Business context and reporting period
V.F. Corporation (VF) designs, sources, markets and distributes branded apparel, footwear and accessories. This Form 10-K covers fiscal 2019, the 52 weeks ended March 30, 2019; it is not a standalone fourth-quarter filing. The company changed its fiscal year-end to the Saturday closest to March 31, so the principal comparison is with the unaudited 12 months ended March 31, 2018. Results are from continuing operations unless noted. VF reported four segments: Outdoor, Active, Work and Jeans.
VF completed the spin-off of its Jeans business as Kontoor Brands on May 22, 2019, after the fiscal year-end. Fiscal 2019 results therefore include that business.
Financial performance and position
| Metric | Fiscal 2019 | Comparable period / change |
|---|---|---|
| Revenue | $13.849 billion | $12.356 billion; up 12% |
| Operating income / margin | $1.676 billion / 12.1% | $1.530 billion / 12.4% |
| Continuing income | $1.259 billion | $769 million |
| Diluted EPS from continuing operations | $3.14 | $1.92 |
| Gross margin | 50.7% | 50.6% |
| Cash from operations | $1.664 billion | $1.442 billion |
Revenue growth reflected $1.039 billion of organic growth and $696 million from acquisitions, offset by $89 million from dispositions and $154 million of unfavorable currency effects. Fiscal fourth-quarter revenue was $3.213 billion, operating income $194 million and continuing income $129 million; VF reported fourth-quarter operating margin of approximately 6%.
Active revenue grew 16% to $4.722 billion and segment operating margin rose to 23.8%. Outdoor revenue grew 9% to $4.649 billion, with margin of 11.7%. Work revenue grew 39% to $1.862 billion, substantially reflecting the Williamson-Dickie acquisition; margin was 11.9%. Jeans revenue fell 4% to $2.492 billion and margin declined to 12.1%.
VF reported working capital of $2.012 billion, a current ratio of 1.8 and cash and equivalents of $543 million at March 30, 2019. Short-term borrowings were $665 million and long-term debt was $2.116 billion, plus $5 million current maturities. Debt to total capital was 39.3%, down from 50.4%. The $2.25 billion revolving facility had approximately $1.58 billion available, including after outstanding commercial paper and letters of credit. Operating cash flow includes discontinued operations; the filing does not separately provide cash flows for continuing operations.
Capital expenditures were $251 million. VF paid $767 million in dividends and repurchased $151 million of stock. The quarterly dividend was increased 11% during the year; management stated it intended to reduce the quarterly dividend after the Jeans spin-off to target a long-term payout ratio of 50%–55%.
Material changes, outlook and unusual items
- Revenue growth and EPS improvement were led by Active, Outdoor and Work, direct-to-consumer sales and acquisitions. E-commerce revenue increased 32%; direct-to-consumer revenue increased 14% and represented 33% of total revenue. International revenue increased 10% and was 41% of total.
- Operating margin declined 30 basis points despite a 10-basis-point gross-margin improvement. Management attributed the margin pressure principally to acquisition, integration, separation and relocation costs, strategic investment and certain higher product costs. The effective tax rate fell to 17.6% from 46.6%, largely because the prior period included the Tax Act transition charge.
- Fiscal 2019 included $131.7 million of Jeans spin-off separation expenses, $47.4 million of headquarters and brand relocation costs, and $107.6 million of restructuring charges. Transaction and deal-related costs totaled $191.7 million, including acquisition, divestiture and separation-related items. VF also recorded losses on sale of Reef and Van Moer totaling $36.8 million. These amounts have different scopes and should not be added together without checking for overlap.
- The Kontoor spin-off transferred approximately $1.0 billion of proceeds from new debt issuance to VF, which management intended to use to repay short-term borrowings. VF expected approximately $150 million of additional capital expenditures in fiscal 2020 for infrastructure. Management said cash generation, cash balances and credit facilities were sufficient to meet obligations and fund planned investment and dividends.
- Management’s stated growth priorities were reshaping the portfolio, transforming the operating model, expanding direct-to-consumer and accelerating growth in Asia, especially China. The filing gives no quantified consolidated revenue or earnings guidance for fiscal 2020.
- Key risks include changing consumer preferences and competition, demand forecasting and inventory exposure, retailer weakness and customer concentration, seasonality and weather, foreign exchange and trade-policy changes, sourcing and supply-chain disruption, cybersecurity and privacy, and execution of the Denver relocation and Jeans separation. Ten largest customers represented 19% of revenue; the largest represented 8%, primarily from Jeans.
- Tax matters include an IRS dispute over timing of income inclusion related to the 2011 Timberland acquisition. VF said it was defending its position and did not expect a material adverse outcome; if the IRS prevails, the filing estimates up to $130 million of net interest expense and approximately $136 million of additional tax expense. VF also disclosed uncertainty around the Belgian tax matter and stated the Swiss Tax Act could materially affect tax expense.
Most important facts for investors to verify
- How VF and Kontoor perform separately after the May 2019 spin-off, including the use of Kontoor’s approximately $1.0 billion payment and VF’s post-spin debt and dividend levels.
- Whether Active and Outdoor growth, particularly Vans and The North Face, can offset weaker Jeans results and sustain margins after the separation.
- The recurring versus one-time components of fiscal 2019 costs, especially acquisition and integration, restructuring, relocation and spin-off expenses.
- Whether cash conversion remains strong as inventory and receivables change, and how VF manages its approximately $2.25 billion of reported short- and long-term borrowings and contractual commitments.
- Developments in the Timberland IRS dispute, Belgian tax appeal and Swiss tax effects, and whether any resulting payments or tax charges differ materially from management’s expectations.