® and Beyond Yoga® brands. We service consumers through our global infrastructure, developing, sourcing and marketing our products around the world.

We recognize wholesale revenue from sales of our products through third-party retailers such as department stores, specialty retailers, third-party e-commerce sites and franchise locations dedicated to our brands. We also sell our products directly to consumers ("direct-to-consumer" or "DTC") through a variety of formats, including our own company-operated mainline and outlet stores, company-operated e-commerce sites and select shop-in-shops that we operate within department stores and other third-party retail locations. As of August 25, 2024, our products were sold in over 45,000 retail locations in more than 110 countries, including approximately 3,400 brand-dedicated stores and shop-in-shops. As of August 25, 2024, we had 1,243 company-operated stores located in 39 countries and approximately 600 company-operated shop-in-shops. The remainder of our brand-dedicated stores and shop-in-shops were operated by franchisees and other partners.

Across all of our brands, pants – including jeans, casual pants, dress pants, shorts, skirts and activewear – represented 66% and 67% of our total units sold in the first nine months of 2024 and 2023, respectively. Tops – including shirts, sweaters, jackets, dresses and jumpsuits – represented 28% and 27% of our total units sold in the first nine months of 2024 and 2023, respectively. The remainder of our products are footwear and accessories. Men’s products generated 62% and 64% of our net revenues in the first nine months of 2024 and 2023. Women’s products generated 36% and 35% of our net revenues in the first nine months of 2024 and 2023, respectively. The remainder of our products are non-gendered. Products other than denim bottoms – which include tops, pants excluding jeans, accessories and footwear – represented 41% and 40% of our net revenues in the first nine months of 2024 and 2023, respectively.

Our Europe and Asia businesses, collectively, contributed 44% of our net revenues in the first nine months of both 2024 and 2023. Net revenues from our international business, which includes our Europe and Asia segments, as well as Canada and Latin America from our Americas segment, was 58% in the first nine months of both 2024 and 2023. Sales of Levi’s® brand products represented 89% and 87% of our total net sales in the first nine months of 2024 and 2023, respectively.

Our wholesale channel generated 54% and 57% of our net revenues in the first nine months of 2024 and 2023, respectively. Sales to franchise partners, included as a component of our wholesale channel, generated 6% of our net revenues in the first nine months of both 2024 and 2023. Our DTC channel generated 46% and 43% of our net revenues in the first nine months of 2024 and 2023, respectively, with sales through our company operated e-commerce sites representing 21% and 20% of DTC channel net revenues in the first nine months of 2024 and 2023, respectively, and 10% and 8% of total net revenues in the first nine months of 2024 and 2023, respectively.

Supply Chain

Disruption of container shipping traffic through the Red Sea and surrounding waterways is affecting transit times and shipping costs for goods manufactured in Asia and destined to Europe (and to a smaller extent the Americas). We have taken actions to divert the flow of goods and are negotiating with shipping companies on the cost impacts to minimize impacts on the business. Major port strikes on the East and Gulf Coasts of the United States could significantly disrupt our supply chain and our ability to service customer demand.

Additionally, inflationary pressures, competition for, and price volatility of, resources throughout the supply chain persist. Trends such as these have resulted in higher product costs in previous periods and may do so again in the future, increasing pressure to reduce costs and raise product prices, which could have a negative impact on demand. We continue to pursue mitigation strategies and create new efficiencies in our global supply chain.

Effects of Inflation

Inflationary pressures have negatively impacted our revenue, operating margins and net income in the three-month and nine-month periods ended August 25, 2024 and August 27, 2023, adversely impacting consumer demand and increasing labor and product costs.

Project Fuel

In the first quarter of 2024, our Board of Directors (the "Board") approved a multi-year global productivity initiative, “Project Fuel”, designed to accelerate the execution of our Brand Led and DTC First strategies while fueling long-term profitable growth. This will be a two-year initiative beginning in 2024, with a focus on optimizing our operating model and structure, redesigning business processes and identifying opportunities to reduce costs and simplify processes across our organization.

The first phase of the global productivity initiative was completed primarily in the first half of 2024, resulting in the Company recognizing $174.7 million in restructuring charges for the nine-month period ended August 25, 2024, primarily due to severance and other post-employment benefits, recorded within “Restructuring charges, net” in the accompanying consolidated statements of income. The Company is changing its distribution strategy from an owned and operated model to a mix of owned and third-party operated distribution centers, which will result in the sale, lease or transfer of certain distribution centers currently owned and operated by the Company to third-party logistics providers. During the nine-month period ended August 25, 2024, we also recognized $34.3 million of restructuring related charges primarily consisting of consulting fees and an impairment charge of $11.1 million related to capitalized internal-use software as a result of the decision to discontinue certain technology projects in connection with Project Fuel, recorded within Selling, general, and administrative expenses (“SG&A”) in the Company’s consolidated statements of income, and $5.5 million in goodwill impairment charges related to our footwear business as a result of the decision to discontinue the category recorded within Goodwill and other intangible impairment charges in the Company’s consolidated statements of income. We may incur additional significant restructuring charges as we progress our global productivity initiative, which could be material in a future fiscal quarter or year.

Subsequent to the end of the third quarter of 2024, the Company announced that it has initiated a formal review of strategic alternatives for the Dockers® brand, which could include a potential sale or other strategic transaction. The Company has retained Bank of America as its financial advisor. The Company has not set a deadline or definitive timetable for the completion of the strategic alternatives review process, and there can be no assurance that this process will result in any transaction or particular outcome.

Other Factors Affecting Our Business

We believe the other key business and marketplace factors that are impacting our business include the following:

• Inflation and other macroeconomic pressures in the U.S. and the global economy such as rising interest rates, energy prices and recession fears are creating a complex and challenging retail environment for us and our customers as consumers reduce discretionary spending. A decline in consumer spending has had and may continue to have an adverse effect on our revenues, operating margins and net income. Challenges forecasting consumer demand has in the past and may in the future lead to elevated inventory levels both with us and our customers, resulting in fewer full-priced sales and a more promotional environment. These trends historically have impacted and may impact our future financial results, affecting inventory, revenue, operating margins and net income.
• Consumer expectations and related competitive pressures have increased and are expected to continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We continue to invest in our online platforms, information systems, digital, data and AI capabilities, as well as in personnel to support the creation of a fully integrated omni-channel shopping experience. There can be no assurance that we will be able to successfully meet these expectations, which may impact our financial results.
• The diversification of our business model across geographies, channels, brands and categories affects our gross margin. For example, if our sales in higher gross margin geographies, channels, brands and categories grow at a faster rate than in our lower gross margin business geographies, channels, brands and categories, we would expect a favorable impact to aggregate gross margin over time. Gross margin in our Europe segment is generally higher than in our Americas and Asia segments. Value brands, which are focused on the value-conscious consumer, generally generate lower gross margin. DTC sales generally have higher gross margins than sales through third parties, although DTC sales also typically have higher selling expenses and could have lower profitability. As we continue to execute on our strategic framework to be DTC first, we expect to see greater impact on our gross margins. Enhancements to our existing product offerings, or our expansion into new brands and products categories, may also impact our future gross margin.
• Foreign currencies continue to be volatile. Significant fluctuations of the U.S. Dollar against various foreign currencies, including the Euro and Mexican Peso, may negatively impact our financial results, revenue, operating margins and net income.
• The current domestic and international political environment, including volatile trade relations, the Russia-Ukraine war, the Israel-Hamas war and the related disruption to shipping lanes and civil unrest taking place in certain parts of the world have resulted in uncertainty surrounding the future state of the global economy. There is greater uncertainty with respect to potential changes in trade regulations, sanctions and export controls, which also increase volatility in the global economy. This environment has affected and may continue to affect production and distribution lead times, increasing our costs and potentially affecting our ability to meet customer demand. If these disruptions persist, they may require us to modify our current sourcing practices, which may impact our product costs, and, if not mitigated, could have a material adverse effect on our business and results of operations.
• The Organization for Economic Cooperation and Development reached agreement among various countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two. Many countries continue to announce changes in their tax laws and regulations based on the Pillar Two proposals. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. Some of these legislative changes could have an adverse impact on our effective tax rate, tax liabilities and cash tax. Given the numerous proposed tax law changes and the uncertainty regarding such proposed legislative changes, the impact of Pillar Two cannot be determined at this time.
• As climate change evolves, we expect an increase in both the frequency and severity of seasonal and severe weather events, which may affect our consumer traffic and demand, as well as the activities of our suppliers, manufacturers and customers. Weather events, such as droughts, heatwaves, floods, wildfires and winter storms could impact store traffic and conversion as the timing for seasonal products may be unpredictable. Additionally, weather events could impact the cost or availability of raw materials integral to our products, such as cotton.
• There has been increased focus from our stakeholders, including consumers, employees and investors and regulatory organizations on corporate environmental, social and governance (“ESG”) practices, including corporate practices related to the causes and impacts of climate change and corporate statements, practices or products related to a variety of social issues. We expect that stakeholder expectations and actions with respect to ESG practices and social issues and regulatory requirements will continue to evolve rapidly, which may negatively impact our financial results, and which may necessitate additional resources to monitor, report on, and adjust our operations.
• Wholesaler/retailer dynamics and wholesale channels remain challenged by mixed growth prospects due to increased competition from e-commerce shopping, pricing transparency enabled by the proliferation of online technologies and vertically-integrated specialty stores. Retailers, including our top customers, have in the past and may in the future decide to consolidate, undergo restructurings or rationalize their stores, which could result in a reduction in the number of stores that carry our products.

