VF Corporation — Form 10-Q Summary
Reporting period: Quarter ended July 1, 2017, with six-month comparisons to the period ended July 2, 2016. VF also announced a fiscal year-end change: fiscal 2017 ends December 30, 2017, followed by a three-month transition period through March 31, 2018; the next fiscal year begins April 1, 2018.
Financial performance
| Metric | Second quarter 2017 | Six months 2017 |
|---|---|---|
| Total revenue | $2.36 billion, up 2% | $4.94 billion, essentially flat |
| Operating income | $168.0 million, down from $194.4 million | $459.5 million, down from $506.2 million |
| Income from continuing operations | $114.9 million; diluted EPS $0.29 | $329.5 million; diluted EPS $0.81 |
| Net income, including discontinued operations | $109.9 million, versus $51.0 million | $319.1 million, versus $311.3 million |
| Gross margin | 49.7%, up 0.8 percentage points | 49.9%, up 1.1 percentage points |
| Operating margin | 7.1%, versus 8.4% | 9.3%, versus 10.2% |
For the first half, cash used by operating activities was $4.5 million, compared with $16.6 million provided in 2016. Investing activities provided $89.1 million, including $208.2 million of net proceeds from the Licensed Sports Group sale; financing activities used $630.3 million. Cash and equivalents were $672.5 million at quarter-end.
At July 1, short-term borrowings were $921.1 million, current long-term debt $253.8 million and long-term debt $2.11 billion. Debt to total capital was 47.4%, versus 31.9% at December 2016; the current ratio was 1.6 and working capital was $1.47 billion. VF had $1.3 billion available under its revolving credit facility after commercial paper and letters of credit. A $250 million note matures in October 2017.
Changes and operating drivers
- Quarterly revenue growth was led by Outdoor & Action Sports, up 4%, and Imagewear, up 11%; Jeanswear declined 5%. First-half Jeanswear revenue fell 7%, while Outdoor & Action Sports rose 3%.
- Direct-to-consumer revenue grew 13% in the quarter and 10% in the first half; e-commerce grew 34% and 29%, respectively. DTC represented 32% of quarterly revenue.
- Gross-margin improvement reflected pricing, lower product costs and a mix shift toward higher-margin businesses, but foreign exchange reduced gross margin by about 0.8 percentage points in the quarter. Higher investment in DTC, innovation, demand creation and technology lifted SG&A as a share of revenue and contributed to lower operating income.
- First-half continuing-operations diluted EPS declined to $0.81 from $0.89. The prior-year comparison included a $17.1 million discrete tax benefit; the 2017 first-half effective tax rate was 21.0%, versus 19.1%.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash, operating cash flow, credit facilities and capital-market access should provide adequate liquidity for obligations, investment, capital expenditures and the planned dividend. It noted operating cash flow is typically lower in the first half because of seasonal inventory buildup.
- VF repurchased 22.2 million shares for $1.2 billion in the first half and paid $337.6 million in dividends. A new $5.0 billion repurchase authorization was approved in March 2017; $4.2 billion remained available at July 1. Management said acquisitions receive first priority in capital allocation, followed by dividends and repurchases.
- VF completed the sale of Licensed Sports Group on April 28, 2017, for $225 million subject to working-capital adjustments; net proceeds received through quarter-end were $208.2 million. The first-half discontinued-operations loss was $10.5 million, including estimated sale-related losses. VF is exiting licensing and classified the JanSport collegiate licensing assets as held for sale.
- VF early adopted accounting guidance for intra-entity asset transfers, reducing opening retained earnings and other assets by $237.8 million. The company expects the new lease standard, effective for it in fiscal 2020, to materially affect its balance sheet.
- Tax matters include an unresolved IRS examination of Timberland’s 2011 return and a contested Belgian excess-profits tax assessment. VF paid €31.9 million ($33.9 million) in January 2017 and recorded it as a tax receivable; recovery depends on the outcome of pending appeals.
- Risks cited include currency volatility, consumer demand and changing preferences, retailer and customer concentration or financial weakness, online competition, margin pressure, supply and distribution disruption, raw-material costs, technology and cybersecurity, and tax, legal and geopolitical matters. VF reported no material changes to previously disclosed risk factors or legal proceedings. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether revenue and profit trends improve, particularly in Jeanswear and wholesale channels, and whether DTC and e-commerce growth continues.
- Liquidity and refinancing plans for the $250 million October 2017 maturity, given higher short-term borrowings and increased leverage.
- Cash generation after seasonal inventory investment and the pace of share repurchases and dividends relative to operating cash flow.
- Final Licensed Sports Group working-capital adjustments and the resolution and recoverability of the Belgian tax receivable.
- Whether strategic spending and foreign-exchange effects continue to pressure operating margins despite gross-margin gains.