VF Corporation — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2023, the three months ended July 2, 2022; comparisons are with the three months ended July 3, 2021. VF sells apparel, footwear and accessories through its Outdoor, Active and Work segments. Occupational Workwear was sold in June 2021 and is presented as discontinued operations.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Net revenue | $2.262 billion | $2.195 billion |
| Gross margin | 53.9% | 56.5% |
| Operating income | $63.4 million | $202.9 million |
| Continuing-operations net income (loss) | $(56.0) million | $154.0 million |
| Diluted EPS from continuing operations | $(0.14) | $0.39 |
| Cash from operating activities | $(358.3) million | $74.9 million |
Revenue rose 3%, including a 4% unfavorable currency impact. Gross margin fell 260 basis points, attributed mainly to mix and higher freight costs, partly offset by price increases. Operating margin declined to 2.8% from 9.2%; SG&A was 51.1% of revenue versus 47.3%.
Segment revenue and profit: Outdoor revenue increased 24% to $768.6 million, while its loss narrowed to $46.9 million. Active revenue declined 4% to $1.254 billion and segment profit fell 21% to $214.0 million. Work revenue declined 13% to $238.9 million and segment profit fell 15% to $35.0 million.
Cash and equivalents were $528.0 million at quarter-end. Inventories were $2.341 billion, up from $1.419 billion at March 2022, partly reflecting seasonality and a change to taking ownership of goods nearer shipment. Short-term borrowings were $827.4 million and long-term debt was $4.468 billion; the company repaid $500 million of notes due April 2022. Working capital was $1.148 billion, the current ratio 1.3:1, and net debt to total capital 64.6%.
Material changes and unusual items
- The continuing-operations loss included a $91.8 million pension settlement charge after VF transferred approximately $330 million of U.S. pension obligations to an insurer. The transaction was funded with plan assets.
- Corporate and other expenses rose to $233.3 million from $27.9 million. The comparison was affected by the pension charge and by a $73.0 million reduction in the estimated Supreme acquisition contingent consideration liability recognized in the prior-year quarter.
- Operating cash flow weakened amid lower earnings and greater working-capital use, notably inventory. Investing cash flow was $(69.5) million, compared with $509.4 million provided a year earlier, which included $616.5 million of net proceeds from the Occupational Workwear sale.
- VF reinstated its voluntary supply-chain finance program. $164.1 million payable to participating financial institutions was included in accounts payable at quarter-end. Management expected planned supplier payment-term extensions to benefit FY2023 operating cash flow, but not materially affect long-term liquidity.
Outlook, risks and contingencies
No specific revenue or earnings guidance for Fiscal 2023 is stated in the provided filing text. VF said it planned to raise additional capital through a term debt facility during FY2023, potentially up to approximately $1.0 billion, for general corporate purposes including tax payments and working capital. It had about $1.4 billion of borrowing availability under its $2.25 billion revolving facility and was in compliance with its covenants. S&P revised its credit outlook to negative in June 2022.
Management cited ongoing COVID-19 disruption, supplier and logistics delays, inflation, freight costs, currency movements and consumer demand as risks. Asia-Pacific revenue fell 20%, and Greater China revenue fell 33%, with COVID-19 resurgence and related restrictions weighing on results. Russia and Ukraine shipments were suspended and VF-operated Russian stores were closed; those markets represented less than 1% of FY2022 revenue. Management did not expect significant business disruption from the conflict at that time.
A U.S. Tax Court ruled for the IRS in a dispute concerning the timing of income inclusion from VF’s 2011 Timberland acquisition; the court issued its final decision on July 14, 2022. VF planned to appeal but anticipated paying or bonding approximately $857.5 million of disputed taxes and interest during FY2023. VF said the amount would be recorded as a tax receivable based on its position; if the ruling is upheld, the receivable might not be recovered and the estimated net tax-expense impact could be up to $715 million.
VF paid a quarterly dividend of $0.50 per share and declared another $0.50 dividend payable in September 2022. It made no share repurchases during the quarter.
Important facts for investors to verify
- Timing, funding and accounting for the anticipated tax payment, and the outcome of VF’s planned appeal.
- Whether elevated inventory converts to sales and cash, and how supplier payment-term changes affect reported operating cash flow.
- Recovery in Active and Work, especially Vans, Dickies and Greater China, alongside Outdoor growth and segment profitability.
- Progress on the planned term debt facility, borrowing costs, credit ratings and liquidity.
- Whether freight, currency and mix pressures continue to weigh on gross margin and earnings.