These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies.

For additional information regarding these risks, as well as other risks we face, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended November 26, 2023.

Seasonality of Sales

We typically achieve our largest quarterly revenues in the fourth quarter. In fiscal year 2023, our net revenues in the first, second, third and fourth quarters represented 27%, 22%, 24% and 27%, respectively, of our total net revenues for the year.

Our Third Quarter 2024 Results

• Net revenues. Consolidated net revenues increased 0.4% on a reported basis and 2.0% on a constant-currency basis compared to the third quarter of 2023. Revenue growth in our DTC business was largely offset by a decline in revenues in our wholesale business. The Levi’s® brand net revenues increased 3.1% on a reported basis and 4.9% on a constant-currency basis.
• Operating income. We recognized consolidated operating income of $30.3 million, compared to $34.8 million in the third quarter of 2023. The decrease was primarily due to higher Beyond Yoga® goodwill and intangible impairment charges as well as higher corporate expenses as a result of Project Fuel, partially offset by an increase in gross profit driven by higher gross margin. Operating margin was 2.0%, down from 2.3% in the third quarter of 2023, as a result of higher impairment charges and corporate expenses, partially offset by the impact of higher gross margin.
• Net income. We recognized consolidated net income of $20.7 million, compared to $9.6 million in the third quarter of 2023. The increase is primarily driven by a pension settlement loss in the prior year quarter, which offset the impact of the slight decrease in operating income.
• Adjusted EBIT. Compared to the third quarter of 2023, Adjusted EBIT increased 27.3% to $175.4 million from $137.8 million. The increase is due to higher gross profit described above, partially offset by higher Adjusted SG&A expenses in the current year. As a result, Adjusted EBIT margin was 11.6%, 250 basis points higher than the third quarter of 2023 on a reported basis, and 260 basis points higher on a constant-currency basis.
• Adjusted net income. Compared to the third quarter of 2023, Adjusted net income increased to $131.9 million from $112.0 million. The increase is due to higher Adjusted EBIT as described above.
• Diluted earnings per share. We recognized diluted earnings per share of $0.05, compared to $0.02 in the third quarter of 2023. Currency translation did not have a significant impact on diluted earnings per share.
• Adjusted diluted earnings per share. Compared to the third quarter of 2023, Adjusted diluted earnings per share increased to $0.33 from $0.28, mainly due to the higher Adjusted net income described above. Currency translation did not have a significant impact on Adjusted diluted earnings per share.

Our Year-to-Date 2024 Results

• Net revenues. Consolidated net revenues decreased 0.5% on a reported basis and increased 0.4% on a constant-currency basis compared to the first nine months of 2023. Net revenues were essentially flat, as growth in our DTC business globally was offset by a decline in wholesale.
• Operating income. Compared to the first nine months of 2023, operating income decreased 74.4% to $51.8 million from $202.1 million due to the recognition of $174.7 million in restructuring charges in the current year as well as higher SG&A expenses, partially offset by an increase in gross profit driven by higher gross margin. As a result, operating margin was 1.1%, 340 basis points lower than the first nine months of 2023.
• Net income. Compared to the first nine months of 2023, consolidated net income decreased to $28.0 million from $122.7 million, primarily driven by the decreased operating income described above, partially offset by a pension settlement loss in the prior year and lower income taxes in the current year.
• Adjusted EBIT. Compared to the first nine months of 2023, Adjusted EBIT increased 13.7% to $403.1 million from $354.6 million, primarily due to higher gross profit in the current year partially offset by higher Adjusted SG&A expenses. Adjusted EBIT margin was 8.9%, 110 basis points higher than the first nine months of 2023 on a reported basis and 120 basis points higher on a constant-currency basis.
• Adjusted net income. Compared to the first nine months of 2023, Adjusted net income increased 14.7% to $300.6 million from $262.0 million, primarily due to higher Adjusted EBIT described above, as well as lower income taxes and lower interest expense.
• Diluted earnings per share. Compared to the first nine months of 2023, diluted earnings per share decreased to $0.07 from $0.31, mainly due to the lower net income described above.
• Adjusted diluted earnings per share. Compared to the first nine months of 2023, Adjusted diluted earnings per share increased to $0.75 from $0.65, due to the higher Adjusted net income described above. Currency translation unfavorably affected Adjusted diluted earnings per share by $0.01.

For more information on non-GAAP financial measures, our calculation of Adjusted EBIT, Adjusted net income, and Adjusted diluted earnings per share and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP, see “Non-GAAP Financial Measures.”

Financial Information Presentation

Fiscal year. We use a 52- or 53- week fiscal year, with each fiscal year ending on the Sunday that is closest to November 30 of that year. Certain of our foreign subsidiaries have fiscal years ending November 30. Each fiscal year generally consists of four 13-week quarters, with each quarter ending on the Sunday that is closest to the last day of the last month of that quarter. Each quarter of fiscal years 2024 and 2023 consists of 13 weeks, except for the fourth quarter of 2024, which will consist of 14 weeks and end on December 1, 2024.

Segments. Our Levi’s Brands business, which includes Levi’s®, Levi Strauss Signature™ and Denizen® brands, is defined by geographical regions into three segments: Americas, Europe and Asia. Our Dockers® and Beyond Yoga® businesses are managed separately and separately do not meet the quantitative thresholds of a reportable segment and are reported in our financial statements under the caption of “Other Brands.” Effective in the second quarter of 2024, Dockers® and Beyond Yoga® businesses are disclosed as separate lines under the caption “Other Brands” to increase transparency of performance.

