VF Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of Fiscal 2021, ended September 26, 2020. Comparisons are with the periods ended September 28, 2019. Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise. The Occupational Workwear business is presented as discontinued operations, with a divestiture expected during Fiscal 2021.
Financial performance
| Metric | Quarter ended Sep. 2020 | Six months ended Sep. 2020 | Comparison with 2019 |
|---|---|---|---|
| Net revenue | $2,608.3 | $3,684.6 | Down 18% and 30%, respectively |
| Gross margin | 50.8% | 51.4% | Down 340 and 360 basis points |
| Operating income / margin | $319.9 / 12.3% | $73.1 / 2.0% | Prior-year margins were 17.3% and 12.3% |
| Continuing-operations income (loss) | $243.2 | $(34.5) | Prior year: $625.4 and $690.7 |
| Diluted continuing-operations EPS | $0.62 | $(0.09) | Prior year: $1.55 and $1.72 |
| Operating cash flow, continuing operations | Not separately stated | $39.5 | Prior-year six-month use: $372.7 |
Quarterly net income, including discontinued operations, was $256.7 million versus $649.0 million a year earlier. Six-month net loss was $28.9 million versus net income of $698.2 million. The prior-year comparison included a $177.4 million discrete tax benefit, chiefly related to Switzerland’s tax reform; the current six-month period had a $3.9 million net discrete tax expense. Current-period results also included $45.8 million of restructuring charges for the six months and a $42.4 million foreign-currency translation expense in the first quarter.
Gross margin pressure reflected elevated promotions to clear inventory and, for the quarter, foreign-currency transaction timing. SG&A declined in dollars amid cost controls and government payroll relief, but rose as a share of revenue because of lower sales and continued digital and direct-to-consumer investment. E-commerce revenue grew 44% in the quarter and 60% in the six-month period, partially offsetting weaker owned-store sales.
Segments and material changes
- Outdoor: Quarterly revenue fell 24% to $1.15 billion; six-month revenue fell 30% to $1.50 billion. Segment profit was $132.5 million for the quarter and a $28.2 million loss for six months.
- Active: Quarterly revenue fell 15% to $1.20 billion; six-month revenue fell 33% to $1.77 billion. Segment profit fell to $259.1 million for the quarter and $266.3 million for six months.
- Work: Quarterly revenue rose 14% to $253.6 million, while six-month revenue fell 2% to $416.0 million. Segment profit was $8.2 million for the quarter and a $3.2 million loss for six months. Occupational Workwear is classified as discontinued operations, so reported Work segment results exclude it.
- Greater China revenue increased 16% in the quarter. International revenue declined 15%; it represented 51% of quarterly revenue.
Balance sheet, cash flow and liquidity
- At September 26, cash and equivalents were $1.88 billion and short-term investments were $800 million. Working capital was $4.16 billion; the current ratio was 3.1 to 1.
- Long-term debt was $5.68 billion, versus $2.61 billion at March 2020; short-term borrowings were $13.2 million, down from $1.23 billion. Net debt to total capital, using the company’s definition that includes operating lease liabilities, was 64.5%, up from 53.4% in March and 42.2% a year earlier.
- Six-month cash flow from continuing operations was $39.5 million from operations, $(954.7) million from investing, and $1.38 billion from financing. Investing outflow included $800 million of short-term investment purchases; financing included proceeds from $3.0 billion of notes and debt repayments.
- VF reported approximately $2.7 billion of cash and short-term investments and approximately $2.2 billion available under its $2.25 billion revolving facility, subject to restrictions. It reported compliance with covenants, including a $750 million minimum-liquidity requirement.
Outlook, commentary and risks
Management expected second-half Fiscal 2021 financial performance to improve from the first half, assuming no material COVID-19 deterioration. Fiscal 2021 revenue was expected to be at least $9.0 billion, approximately 14% below Fiscal 2020, while full-year net income was expected to be significantly lower. Management stressed that pandemic duration and severity remained uncertain and that renewed store closures could occur. At quarter-end, over 95% of North American VF-operated stores were open; subsequently, all were reported open.
VF issued $3.0 billion of senior notes in April 2020, partly to repay revolver borrowings and strengthen liquidity. Credit-rating outlooks were negative at both S&P and Moody’s. The company paused share repurchases; $2.8 billion remained authorized. It intended, subject to Board approval, to continue regular dividends and was not then contemplating suspension. A quarterly dividend of $0.49 per share was declared for December 2020.
Key risks include COVID-19 effects on demand, store operations, supply chain, collections and margins; possible inventory markdowns; foreign-exchange and financing-market volatility; and execution of the business transformation. VF also faces an unresolved IRS dispute over timing of income inclusion relating to the 2011 Timberland acquisition. The company is contesting the matter and does not expect a material adverse impact, but disclosed that an IRS victory could result in up to $170 million of net interest expense and approximately $136 million of additional tax expense.
Important facts for investors to verify
- Whether the expected Occupational Workwear divestiture was completed in Fiscal 2021, and its final proceeds and effect on continuing results.
- Actual Fiscal 2021 revenue and earnings against the at-least-$9.0-billion revenue outlook, and whether second-half improvement materialized.
- Subsequent cash generation, debt levels, liquidity and compliance with the amended credit-facility covenants.
- How the IRS Timberland dispute and the Belgium tax-ruling proceedings were ultimately resolved.
- Whether COVID-related store closures, consumer demand and promotional activity affected margins and inventory beyond management’s assumptions.