Description

Levi Strauss (7.00% due 2007, 11.635% due 2008 & 12.25% due 2012) – I recommend that investors buy Levi unsecured debt. At prices (78 – for the 2006, 83 for the 2008 & 81 for the 2012) and YTM of roughly 16%. – I believe Levi will pay down debt over the next 2-3 years with cash generated from working capital & ongoing operations. As the debt is paid down and credit statistics improve, the bonds should trade to par for a Yield to an improved credit of 20-30% IRR.

Levi Strauss is a leading international producer of banded Apparel (Levi, Dockers & Levi Signature Series) – Denim as represented by the Levi’s brand accounted for roughly 75% of sales in 2002 & Dockers accounted for roughly 25%. Levi Signature Serise is a new brand, launched in the summer of 2003 at Wal-Mart (all Wal-Mart's, please go buy a pair). Geographic Break down of sale in 2002, Americas -65%, Europe 26%, Asia 9%.Levi products are mid to low priced and are typically sold through department stores. Largest customers are JC Penney, Sears, Kohls & May Department Stores.


Levi has recently fallen on hard times as its sales have declined from $6.8b in 1997 to $4b LTM (ya can’t blame that on the economy). EBITDA has declined from $1000m to $400m over that same period. 3 things have happened. 1. Levi is less popular with younger fashion forward crowd (levi only started making lowrider jeans in the past 6mths). 2. More importantly, sales are moving from tradition Levi customers, department stores, to specialty stores like the Gap, Old Navy, Abercrombie, American Eagle and others. 3. Shoppers have shifted their purchases to discount retailers like Wal-Mart. --- Levi seems to have stemmed this sales decline with the introduction of the Levi Signature Series in Wal-Mart. By all account the launch in Wal-Mart has gone well.

Levi has compounded their sales problems by continuing (until recently) to manufacturer denim in North America. It costs approx 20% more to manufacture denim in North America than in the far east. Just recently the company announced the closure of its last plants in North America – this should improve margins going forward. The company continues to manufacture in Europe & I expect them to realize cost savings by outsourcing these operations to the far east over the next few years. The closing of US & European manufacturing facilities should also reduce the Company’s Capex need going forward.

Despite Levi recent operating decline, the bonds appear to offer good value as well as attractive contractual returns. Total EV through the bonds = $2.4b = 7.5x EBITDA-Capex

Levi should generate $.3b over the next 3mths from working capital, allowing the company to pay debt down to $2.1b. The company should generate $100 - $150* million in fcf from operations in each of the next 2 years. This will leave the company with $1.9-1.8b in debt = 4.5x future EBITDA- Capex



* The key variables are sales & cost reductions. I feel that $100-$150mm is mid range. It assumes cost reductions & sales reductions of 10% per yr.


Liquidity – Levi has approx. $.4b of liquidity between cash and revolver availibity. Liquidity & hence a near term ch.11 should not be a concern.


Other issues – Levi recently announced the delay of their 10-Q, due to tax errors. This does not appear to be a material amount, and should not hurt the company from a cash perspective. Disgruntled employees have maintained that the company was an aggressive, illegal users of tax shelters over the past 10 years.


Catalyst – Current Cash payments, Debt paydown from W/C & growth of Wall-Mart business.

Catalyst

Catalyst – Current Cash payments, Debt paydown from W/C & growth of Wall-Mart business.