Classification. Our classification of certain significant revenues and expenses reflects the following:

• Net revenues comprise net sales and licensing revenues. Net sales include sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores and shop-in-shops located within department stores and other third-party locations, as well as company-operated e-commerce sites. Net revenues are recorded net of discounts, allowances for estimated returns and retailer promotions and other incentives. Licensing revenues, which include revenues from the use of our trademarks in connection with the manufacturing, advertising and distribution of trademarked products by third-party licensees, are earned and recognized as products are sold by licensees based on royalty rates as set forth in the applicable licensing agreements.
• Cost of goods sold primarily comprises product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. On both a reported and constant-currency basis, cost of goods sold reflects the transactional currency impact resulting from the purchase of products in a currency other than the functional currency.
• Selling expenses include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops, as well as costs associated with our e-commerce operations.
• We reflect substantially all distribution costs in SG&A, for both our DTC and wholesale channels, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling and certain other activities associated with our distribution network.

Results of Operations

The following table presents, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

(Dollars and shares in millions, except per share amounts)

Net revenues

The following table presents net revenues for the periods indicated and the changes in net revenues on both reported and constant-currency basis from period to period.

(Dollars in millions)

Total net revenues on a reported basis increased for the three-month period ended August 25, 2024 and decreased for the nine-month period ended August 25, 2024, as compared to the same periods in 2023. On a constant-currency basis, total net revenues increased for both the three-month and nine-month periods ended August 25, 2024, as compared to the same periods in 2023.

Americas. On a reported basis, net revenues decreased for the three-month period ended August 25, 2024 and increased for the nine-month period ended August 25, 2024. On a constant-currency basis, net revenues increased for both the three-month and nine-month periods ended August 25, 2024. Currency translation affected net revenues unfavorably by approximately $11 million for the three-month period ended August 25, 2024 and did not have a significant impact for the nine-month period ended August 25, 2024.

Excluding the effects of currency, net revenues increased for the three-month period ended August 25, 2024, driven by growth in our DTC channel, largely offset by a decrease in wholesale channel revenue primarily as a result of lower volume in our Signature brand. Additionally, the exit of the Denizen business contributed $15 million to the decline.

The increase in DTC revenue was attributable to growth across all markets, led by the U.S., for the three-month period ended August 25, 2024. Revenue growth was driven by both store performance and store expansion, as we benefited from 49 more company-operated stores in operation in the Americas as of August 25, 2024, as compared to August 27, 2023. E-commerce net revenues increased primarily due to higher online traffic and conversion.

Net revenues increased for the nine-month period ended August 25, 2024, as growth in our DTC channel was largely offset by a decline in wholesale channel revenue. The growth in DTC revenue was due to strong performance and increased traffic within our company-operated stores as well as store expansion. E-commerce revenue increased due to higher online traffic and conversion. The decrease in wholesale channel revenue was impacted by the exit of our Denizen business of $41 million.

Europe. Net revenues in Europe increased for the three-month period ended August 25, 2024 and decreased for the nine-month period ended August 25, 2024 on both a reported and constant-currency basis. Currency translation affected net revenues unfavorably by approximately $3 million for the three-month period ended August 25, 2024 and did not have a significant impact for the nine-month period ended August 25, 2024.

Constant-currency net revenues increased for the three-month period due to growth in our DTC channel and higher wholesale channel revenue and decreased for the nine-month period ended August 25, 2024 as growth in DTC was more than offset by a decrease in wholesale channel revenue.

Excluding the effects of currency, for the three-month period ended August 25, 2024, compared to the prior year quarter, the increase in revenue was driven by higher volume in both our DTC channel, primarily due to expansion, and in our wholesale channel. There were 10 more company-operated stores in operation in Europe as of August 25, 2024 as compared to August 27, 2023.

For the nine-month period ended August 25, 2024, the decrease in wholesale channel revenue was primarily driven by lower volumes as well as the exit from Russia, which included wholesale channel revenues of approximately $8 million in the prior year. The growth in DTC revenue was primarily driven by expansion, partially offset by the exit from Russia, which included DTC channel revenues of approximately $5 million in the prior year.

Asia. On a reported basis, net revenues in Asia increased for the three-month period ended August 25, 2024 and decreased for the nine-month period ended August 25, 2024. On a constant-currency basis, net revenues increased for both the three-month and nine-month periods ended August 25, 2024, with currency affecting net revenues unfavorably by approximately $8 million and $38 million, respectively.

Excluding the effects of currency, net revenues for the three-month and nine-month periods ended August 25, 2024 increased from growth in both our DTC and wholesale channels across most markets including Turkey and Japan, offset by performance of our China and Middle East markets.

The growth in DTC revenue was due to strong performance in our company-operated stores and e-commerce, as a result of increased volume driven by store expansion and higher average selling prices in company-operated stores and e-commerce, along with higher e-commerce traffic. Additionally, we benefited from 22 more company-operated stores in operation in Asia as of August 25, 2024 as compared to August 27, 2023. The increase in wholesale revenue was primarily due to an increase in units sold in our franchise channel.

Other Brands.

• Dockers. Net revenues in Dockers decreased on a reported and constant-currency basis for the three-month and nine-month periods ended August 25, 2024, with currency affecting net revenues unfavorably by approximately $2 million for both the three-month and nine-month periods ended August 25, 2024. Excluding the effects of currency, net revenues decreased for the three-month and nine-month periods ended August 25, 2024 primarily due to lower volume in the U.S. wholesale channel, partially offset by expansion in our DTC channel in the nine month period.
• Beyond Yoga®. Net revenues in Beyond Yoga® increased on a reported and constant-currency basis for the three-month and nine-month periods ended August 25, 2024. Currency translation did not have an impact on net revenues. Net revenues grew across both our DTC and wholesale channels. The growth in our DTC channel was primarily due to growth in e-commerce as well as store expansion. The growth in our wholesale channel was primarily due to higher volume.

Net revenues by channel

Wholesale. On both a reported and constant-currency basis, net revenues in our wholesale channel decreased for the three-month and nine-month periods ended August 25, 2024, with currency translation affecting net revenues unfavorably by approximately $13 million and $11 million, respectively. The decreases in both periods were driven by lower volume, primarily in the U.S. The impact of the exit of the Denizen brand contributed approximately $15 million and $41 million to the decline in wholesale net revenues for the three-month and nine-month periods ended August 25, 2024, respectively. Additionally, the impact of the exit of the Russia business contributed $8 million to the decline for the nine-month period ended August 25, 2024.

DTC (Direct to Consumer). Net revenues in our DTC channel increased on both a reported and constant-currency basis for the three-month and nine-month periods ended August 25, 2024, with currency translation affecting net revenues unfavorably by approximately $12 million and $29 million, respectively. The increase was driven by store performance across brick-and-mortar mainline and outlet stores, as well as e-commerce. Our U.S. DTC business for the three-month and nine-month periods grew 12% and 11%, respectively. For both the three-month and nine-month periods ended August 25, 2024 net revenues from e-commerce grew 16%, driven by growth across the Levi’s and Beyond Yoga® brands. As a percentage of net revenues for the three-month and nine-month periods ended August 25, 2024, DTC comprised 44% and 46% of total net revenues, respectively.

Gross profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

(Dollars in millions)

Currency translation impacted gross profit unfavorably by approximately $13 million and $25 million, respectively, for the three-month and nine-month periods ended August 25, 2024.

For the three-month and nine-month periods ended August 25, 2024, the increase in gross margin was primarily driven by lower product costs and favorable channel and brand mix. Gross margin increased 50 basis points as a result of lower discounted sales for the three-month period ended August 25, 2024. Currency exchange, including transaction impacts, unfavorably impacted gross margin by approximately 30 basis points and 80 basis points for the three-month and nine-month periods ended August 25, 2024, respectively.

