VF Corporation — Q3 FY2019 Form 10-Q
Reporting period: Third quarter ended December 29, 2018; fiscal 2019 runs April 1, 2018–March 30, 2019. Results are unaudited. Comparisons are to the corresponding 2017 periods; the company’s fiscal-year calendar changed, and prior segment data was recast.
Financial performance
- Revenue: Q3 revenue was $3.94 billion, up 8%; nine-month revenue was $10.64 billion, up 14%. Q3 growth included $57.6 million from acquisitions and a $57.4 million adverse foreign-exchange impact. Nine-month growth included $629.9 million from acquisitions and a $52.5 million adverse currency impact.
- Profit and margins: Q3 operating income was $591.9 million, versus $484.6 million; operating margin was 15.0%, up from 13.3%. Continuing-operations income was $463.1 million, or diluted EPS of $1.16, versus a $73.0 million loss, or $(0.18) per diluted share. Nine-month operating income was $1.48 billion and continuing-operations income was $1.13 billion, or $2.82 per diluted share.
- Gross margin: Q3 was 51.9%, up 40 basis points; nine-month margin was 50.8%, up 20 basis points. Management cited favorable business mix and pricing, partly offset by product costs and acquisition, integration and separation expenses.
- Cash flow: Nine-month operating cash flow was $1.44 billion, down from $1.68 billion, principally due to greater working-capital cash use. Investing used $148.5 million; financing used $1.44 billion. Capital expenditures were $195.3 million. Cash and equivalents were $535.3 million at quarter-end.
- Debt and liquidity: Short-term borrowings were $677.9 million and long-term debt, including current portion, was approximately $2.14 billion. Working capital was $2.05 billion, current ratio 1.8:1, and debt to total capital 39.6%. VF reported $670 million of commercial paper and approximately $1.6 billion of remaining capacity under its $2.25 billion revolving facility.
- Shareholder returns: Nine-month dividends paid were $565.2 million; share repurchases were $150.7 million. The board declared a $0.51-per-share quarterly dividend payable in March 2019.
Changes and business mix
- Active: Q3 revenue rose 16% to $1.14 billion and segment profit rose 37% to $272.9 million. Vans global revenue increased 25%; Active margin expanded to 23.9% from 20.2%.
- Outdoor: Q3 revenue increased 11% to $1.61 billion and segment profit increased 23% to $338.0 million. Growth included Icebreaker and Altra acquisitions; North Face revenue rose 14%.
- Work: Q3 revenue rose 2% to $493.6 million and segment profit rose 9% to $62.5 million. Nine-month revenue growth of 57% included $471.9 million from Williamson-Dickie; excluding acquisitions and divestitures, nine-month revenue increased 4%.
- Jeans: Q3 revenue declined 5% to $657.9 million and segment profit declined 27% to $67.8 million. Margin fell to 10.3% from 13.5%; management cited wholesale weakness, a U.S. customer bankruptcy, higher product costs and separation expenses.
- Direct-to-consumer revenue grew 10% in Q3; e-commerce grew 24%. International revenue increased 5%, despite a 4% adverse currency impact.
Outlook, risks and unusual items
- VF announced plans to spin off its Jeans business, including Wrangler, Lee, Rock & Republic and VF Outlet, into a separate public company. The transaction was expected in Q1 FY2020 and intended to be tax-free; completion, timing, tax treatment, disruption, lost synergies and separation costs remain risks. VF incurred $63.8 million of related expenses in the first nine months.
- VF sold the Reef brand and Van Moer business in October 2018, recording estimated losses of $14.4 million and $22.4 million, respectively. It also completed the Nautica sale in April 2018; the sale generated $285.8 million in proceeds and a final after-tax loss of $38.2 million.
- Nine-month restructuring charges were $44.6 million; management expected additional fiscal 2019 expense. Quarter-end restructuring accruals were $55.1 million.
- The nine-month effective tax rate was 16.4%, versus 55.7% in 2017, when tax expense included a $465.5 million provisional Tax Act charge. VF finalized its Tax Act accounting in Q3 FY2019 with additional net charges of $10.4 million. The company was evaluating final transition-tax regulations issued after quarter-end.
- Contingencies include an unresolved IRS dispute over Timberland’s 2011 tax return and EU/Belgian tax rulings. VF had paid €35.0 million in assessments relating to the Belgian matter and recorded the payments as a tax receivable; an adverse outcome could prevent recovery.
- Management said available cash, operating cash flow, credit facilities and capital-market access should provide adequate liquidity for obligations, capital spending and planned dividends. No specific revenue or earnings guidance is provided in the supplied filing text.
- Other stated risks include foreign-exchange movements, consumer demand, customer concentration and creditworthiness, sourcing and raw-material costs, competition, data security, acquisitions, relocation of headquarters and brands to Denver, Brexit-related uncertainty, and the proposed spin-off. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- How much growth is organic and sustainable after separating acquisition, currency and divestiture effects, particularly in Active and Outdoor.
- Whether the Jeans segment’s revenue and margin declines persist, and how the customer bankruptcy and planned spin-off affect results and costs.
- Working-capital trends and operating cash flow, including the company’s recurring accounts-receivable sales program.
- Progress, total costs, timing and tax treatment of the Jeans spin-off, as well as headquarters-relocation and restructuring costs.
- Resolution and potential financial effects of the IRS and Belgian tax matters, and any further Tax Act adjustments.