VF Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended September 28, 2019. The filing was submitted October 31, 2019. Fiscal 2020 Q2 is not calendar-year Q2. Results are primarily continuing operations; VF completed the spin-off of its Jeans business, including Wrangler and Lee, on May 22, 2019.
Financial performance
| Metric | Three months ended September 2019 | Six months ended September 2019 |
|---|---|---|
| Revenue | $3.393 billion, up 5% | $5.665 billion, up 6% |
| Gross margin | 52.9%, up 0.9 percentage points | 53.5%, up 1.1 percentage points |
| Operating income / margin | $579.1 million / 17.1% | $712.4 million / 12.6% |
| Continuing-operations income | $649.0 million | $746.3 million |
| Diluted continuing-operations EPS | $1.61, versus $1.04 | $1.86, versus $1.19 |
Second-quarter revenue growth reflected organic growth of $263.3 million, partly offset by $58.8 million of unfavorable currency effects. Direct-to-consumer revenue rose 11%, e-commerce rose 15%, and international revenue rose 4%; direct-to-consumer represented 32% of quarterly revenue. Gross-margin expansion was attributed mainly to a mix shift toward higher-margin businesses, partly offset by higher product costs.
- Segments, Q2: Active revenue rose 9% to $1.414 billion and segment profit rose 11% to $388.2 million; Outdoor revenue rose 4% to $1.526 billion while profit was nearly flat at $256.4 million; Work revenue fell 4% to $435.6 million and profit fell 24% to $39.2 million.
- Vans revenue grew 14% in the quarter. The North Face grew 8%; Timberland revenue declined 3%. Work weakness included Dickies declines and higher product costs.
- SG&A increased to 35.9% of quarterly revenue from 35.1%, reflecting headquarters/brand relocation costs, strategic decisions in South America and growth investments. Net interest expense fell $11.0 million in Q2 and $20.8 million for the six months, primarily due to lower short-term borrowings.
Cash flow, balance sheet and liquidity
- For the six months, cash used by operating activities from continuing operations was $378.7 million, compared with $95.7 million used a year earlier. Management cited increased working-capital use, including receivables and inventory; this is also a seasonally cash-consuming part of the year.
- Continuing-operations investing cash outflow was $75.1 million. Financing provided $411.9 million, including $906.1 million received from Kontoor Brands, net of cash transferred. Dividends paid were $373.6 million.
- At September 28, cash and equivalents were $507.6 million; total current assets were $4.775 billion and current liabilities $2.404 billion. Working capital was $2.371 billion and the current ratio 2.0 to 1.
- Short-term borrowings were $484.3 million and long-term debt, including current portion, was about $2.096 billion. Debt to total capital was 45.7%, including operating lease liabilities; excluding leases it was 35.7%. Operating lease liabilities totaled $1.324 billion.
- VF reported approximately $1.8 billion available under its $2.25 billion revolving credit facility after commercial paper and letters of credit. Management stated cash, operating cash flow and borrowing capacity were adequate for obligations, planned capital spending and dividends.
Material changes, outlook and risks
- Jeans spin-off: The 2019 six-month results include a $48.0 million after-tax loss from discontinued operations, including $59.5 million of separation and related costs. VF received $906.1 million from Kontoor, net of cash transferred. Prior-year comparisons include discontinued-operation earnings, so total net income comparisons are not directly like-for-like.
- Tax benefit: The six-month effective tax rate was negative 8.9%, versus 14.0% a year earlier, including a $177.6 million discrete tax benefit, of which $164.4 million related to Switzerland’s tax reform. Management identified a $0.41 per-share benefit from the Swiss Tax Act in Q2. Reported earnings growth therefore includes a substantial nonrecurring tax benefit.
- Impairment sensitivity: VF tested Timberland goodwill and its indefinite-lived trademark after weaker results and a lower forecast; neither was impaired. Goodwill fair value exceeded carrying value by 27%. Management cautioned that failure to achieve forecast recovery could lead to a future impairment.
- Contingency: An IRS dispute over timing of income inclusion tied to the 2011 Timberland acquisition remains unresolved. VF says it does not expect a material adverse impact, but estimates potential net interest expense of up to $145 million and approximately $136 million of additional tax expense if the IRS prevails.
- Other risks cited include foreign exchange, consumer demand, competitive and margin pressures, supply/distribution disruption, relocation costs and execution, cybersecurity, tax and regulatory changes, Brexit-related uncertainty, and potential brand impairment. No material changes to previously disclosed risk factors or market-risk exposures were reported. Management provided no specific numeric revenue or earnings guidance in this filing.
- The Board declared a quarterly dividend of $0.48 per share, payable December 20, 2019. No open-market share repurchases were made in the six-month period.
Key facts for investors to verify
- Underlying sales, margins and cash generation excluding the Swiss tax benefit and the effects of the Jeans spin-off and other divestitures.
- Whether working capital normalizes and operating cash flow strengthens in the seasonally stronger second half.
- Timberland’s performance against the recovery assumptions supporting the no-impairment conclusion.
- Resolution and potential financial effects of the IRS dispute, and any further Swiss tax-law changes.
- Execution costs and business impacts from the headquarters relocation, lease commitments and ongoing growth investments.