Selling, general and administrative expenses

The following table shows SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

(Dollars in millions)

* Not meaningful

Currency translation impacted SG&A favorably by approximately $8 million and $16 million for the three-month and nine-month periods ended August 25, 2024, respectively.

Selling. Currency translation impacted selling expenses favorably by approximately $6 million and $11 million for the three-month and nine-month periods ended August 25, 2024, respectively. The increase in selling expenses for the three-month and nine-month periods ended August 25, 2024 was primarily due to DTC business expansion in the current year as compared to the prior year.

Advertising and promotion. Currency translation did not have a significant impact on advertising and promotion expenses for the three-month period and had a favorable impact of approximately $2 million for the nine-month period ended August 25, 2024. The increase in advertising and promotion expenses for the three-month period ended August 25, 2024 was primarily due to increased media spending. The decrease in advertising and promotion for the nine-month period ended August 25, 2024 was primarily due to decreased media spending in comparison to the prior year, which included expenses associated with the 150th anniversary of the 501® jean campaign, partially offset by expenses associated with the Live in Levi’s campaign launched in the current year.

Administration. Administration expenses include functional administrative and organization costs. Currency translation did not have a significant impact on administration expenses for the three-month period and had a favorable impact of approximately $2 million for the nine-month period ended August 25, 2024. The increase in administration costs for the three months ended August 25, 2024, was primarily due to restructuring related charges which totaled $19.0 million, which was mostly due to consulting fees in connection with Project Fuel, as well as $11.1 million of impairments related to discontinued technology projects, partially offset by lower employee incentive compensation.

The increase in administration costs for the nine-month period ended August 25, 2024 was primarily due to an increase in restructuring related charges, primarily consulting fees, additional funding of employee incentive compensation as compared to the same prior-year period, and $11.1 million of impairments related to discontinued technology projects. The Company recognized restructuring related charges of $34.3 million for the nine-month period ended August 25, 2024 in connection with Project Fuel. The nine-month period ended August 27, 2023 included $24.9 million in charges related to the impairment of capitalized internal-use software as a result of the decision to discontinue certain technology projects, net of a $3.9 million gain on the early termination of certain store leases related to the Russia-Ukraine war.

Other. Other costs include distribution, information resources and marketing organization costs. Currency translation did not have a significant impact on other costs for the three-month and nine-month periods ended August 25, 2024. For the three-month and nine-month periods ended August 25, 2024, the increase in other costs was primarily due to higher spend on distribution expenses in support of both our DTC and wholesale businesses, including costs to finalize and transition the distribution center in Dorsten, Germany.

Restructuring charges, net

During the three-month and nine-month periods ended August 25, 2024, we recognized restructuring charges of $3.4 million and $174.7 million, respectively, related to Project Fuel consisting primarily of severance and post-employment benefit charges. During the three-month and nine-month periods ended August 27, 2023, restructuring charges, net of $1.5 million and $19.3 million primarily included the recognition of severance and other post-employment benefits related to a restructuring initiative that commenced in 2022.

Goodwill and other intangible asset impairment charges

For the three-month and nine-month periods ended August 25, 2024, we recognized impairment charges of $111.4 million related to the Beyond Yoga® acquisition. The impairment charge is composed of a $36.3 million impairment in goodwill, a $66.0 million impairment in the trademark intangible asset and a $9.1 million impairment in the customer relationship intangible assets. During 2024, the Company appointed new Beyond Yoga® executive management and implemented a new strategic plan for growth and expansion. Additionally, during the first quarter of 2024 we recognized $5.5 million in goodwill impairment charges related to our footwear business as a result of the decision to discontinue the category.

For the three-month and nine-month periods ended August 27, 2023, we recognized impairment charges of $90.2 million related to the Beyond Yoga® acquisition. The impairment charge is composed of a $75.4 million impairment in goodwill and a $14.8 million impairment in the trademark intangible asset. The impairment charges were due to incremental investments in the brand and team, and disciplined expansion in response to the current macroeconomic conditions as well as an increase in discount rates.

Operating income

The following table shows operating income, restructuring charges and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

(Dollars in millions)

v Percentage of consolidated net revenues

Currency translation impacted total operating income unfavorably by approximately $4 million and $9 million for the three-month and nine-month periods ended August 25, 2024, respectively.

Levi’s Brands operating income.

• Americas. Currency translation had an unfavorable impact of approximately $2 million for the three-month period ended August 25, 2024 and did not have a significant impact for the nine-month period ended August 25, 2024. The increases in operating income for the three-month and nine-month periods ended August 25, 2024 were primarily due to higher gross margins as compared to the prior year. Higher SG&A expense as a percent of revenue partially offset these increases in the three-month period ended August 25, 2024 compared to the prior year.
• Europe. Currency translation did not have a significant impact for the three-month period ended August 25, 2024 and had an unfavorable impact of approximately $2 million for the nine-month period ended August 25, 2024. The increase in operating income for the three months ended August 25, 2024 compared with the prior year was primarily due to higher revenues and higher gross margins. Higher gross margins during the nine-month period ended August 25, 2024 were offset by lower revenues and an increase in SG&A expense as a percent of revenue, resulting in a slight decrease in operating income compared with the prior year.
• Asia. Currency translation had an unfavorable impact of approximately $2 million and $8 million for the three-month and nine-month periods ended August 25, 2024, respectively. On a constant-currency basis operating income was nearly unchanged for the three months ended August 25, 2024 and increased during the nine months ended August 25, 2024. Higher net revenues and gross margins were offset by higher SG&A expense as a percent of revenue for the three-month period ended August 25, 2024, as compared to the prior year. Higher net revenues and gross margins were largely offset by higher SG&A expense as a percent of revenue in the nine-month period ended August 25, 2024, as compared to the prior year.

Other Brands.

• Dockers. Currency translation did not have a significant impact for the three-month and nine-month periods ended August 25, 2024. Operating losses for the three-month and nine-month periods ended August 25, 2024 were consistent with the prior year as lower revenues were offset by higher gross margins.
• Beyond Yoga®. Currency translation did not have a significant impact for the three-month and nine-month periods ended August 25, 2024. The decrease in operating income for the three-month and nine-month periods ended August 25, 2024 as compared to the prior year was primarily due to higher SG&A expense as a percent of revenue and lower gross margins, partially offset by higher revenue.

Restructuring charges, net. During the three-month and nine-month periods ended August 25, 2024, we recognized restructuring charges of $3.4 million and $174.7 million, respectively, related to Project Fuel consisting primarily of severance and post-employment benefit charges.

Goodwill and other intangible asset impairment charges. During the three-month and nine-month periods ended August 25, 2024 we recognized an impairment charge of $111.4 million related to the Beyond Yoga® acquisition. The impairment charge is composed of a $36.3 million impairment in goodwill, a $66.0 million impairment in the trademark intangible asset and a $9.1 million impairment in the customer relationship intangible assets. During 2024, the Company appointed new Beyond Yoga® executive management and implemented a new strategic plan for growth and expansion. Additionally, during the first quarter of 2024 we recognized $5.5 million in goodwill impairment charges related to our footwear business as a result of the decision to discontinue the category.

During the three-month and nine-month periods ended August 27, 2023, we recognized impairment charges of $90.2 million related to the Beyond Yoga® acquisition. The impairment charges were composed of a $75.4 million impairment in goodwill and a $14.8 million impairment in the trademark intangible asset. The impairments were due to incremental investments in the brand and team, and disciplined expansion in response to the current macroeconomic conditions as well as an increase in discount rates.

Corporate. Corporate expenses represent costs that management does not attribute to any of our operating segments. Included in corporate expenses are other corporate staff costs and costs associated with our global inventory sourcing organization, which are reported as a component of consolidated gross margin. Currency translation did not have a significant impact for the three-month and nine-month periods ended August 25, 2024.

