VF Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter ended October 1, 2016, and nine months then ended; comparative periods ended October 3, 2015. Results are unaudited. The Contemporary Brands businesses were classified as discontinued operations following their sale.
Financial performance
| Metric | Third quarter 2016 | Nine months 2016 | Comparison with 2015 |
|---|---|---|---|
| Total revenue | $3.488 billion | $8.698 billion | Down 1% for the quarter; essentially flat for nine months |
| Operating income | $635 million | $1.179 billion | Down 1% and 6%, respectively |
| Income from continuing operations | $503 million | $908 million | Up 10% for the quarter; essentially flat for nine months |
| Diluted EPS from continuing operations | $1.20 | $2.14 | Versus $1.06 and $2.10 |
| Net income, including discontinued operations | $498 million | $810 million | Versus $460 million and $919 million |
| Gross margin | 48.4% | 48.2% | Up 0.7 percentage point for the quarter; unchanged for nine months |
| Operating cash flow | $43 million for nine months | Compared with cash used of $280 million |
Quarterly revenue growth in Outdoor & Action Sports and direct-to-consumer and international channels was offset by declines in Jeanswear, Imagewear and Sportswear. For nine months, Outdoor & Action Sports grew 2%, while Sportswear declined 15%. Direct-to-consumer revenue rose 6% in the quarter and 7% for nine months; international revenue rose 5% and 4%, respectively.
Gross margin benefited from pricing, lower product costs and mix, partly offset by actions to manage inventory. Currency reduced gross margin by about 0.6 percentage point in the quarter and 0.7 point for nine months. SG&A was 30.2% of revenue in the quarter and 34.6% for nine months, up 0.6 and 0.8 point, respectively, primarily reflecting investment in direct-to-consumer and product innovation.
Liquidity, debt and capital allocation
- At October 1, cash and equivalents were $738 million; working capital was $2.642 billion and the current ratio was 2.2 to 1.
- Total short- and long-term borrowings were approximately $3.088 billion. Debt-to-total capital was 38.8%, versus 25.6% at December 2015.
- VF issued €850 million of 0.625% notes due 2023, recorded at $947 million net of issuance discounts and costs. The $2.25 billion revolving credit facility supported the commercial paper program; $1.5 billion was available at quarter-end.
- Nine-month operating cash flow improved year over year, partly because a $250 million domestic pension contribution made in 2015 did not recur and working capital changes were more favorable. Receivables and inventory nevertheless used substantial cash amid seasonal buildup.
- Capital expenditures were $130 million. VF repurchased $1.0 billion of stock and paid $462 million in dividends during the first nine months. The board declared a subsequent quarterly dividend of $0.42 per share.
Material changes, unusual items and risks
- VF completed the sale of 7 For All Mankind, Splendid and Ella Moss on August 26, 2016, for $116.9 million. The sale produced a $104.4 million after-tax loss for the first nine months, including $3.8 million in the quarter. Discontinued operations also reduced nine-month net income by $98.4 million.
- The nine-month effective tax rate was 18.7%, versus 23.6%, including a $40.6 million net discrete tax benefit. Management cited a higher share of income in lower-tax jurisdictions and U.S. tax-law changes as factors in the lower rate excluding discrete items.
- Sportswear revenue and profit weakened substantially. Nautica revenue fell 15% in the quarter and 16% for nine months; an interim impairment review found no goodwill or trademark impairment, but management warned estimates and assumptions may change.
- The company reported an ongoing IRS dispute regarding Timberland’s 2011 tax return and an appeal of the EU decision on Belgium’s excess-profit tax regime. VF had not paid the Belgian assessment and recorded no additional accrual, concluding the previously recognized benefit was more likely than not to be sustained.
- Management stated liquidity was adequate for obligations, investment and planned dividends, but did not provide specific earnings or revenue guidance in the supplied filing text. It cautioned that interim results may not indicate full-year results and highlighted risks including currency, consumer demand, customer financial health, margins, supply chain, execution, taxes and potential impairments.
Important facts for investors to verify
- How much of earnings-per-share growth reflects the lower tax rate and discrete tax benefits, rather than operating performance?
- Whether weak Sportswear and Jeanswear results, wholesale inventory pressures and customer bankruptcies persist, and how the Nautica business performs against impairment assumptions.
- Whether operating cash flow improves as seasonal inventory is sold and receivables are collected, given higher borrowings and substantial buybacks and dividends.
- Developments and potential cash implications of the Timberland IRS examination and Belgian tax appeal.
- Progress and final financial effects of the Contemporary Brands divestiture and related transition services.