VF Corporation — Q3 Fiscal 2021 Form 10-Q
Reporting period: Third quarter ended December 26, 2020; year-to-date figures cover the nine months then ended. The unaudited results reflect continuing operations separately from discontinued operations. Comparisons are with the corresponding fiscal 2019 periods.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $2.972B | $3.156B | $6.656B | $8.386B |
| Operating income | $412.0M | $540.0M | $485.1M | $1.185B |
| Income from continuing operations | $327.7M | $421.6M | $293.2M | $1.112B |
| Net income, including discontinued operations | $347.2M | $465.0M | $318.3M | $1.163B |
| Diluted EPS from continuing operations | $0.83 | $1.05 | $0.75 | $2.77 |
| Total diluted EPS | $0.88 | $1.16 | $0.81 | $2.90 |
| Gross margin | 54.7% | 57.2% | 52.9% | 55.8% |
| Operating margin | 13.9% | 17.1% | 7.3% | 14.1% |
Q3 revenue declined 6% (including a 2% favorable foreign-exchange effect); nine-month revenue fell 21% (including a 1% favorable currency effect). Management attributed the declines primarily to COVID-19-related store closures, wholesale disruption, supply-chain interruptions and weaker consumer demand. Q3 gross margin fell 250 basis points, reflecting promotions, currency transaction timing and optimization-related costs, partly offset by favorable channel and business mix. SG&A fell in dollars but rose as a percentage of sales due to lower revenue and continued strategic investment.
Q3 segment revenue was down 5% in Outdoor and 9% in Active, while Work grew 8%. Nine-month revenue declined 19% in Outdoor and 25% in Active, while Work increased 2%. Profit and margins declined across all three segments in both periods.
Cash flow, debt and liquidity
- Nine-month cash from continuing operations was $1.084B, compared with $814.0M a year earlier; management cited lower working-capital cash use, partly offset by lower earnings. Investing activities used $813.5M, including $800M of short-term investment purchases and $200M of maturities. Financing activities provided $1.525B.
- At December 26, cash and equivalents were $3.254B and short-term investments were $599.4M. About $2.2B of cash was designated for the Supreme acquisition. Cash, equivalents and restricted cash totaled $3.275B.
- Short-term borrowings were $299.7M and long-term debt was $5.787B, versus $2.609B of total debt at March 2020. The increase principally reflects $3.0B of senior notes issued in April 2020. Net debt to total capital, as defined by VF, was 58.7%, versus 53.4% at March 2020 and 39.3% a year earlier.
- VF reported a 2.8-to-1 current ratio and $4.347B working capital at December 2020. Approximately $1.9B remained available under the $2.25B revolving facility; VF reported compliance with its covenants, including a $750M minimum-liquidity requirement.
- Dividends paid were $0.49 per share in Q3 and $1.45 per share year to date. Share repurchases were paused; $2.8B remained under the authorization.
Outlook, material events and risks
- VF forecast Fiscal 2021 revenue of $9.1B–$9.2B, a 12%–13% decline from Fiscal 2020, assuming no material worsening of COVID-19. The outlook includes Supreme’s expected Q4 contribution. Management expected COVID-19 to significantly reduce full-year net income and cash flows.
- COVID-19 remained a material source of uncertainty. At quarter-end, about 15% of VF-operated North American stores were closed; subsequent closures left over 60% of Europe stores closed. The filing warns of possible further closures, demand weakness, promotional pressure, supply disruption and effects on customers and suppliers.
- VF completed its $2.1B cash acquisition of Supreme on December 28, 2020, two days after quarter-end. The purchase price is subject to adjustments and could include up to $300M of additional performance-based consideration. Purchase accounting was still in process at filing time.
- The Occupational Workwear business remained classified as held for sale and discontinued operations; a divestiture had been under exploration, with no completed sale reported in this filing. The quarter’s net income includes discontinued-operation income of $19.6M.
- Nine-month restructuring charges were $84.0M, including severance, asset impairments, accelerated depreciation and inventory write-downs. The period also included a $42.4M currency-translation expense associated with liquidation of certain foreign entities and $6.6M of Supreme transaction expenses.
- The nine-month effective tax rate was 20.2%, versus 0.4% in the prior-year period, which benefited from a $169.4M discrete tax benefit, primarily related to Swiss tax reform. VF disclosed an IRS dispute over the timing of income inclusion related to the 2011 Timberland acquisition; if the IRS prevails, the filing estimates up to $175M of net interest expense and approximately $136M of additional tax expense.
- Credit conditions bear watching: S&P downgraded VF in December 2020 but set a stable outlook; Moody’s had placed long-term ratings on review for downgrade. Management said liquidity was sufficient but cautioned that COVID-19’s duration and severity could make mitigation measures inadequate.
Investor facts to verify
- Whether store reopenings, consumer demand and digital growth support the $9.1B–$9.2B fiscal-year revenue outlook.
- Supreme’s post-acquisition contribution, final purchase accounting, funding mix and any additional milestone payment.
- Progress on deleveraging, available liquidity, credit ratings and continued dividend payments.
- Status and timing of the Occupational Workwear divestiture and related discontinued-operation balances.
- Resolution of the Timberland IRS dispute and the potential financial exposure disclosed by VF.