The increase in corporate expenses for the three-month and nine-month periods ended August 25, 2024 is primarily due to restructuring related expenses, mostly consulting fees of $19.0 million and $34.3 million, for the three-month and nine-month periods ended August 25, 2024. The Company also recognized $11.1 million of impairments related to technology projects discontinued in connection with Project Fuel during the three months ended August 25, 2024. This increase is partially offset by previous period charges of $24.9 million related to the impairment of capitalized internal-use software, net of a $3.9 million gain on the early termination of certain store leases.

Interest expense

Interest expense was $10.1 million and $30.4 million for the three-month and nine-month periods ended August 25, 2024, respectively, as compared to $11.5 million and $35.4 million in the prior-year periods. The decrease is primarily due to the $200.0 million revolving credit facility paid off in 2023.

Our weighted-average interest rate on average borrowings outstanding during the three-month and nine-month periods ended August 25, 2024 was 3.97% and 3.98%, respectively, as compared to 4.35% and 4.24%, during the comparable periods in 2023.

Other expense, net

For the three-month and nine-month periods ended August 25, 2024, we recorded other expense of $0.4 million and $2.3 million, respectively, as compared to $26.7 million and $38.1 million in the prior-year periods. The decrease in other expense for the three-month and nine-month periods ended August 25, 2024 was primarily due to the recognition of a $19.0 million pension settlement loss in the third quarter of 2023. In addition, we recognized $10.4 million of foreign currency transaction losses for the nine-month period compared to transaction losses of $38.5 million in prior year. Also in the nine-month period ended August 25, 2024 we recognized foreign exchange management gains of $1.7 million compared to gains of $20.6 million in prior year.

Income tax (benefit) expense

Our effective income tax rate was (4.1)% for the three months ended August 25, 2024, compared to 386.6% for the same prior-year period. The decrease in the effective tax rate in the current quarter is primarily driven by the foreign-derived intangible income deduction as a proportion to earnings before income tax compared to loss before income tax in the same prior-year period.

Our effective income tax rate was (46.2)% for the nine months ended August 25, 2024, compared to 4.5% for the same prior-year period. The decrease in the effective tax rate is primarily driven by a tax benefit of $10.1 million related to favorable resolutions and finalizations of state audits.

Liquidity and Capital Resources

Liquidity outlook

We believe we will have adequate liquidity over the next 12 months and in the longer term to operate our business and to meet our cash requirements. Over the long term, we plan to deploy capital across all four of our capital allocation priorities: (1) to reinvest 3.5-4% of our revenue in capital investments, including in high growth investment opportunities and initiatives, to grow our business organically; (2) to return capital to our stockholders in the form of cash dividends, with a dividend payout ratio target of 25-35% of net income; (3) to pursue high return on investment acquisitions, both organic and inorganic, that support our current strategies; and (4) to repurchase shares with the goal of offsetting dilution or opportunistic buybacks or both, while maintaining an adequate public float of our shares. Our aim is to return 55-65% of our Adjusted free cash flow to stockholders in the form of dividends and share repurchases. We will continue to concentrate our capital investments in new stores, distribution capacity and technology to accelerate the profitable growth of our business. For more information on our calculation of Adjusted free cash flow, a non-GAAP financial measure, see “Non-GAAP Financial Measures.”

Future determinations regarding the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then-existing economic conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements and other factors that our Board may deem relevant.

Cash sources

We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales.

Our Credit Agreement provides for an asset-based, senior secured revolving credit facility ("Credit Facility"), in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the facility is $1.0 billion, of which $950.0 million is available to us for revolving loans in U.S. Dollars and $50.0 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.

As of August 25, 2024, we had no borrowings under the Credit Facility. Unused availability under the facility was $705.8 million as our total availability of $726.8 million (based on collateral levels as defined by the agreement less outstanding borrowings under the Credit Facility) was reduced by $21.0 million from other credit-related instruments. We also had cash and cash equivalents totaling approximately $577.1 million resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.3 billion. Of our $577.1 million in cash and cash equivalents, approximately $330.7 million was held by foreign subsidiaries.

Cash uses

Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, settlement of shares issued under our equity incentive plans and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase shares, all consistent with the terms of our debt agreements.

During the three and nine months ended August 25, 2024, we repurchased 1.0 million and 3.3 million shares for $17.8 million and $59.7 million, plus broker’s commissions, respectively, in the open market.

In October 2024, a cash dividend of $0.13 per share was declared to holders of record of our Class A and Class B common stock at the close of business on October 29, 2024. The cash dividend will be payable on November 14, 2024, for a total quarterly dividend of approximately $52 million.

Cash flows

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:

(Dollars in millions)

Cash flows from operating activities

Cash provided by operating activities was $601.1 million for the nine-month period ended August 25, 2024, as compared to $176.6 million for the comparable period in 2023. The increase in cash provided by operating activities is primarily driven by lower spending on inventory and SG&A expenses. In addition, we received $77.9 million as an advance payment associated with the transition of our distribution center to a third-party logistics provider. See “Distribution Center Conversion” in Note 1 to our unaudited consolidated financial statements included in this Quarterly Report for additional information.

Cash flows from investing activities

Cash used for investing activities was $192.2 million for the nine-month period ended August 25, 2024, as compared to $160.9 million for the comparable period in 2023. The increase in cash used for investing activities is primarily due to lower net proceeds from short-term investments, higher payments mostly from the acquisition of our former Colombian distributor, Expofaro, and foreign exchange contracts. These increases in cash used are partially offset by lower capital expenditures.

Cash flows from financing activities

Cash used for financing activities was $229.1 million for the nine-month period ended August 25, 2024, as compared to $139.1 million for the comparable period in 2023. Cash used in 2024 primarily reflects dividend payments of $147.1 million and common stock repurchases of $59.7 million. Cash used in 2023 primarily reflects proceeds from the senior revolving credit facility of $200.0 million, partially offset by repayment of the senior revolving credit facility of $175.0 million and dividend payments of $142.9 million.

Indebtedness

Of our total debt of $1.0 billion as of August 25, 2024, we had fixed rate debt of $1.0 billion (99.6% of total debt), net of capitalized debt issuance costs, and variable-rate debt of $4.2 million (0.4% of total debt). As of August 25, 2024, our required aggregate debt principal payments on our unsecured long-term debt were $1.0 billion, with payments starting in 2027. Short-term borrowings of $6.8 million at various foreign subsidiaries are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.

Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We were in compliance with all of these covenants as of August 25, 2024.

Non-GAAP Financial Measures

Adjusted SG&A, Adjusted SG&A margin, Adjusted EBIT, Adjusted EBIT Margin, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Margin and Adjusted Diluted Earnings per Share

We define the following non-GAAP measures as follows:

We believe Adjusted SG&A, Adjusted SG&A margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share are useful to investors because they help identify underlying trends in our business that could otherwise be masked by certain expenses that we include in calculating net income but that can vary from company to company depending on its financing, capital structure and the method by which its assets were acquired, and can also vary significantly from period to period. Our management also uses Adjusted EBIT in conjunction with other GAAP financial measures for planning purposes, including as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance.

