VF Corporation — Q2 FY2024 Form 10-Q
Reporting period: Second quarter and six months ended September 30, 2023; comparable periods ended October 1, 2022. Amounts below are U.S. dollars.
Financial performance
| Metric | Q2 FY24 | Q2 FY23 | Six months FY24 | Six months FY23 |
|---|---|---|---|---|
| Revenue | $3.034B | $3.081B | $5.121B | $5.342B |
| Gross margin | 51.3% | 51.4% | 51.9% | 52.4% |
| Operating income (loss) | $362.9M | $(90.8)M | $353.9M | $(27.5)M |
| Net income (loss) | $(450.7)M | $(118.4)M | $(508.1)M | $(174.4)M |
| Diluted loss per share | $(1.16) | $(0.31) | $(1.31) | $(0.45) |
Q2 operating margin was 12.0%, versus negative 2.9% in the prior-year quarter, which included $421.9M of goodwill and intangible-asset impairment charges. Current-period operating income did not include impairment charges. Revenue fell 2% in Q2 and 4% for the six months; foreign exchange contributed favorably in both periods. Six-month operating cash flow was $(19.3)M, compared with $(914.0)M a year earlier, primarily reflecting lower working-capital cash use, including lower inventory-related outflows. Investing cash use was $149.7M; financing cash use was $125.9M.
Segments and material changes
- Outdoor: Q2 revenue rose 10% to $1.714B and segment profit rose 14% to $296.8M, led by The North Face. Six-month revenue increased 9%.
- Active: Q2 revenue fell 14% to $1.082B and segment profit fell 26% to $134.0M. Vans revenue declined 21% in Q2; weakness was broad, particularly in the Americas.
- Work: Q2 revenue fell 10% to $238.3M and segment profit fell 78% to $8.5M. Lower gross margin, inventory reserves and reduced operating leverage weighed on results.
- Q2 SG&A declined $59.0M year over year; six-month SG&A declined $104.2M. Higher borrowing costs increased net interest expense by $21.7M in Q2 and $40.2M year to date.
Balance sheet, liquidity and debt
At September 30, 2023, cash and equivalents were $498.9M; short-term borrowings were $1.023B and long-term debt was $5.657B. The company repaid $907.1M of euro-denominated notes due in September and had approximately $1.0B of commercial paper outstanding. Working capital was $1.699B, the current ratio was 1.5 to 1, and net debt to total capital was 77.5%, up from 71.6% at March 2023. Approximately $1.2B remained available under the $2.25B revolving credit facility; VF reported compliance with its covenants. Eligible supplier obligations under its supply-chain finance program were $688.0M, included in accounts payable.
Outlook, management commentary and risks
- On October 30, VF announced its Reinvent transformation, focused on North America, a Vans turnaround, cost reduction and balance-sheet strengthening. It expects $300M of fixed-cost savings; implementation is likely to generate cash and non-cash charges. The filing provides no detailed timing for realizing the savings.
- The board declared a quarterly dividend of $0.09 per share, a 70% reduction from the $0.30 paid in Q2, to support debt reduction. Continued quarterly dividends remain subject to board approval.
- A $690.0M tax expense followed an unfavorable appellate decision in the Timberland tax case; VF wrote off the related tax receivable and interest. The Belgium excess-profits ruling generated a further $26.1M net tax expense. Six-month discrete tax expense was $703.3M; the reported effective tax rate was 310.4%, versus 19.2% excluding that discrete expense.
- Inflation, higher interest rates, weak consumer sentiment, elevated inventories and promotional activity remain challenges. VF cited risks to brand performance, especially Vans and Dickies, and potential future impairment if Dickies does not meet its projections; its goodwill valuation headroom was 8%.
- After quarter-end, S&P changed VF’s credit outlook to negative while affirming its BBB rating. Management said it believes liquidity is sufficient to meet obligations. No specific revenue or earnings guidance is provided in the filing text.
Key facts for investors to verify
- Whether Reinvent delivers the stated $300M in fixed-cost savings, and the timing and cost of implementation.
- Whether Vans and Work-segment sales and profitability stabilize, and whether Dickies achieves the projections supporting its valuation.
- Debt, borrowing costs, covenant headroom, cash generation and progress toward deleveraging after the dividend reduction.
- Final tax impacts and any further developments in the Timberland and Belgium tax matters.
- Inventory levels, promotional intensity and the scale of supplier-finance obligations as seasonal cash needs evolve.