Adjusted SG&A, Adjusted SG&A margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted EBITDA, Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results prepared and presented in accordance with GAAP. Some of these limitations include:

• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect income tax payments that reduce cash available to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness, which reduces cash available to us;
• Adjusted EBIT, Adjusted EBIT margin and Adjusted EBITDA exclude other expense, net, which includes realized and unrealized gains and losses on our forward foreign exchange contracts and transaction gains and losses on our foreign exchange balances, although these items affect the amount and timing of cash available to us when these gains and losses are realized;
• all of these non-GAAP financial measures exclude acquisition and integration related charges, impairment charges and early termination gains, restructuring charges, net and restructuring related charges, severance and other, net which can affect our current and future cash requirements;
• all of these non-GAAP financial measures exclude certain other SG&A expense items, which include severance, transaction and deal related costs, including acquisition and integration costs which can affect our current and future cash requirements;
• all of these non-GAAP financial measures exclude certain other SG&A expense items, which include non-cash property and equipment and right-of-use asset impairment charges. The store-related assets being impaired may still be in use, resulting in lower recurring expenses of depreciation of property and equipment and right-of-use asset amortization. Although property and equipment impairment charges are non-cash expenses, the assets being impaired may need to be replaced in the future which can affect our current and future cash requirements;
• the expenses and other items that we exclude in our calculations of all of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from all of these non-GAAP financial measures or similarly titled measures;
• Adjusted EBITDA excludes the recurring, non-cash expenses of depreciation of property and equipment and, although these are non-cash expenses, the assets being depreciated may need to be replaced in the future; and
• Adjusted net income, Adjusted net income margin and Adjusted diluted earnings per share do not include all of the effects of income taxes and changes in income taxes reflected in net income.

Because of these limitations, all of these non-GAAP financial measures should be considered along with net income and other operating and financial performance measures prepared and presented in accordance with GAAP. The following tables present reconciliations of historic non-GAAP financial measures to their most comparable GAAP financial measure. A reconciliation of forward-looking non-GAAP information to the corresponding GAAP measures cannot be provided without unreasonable efforts due to the challenge in quantifying various items including, but not limited to, the effects of foreign currency fluctuations, taxes and any future restructuring, restructuring-related severance and other charges.

Adjusted SG&A:

The following table presents a reconciliation of SG&A, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted SG&A for each of the periods presented.

(Dollars in millions)

(Unaudited)

(1) Acquisition and integration related charges includes acquisition-related compensation subject to the continued employment of certain Beyond Yoga® employees. In the first quarter of 2024, their employment ceased, resulting in the acceleration of the remaining compensation.

(2) For the three-month and nine-month periods ended August 25, 2024, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $11.1 million of impairments related to technology projects discontinued as a result of Project Fuel.

For the three-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $6.1 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, as well as $3.7 million of impairment related to other discontinued projects. For the nine-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $24.9 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, a $3.9 million gain on the early termination of store leases related to the Russia-Ukraine war, and $3.7 million of impairment related to other discontinued projects.

(3) For the three-month period ended August 25, 2024, restructuring related charges, severance, and other, net primarily relates to consulting fees associated with our restructuring initiative of $19.0 million, an estimated legal settlement accrual of $4.0 million and certain executive separation charges of $0.5 million, offset by a favorable sales-tax related settlement of $4.4 million.

For the nine-month period ended August 25, 2024, restructuring related charges, severance, and other, net primarily relates to consulting fees associated with our restructuring initiative of $34.3 million, legal settlements of $9.5 million and certain executive separation charges of $2.7 million and transaction and deal related costs of $1.7 million, offset by a favorable sales-tax related settlement of $4.4 million.

For the nine-month period ended August 27, 2023, restructuring related charges, severance, and other, net primarily relates to certain executive severance and separation charges, costs associated with the wind-down of the Russia business and other transaction and deal related costs.

Adjusted EBIT and Adjusted EBITDA:

The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted EBIT and Adjusted EBITDA for each of the periods presented.

(Dollars in millions)

(Unaudited)

(1) Acquisition and integration related charges includes acquisition-related compensation subject to the continued employment of certain Beyond Yoga® employees. In the first quarter of 2024, their employment ceased, resulting in the acceleration of the remaining compensation.

(2) For the three-month and nine-month periods ended August 25, 2024, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $11.1 million of impairments related to technology projects discontinued as a result of Project Fuel.

For the three-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $6.1 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, as well as $3.7 million of impairment related to other discontinued projects. For the nine-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $24.9 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, a $3.9 million gain on the early termination of store leases related to the Russia-Ukraine war, and $3.7 million of impairment related to other discontinued projects.

(3) For the three-month and nine-month periods ended August 25, 2024, goodwill and other intangible asset impairment charges includes impairment charges of $36.3 million related to Beyond Yoga® reporting unit goodwill, $66.0 million related to the Beyond Yoga® trademark and $9.1 million related to the Beyond Yoga® customer relationship intangible assets. Additionally, the nine-month period ended August 25, 2024 includes a $5.5 million goodwill impairment charge related to our footwear business.

For the three-month and nine-month periods ended August 27, 2023, goodwill and other intangible asset impairment charges includes impairment charges of $75.4 million related to Beyond Yoga® reporting unit goodwill and $14.8 million related to the Beyond Yoga® trademark.

(4) For the three-month and nine-month periods ended August 25, 2024, restructuring charges, net includes $3.4 million and $174.7 million, respectively, related to Project Fuel consisting primarily of severance and other post-employment benefit charges.

For the three-month and nine-month periods ended August 27, 2023, restructuring charges, net primarily includes net restructuring charges of $1.5 million and $19.3 million, respectively, recognized in connection with the 2022 restructuring initiative.

(5) For the three-month period ended August 25, 2024, restructuring related charges, severance, and other, net primarily relates to consulting fees associated with our restructuring initiative of $19.0 million, an estimated legal settlement accrual of $4.0 million and certain executive separation charges of $0.5 million, offset by a favorable sales-tax related settlement of $4.4 million.

For the nine-month period ended August 25, 2024 restructuring related charges, severance, and other, net primarily relates to consulting fees associated with our restructuring initiative of $34.3 million, legal settlements of $9.5 million and certain executive separation charges of $2.7 million and transaction and deal related costs of $1.7 million, offset by a favorable sales-tax related settlement of $4.4 million.

For the nine-month period ended August 27, 2023 restructuring related charges, severance, and other, net primarily includes other executive severance and separation charges, costs associated with the wind-down of the Russia business and other transaction and deal related costs.

Adjusted Net Income:

The following table presents a reconciliation of net income, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted net income for each of the periods presented.

(Dollars in millions)

(Unaudited)

(1) Acquisition and integration related charges includes acquisition-related compensation subject to the continued employment of certain Beyond Yoga® employees. In the first quarter of 2024, their employment ceased, resulting in the acceleration of the remaining compensation.

(2) For the three-month and nine-month periods ended August 25, 2024, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $11.1 million of impairments related to technology projects discontinued as a result of Project Fuel.

For the three-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $6.1 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, as well as $3.7 million of impairment related to other discontinued projects. For the nine-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $24.9 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, a $3.9 million gain on the early termination of store leases related to the Russia-Ukraine war, and $3.7 million of impairment related to other discontinued projects.

(3) For the three-month and nine-month periods ended August 25, 2024, goodwill and other intangible asset impairment charges includes impairment charges of $36.3 million related to Beyond Yoga® reporting unit goodwill, $66.0 million related to the Beyond Yoga® trademark and $9.1 million related to the Beyond Yoga® customer relationship intangible assets. Additionally, the nine-month period ended August 25, 2024 includes a $5.5 million goodwill impairment charge related to our footwear business.

For the three-month and nine-month periods ended August 27, 2023, goodwill and other intangible asset impairment charges includes impairment charges of $75.4 million related to Beyond Yoga® reporting unit goodwill and $14.8 million related to the Beyond Yoga® trademark.

(4) For the three-month and nine-month periods ended August 25, 2024, restructuring charges, net includes $3.4 million and $174.7 million, respectively, related to Project Fuel consisting primarily of severance and other post-employment benefit charges.

For the three-month and nine-month periods ended August 27, 2023, restructuring charges, net primarily includes net restructuring charges of $1.5 million and $19.3 million, respectively, recognized in connection with the 2022 restructuring initiative.

(5) For the three-month period ended August 25, 2024, restructuring related charges, severance, and other, net primarily includes consulting fees associated with our restructuring initiative of $19.0 million, an estimated legal settlement accrual of $4.0 million and certain executive separation charges of $0.5 million, offset by a favorable sales-tax related settlement of $4.4 million, as well as an insurance recovery of $2.7 million and a government subsidy gain of $1.4 million, both of which were recorded within Other expense, net.

The nine-month period ended August 25, 2024 restructuring related charges, severance, and other, net primarily includes consulting fees associated with our restructuring initiative of $34.3 million, legal settlements of $9.5 million and certain executive separation charges of $2.7 million and transaction and deal related costs of $1.7 million, offset by a favorable sales-tax related settlement of $4.4 million, as well as an insurance recovery of $2.7 million and a government subsidy gain of $1.4 million, both of which were recorded within Other expense, net.

For the nine-month period ended August 27, 2023 restructuring related charges, severance, and other, net primarily includes other executive severance and separation charges, costs associated with the wind-down of the Russia business and other transaction and deal related costs.

(6) For the three-month and nine-month periods ended August 27, 2023, the pension settlement relates to the Company purchasing nonparticipating annuity contracts in order to transfer certain retiree liabilities to an insurer, resulting in a one-time settlement charge of $19.0 million.

(7) Tax impact calculated using the annual effective tax rate, excluding discrete costs and benefits. The tax impact of the Beyond Yoga impairment charges were calculated using the U.S. specific tax rate of 24%. Excluding the impact of the Beyond Yoga® impairment charges, the effective tax rate for the three-month and nine-month periods ended August 25, 2024 was approximately 20% and 14%, respectively. For the three-month and nine-month periods ended August 27, 2023, the effective tax rate was approximately 10% and 13%, respectively.

Adjusted Diluted Earnings per Share:

The following table presents a reconciliation of diluted earnings per share, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted diluted earnings per share for each of the periods presented.

(Unaudited)

(1) Acquisition and integration related charges includes acquisition-related compensation subject to the continued employment of certain Beyond Yoga® employees. In the first quarter of 2024, their employment ceased, resulting in the acceleration of the remaining compensation.

(2) For the three-month and nine-month periods ended August 25, 2024, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $11.1 million of impairments related to technology projects discontinued as a result of Project Fuel.

For the three-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $6.1 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, as well as $3.7 million of impairment related to other discontinued projects. For the nine-month period ended August 27, 2023, property, plant, equipment, right-of-use asset impairment, and early lease terminations, net primarily includes $24.9 million of capitalized internal-use software as a result of the decision to discontinue certain technology projects, a $3.9 million gain on the early termination of store leases related to the Russia-Ukraine war, and $3.7 million of impairment related to other discontinued projects.

(3) For the three-month and nine-month periods ended August 25, 2024, goodwill and other intangible asset impairment charges includes impairment charges of $36.3 million related to Beyond Yoga® reporting unit goodwill, $66.0 million related to the Beyond Yoga® trademark and $9.1 million related to the Beyond Yoga® customer relationship intangible assets. Additionally, the nine-month period ended August 25, 2024 includes a $5.5 million goodwill impairment charge related to our footwear business.

For the three-month and nine-month periods ended August 27, 2023, goodwill and other intangible asset impairment charges includes impairment charges of $75.4 million related to Beyond Yoga® reporting unit goodwill and $14.8 million related to the Beyond Yoga® trademark.

(4) For the three-month and nine-month periods ended August 25, 2024, restructuring charges, net includes $3.4 million and $174.7 million, respectively, related to Project Fuel consisting primarily of severance and other post-employment benefit charges.

For the three-month and nine-month periods ended August 27, 2023, restructuring charges, net primarily includes net restructuring charges of $1.5 million and $19.3 million, respectively, recognized in connection with the 2022 restructuring initiative.

(5) For the three-month period ended August 25, 2024, restructuring related charges, severance, and other, net primarily includes consulting fees associated with our restructuring initiative of $19.0 million, an estimated legal settlement accrual of $4.0 million and certain executive separation charges of $0.5 million, offset by a favorable sales-tax related settlement of $4.4 million, as well as an insurance recovery of $2.7 million and a government subsidy gain of $1.4 million, both of which were recorded within Other expense, net.

For the nine-month period ended August 25, 2024 restructuring related charges, severance, and other, net primarily relates to consulting fees associated with our restructuring initiative of $34.3 million, legal settlements of $9.5 million and certain executive separation charges of $2.7 million and transaction and deal related costs of $1.7 million, offset by a favorable sales-tax related settlement of $4.4 million, as well as an insurance recovery of $2.7 million and a government subsidy gain of $1.4 million, both of which were recorded within Other expense, net.

For the nine-month period ended August 27, 2023 restructuring related charges, severance, and other, net primarily includes other executive severance and separation charges, costs associated with the wind-down of the Russia business and other transaction and deal related costs.

(6) For the three-month and nine-month periods ended August 27, 2023, the pension settlement relates to the Company purchasing nonparticipating annuity contracts in order to transfer certain retiree liabilities to an insurer, resulting in a one-time settlement charge of $19.0 million.

(7) Tax impact calculated using the annual effective tax rate, excluding discrete costs and benefits. The tax impact of the Beyond Yoga® impairment charges were calculated using the U.S. specific tax rate of 24%. Excluding the impact of the Beyond Yoga® impairment charges, the effective tax rate for the three-month and nine-month periods ended August 25, 2024 was approximately 20% and 14%, respectively. For the three-month and nine-month periods ended August 27, 2023, the effective tax rate was approximately 10% and 13%, respectively.

Adjusted Free Cash Flow:

We define Adjusted free cash flow, a non-GAAP financial measure, as net cash flow from operating activities less purchases of property, plant and equipment. We believe Adjusted free cash flow is an important liquidity measure of the cash that is available after capital expenditures for operational expenses and investment in our business. We believe Adjusted free cash flow is useful to investors because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet, invest in future growth and return capital to stockholders.

Our use of Adjusted free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results under GAAP. First, Adjusted free cash flow is not a substitute for net cash flow from operating activities. Second, other companies may calculate Adjusted free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted free cash flow as a tool for comparison. Additionally, the utility of Adjusted free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, Adjusted free cash flow should be considered along with net cash flow from operating activities and other comparable financial measures prepared and presented in accordance with GAAP.

The following table presents a reconciliation of net cash flow from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted free cash flow for each of the periods presented.

(Dollars in millions)

(Unaudited)

Constant-Currency:

We report our operating results in accordance with GAAP, as well as on a constant-currency basis in order to facilitate period-to-period comparisons of our results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates we use to translate our operating results for all countries where the functional currency is not the U.S. Dollar into U.S. Dollars. Because we are a global company, foreign currency exchange rates used for translation may have a significant effect on our reported results. In general, our reported financial results are affected positively by a weaker U.S. Dollar and are affected negatively by a stronger U.S. Dollar as compared to the foreign currencies in which we conduct our business. References to our operating results on a constant-currency basis mean our operating results without the impact of foreign currency translation fluctuations.

We believe disclosure of constant-currency results is helpful to investors because it facilitates period-to-period comparisons of our results by increasing the transparency of our underlying performance by excluding the impact of fluctuating foreign currency exchange rates. However, constant-currency results are non-GAAP financial measures and are not meant to be considered in isolation or as a substitute for comparable measures prepared in accordance with GAAP. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Constant-currency results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.

We calculate constant-currency amounts by translating local currency amounts in the prior-year period at actual foreign exchange rates for the current period. Our constant-currency results do not eliminate the transaction currency impact, which primarily includes the realized and unrealized gains and losses recognized from the measurement and remeasurement of purchases and sales of products in a currency other than the functional currency. Additionally, gross margin is impacted by gains and losses related to the procurement of inventory, primarily products sourced in U.S. Dollars, by our global sourcing organization on behalf of our foreign subsidiaries.

Constant-Currency Net Revenues

The table below sets forth the calculation of net revenues by segment on a constant-currency basis for the comparison periods applicable to the three-month and nine-month periods ended August 25, 2024:

(Dollars in millions)

(Unaudited)

The table below sets forth the calculation of net revenues by channel on a constant-currency basis for the comparison periods applicable to the three-month and nine-month periods ended August 25, 2024:

(Dollars in millions)

(Unaudited)

Constant-Currency Adjusted EBIT and Constant-Currency Adjusted EBIT margin:

The table below sets forth the calculation of Adjusted EBIT on a constant-currency basis for the comparison period applicable to the three-month and nine-month periods ended August 25, 2024.

(Dollars in millions)

(Unaudited)

(1) Adjusted EBIT is reconciled from net income which is the most comparable GAAP measure. Refer to Adjusted EBIT and Adjusted EBITDA table for more information.

(2) We define constant-currency Adjusted EBIT margin as constant-currency Adjusted EBIT as a percentage of constant-currency net revenues.

Constant-Currency Adjusted Net Income and Adjusted Diluted Earnings per Share:

The table below sets forth the calculation of Adjusted net income and Adjusted diluted earnings per share on a constant-currency basis for the comparison periods applicable to the three-month and nine-month periods ended August 25, 2024.

(Dollars in millions, except per share amounts)

(Unaudited)

(1) Adjusted net income is reconciled from net income which is the most comparable GAAP measure. Refer to Adjusted net income table for more information.

(2) We define constant-currency Adjusted net income margin as constant-currency Adjusted net income as a percentage of constant-currency net revenues.

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

As of August 25, 2024, there had been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 2023 Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies from those disclosed in our 2023 Annual Report on Form 10-K.

Recently Issued Accounting Standards

See Note 1 to our unaudited consolidated financial statements included in this Quarterly Report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report, including (without limitation) statements under "Management’s Discussion and Analysis of Financial Condition and Results of Operations" contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

These forward-looking statements include statements relating to our anticipated financial performance and business prospects, including debt reduction, currency values and financial impact, foreign exchange counterparty exposures, the impact of pending legal proceedings, adequate liquidity levels, dividends, share repurchases or other capital deployment initiatives and/or statements preceded by, followed by or that include the words "believe", "will", "will be", "will continue", "will likely result", "may", "predicts", "so we can", "when", "anticipate", "intend", "estimate", "expect", "project", "aim", "could", "plans", "seeks" and similar expressions. These forward-looking statements speak only as of the date stated, and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed in Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the fiscal year ended November 26, 2023, and in our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:

• changes in general economic and financial conditions, inflationary pressures and the resulting impact on the level of discretionary consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes;
• the Russia-Ukraine war, the Israel-Hamas war and the potential impacts of these and other conflicts on global economic and geopolitical conditions;
• the risk of future non-cash asset impairment charges, including to goodwill, operating right-of-use assets and/or other store assets;
• our ability to execute on our business strategies, including our focus on elevating and strengthening our brand, the portion of our net revenues we aim to have represented by our direct-to-consumer business, our digital presence and growth into under-penetrated parts of our business, our expectations regarding gross and Adjusted EBIT margins, and our plans and expectations for the benefits of investments in operational excellence including steps to improve our speed-to-market;
• our ability to effectively manage any global productivity and outsourcing actions as planned, which are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service-delivery models in our distribution network and streamline our procurement practices to maximize efficiency in our global operations, without business disruption or mitigation to such disruptions;
• our ability to effectively manage our inventory and supply chain and the potential strain on our U.S distribution centers;
• consequences of impacts to the businesses of our wholesale customers, including significant store closures or a significant decline in a wholesale customer’s financial condition leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as, among other things, inability to secure financing, decreased discretionary consumer spending, inconsistent foot and online traffic patterns and an increase in promotional activity as a result of decreased foot and online traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
• our ability to execute on our commitment to increasing total shareholder returns through our capital allocation priorities;
• our ability to achieve anticipated operating model optimization, simplified processes and cost savings from our global productivity initiative;
• our and our wholesale customers’ decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs, including liquidating inventory or increasing promotional activity;
• our ability to purchase products through our independent contract manufacturers that are made with quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
• our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points, as well as in-store and digital shopping experiences;
• our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets and to increasing consumer expectations;
• our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
• our future business expectations, products, strategies, and goals, including our future financial, strategic, and operating performance and our long-term goals and targets;
• the extent to which wholesale customer forward demand signals result in actual sales;
• consequences of inflation, foreign currency exchange and interest rate fluctuations;
• the impact of foreign currency and exchange counterparty exposures;
• the impact of the effects of global supply chain disruptions on our business;
• increases in the price or availability of raw materials could increase our cost of goods and negatively impact our financial results.
• the impact on our consumer traffic and demand, our business operations and the operations of our suppliers and manufacturers as climate change evolves and the frequency and severity of weather events increase;
• the impact of seasonality of our sales and our business;
• our ability to successfully prevent or mitigate the impacts of data security breaches;
• our ability to attract and retain key executives and other key employees;
• our ability to achieve our diversity, equity and inclusion, ESG and sustainability and climate change goals;
• our ability to protect our trademarks and other intellectual property;
• the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
• our dependence on key distribution channels, customers and suppliers;
• our ability to utilize our tax credits and net operating loss carryforwards;
• potential future paydowns of existing debt;
• future acquisitions of or investments in new businesses, including the Beyond Yoga® integration;
• the adequacy of our liquidity position;
• the process and risks relating to the implementation of a new ERP system;
• the impact of pending, ongoing or future legal proceedings, litigation matters and disputes and regulatory developments;
• the impact of future shareholder returns, including share repurchases and dividends;
• changes in or application of trade and tax laws and policies;
• potential increases in import tariffs or taxes, and the implementation of trade restrictions or sanctions; and
• political, social and economic instability, or natural disasters, in countries where we or our customers do business.

We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described under Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the fiscal year ended November 26, 2023, in our other filings with the SEC and in this Quarterly Report. These risks are not exhaustive. Other sections of this Quarterly Report include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

The forward-looking statements made in this Quarterly Report relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this Quarterly Report or to conform such statements to actual results or revised expectations, except as required by law.

Additional information regarding factors that could cause results to differ can be found in our Annual Report on Form 10-K for the fiscal year ended November 26, 2023, in this Quarterly Report and our other filings with the U.S. Securities and Exchange Commission. We suggest that this document be read in conjunction with our other filings with the U.S. Securities and Exchange Commission.

As used herein, "Levi Strauss", "Levi", "Levi’s”, "the company", "the Company", "we", "us", "our" and similar terms include Levi Strauss & Co. and its subsidiaries, unless the context indicates otherwise.

There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 2023 Annual Report on Form 10-K.

Evaluation of Disclosure Controls and Procedures

We have evaluated, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of August 25, 2024. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of August 25, 2024, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal control over financial reporting for the quarterly period ended August 25, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended November 26, 2023. There have been no material changes to our previously reported Risk Factors.