VF Corporation Q3 FY2023 Form 10-Q Summary
Business context and reporting period
VF Corporation reported its third quarter and first nine months of fiscal 2023, ended December 31, 2022. The company operates Outdoor, Active and Work segments. Results exclude Occupational Workwear, sold in June 2021 and reported as discontinued operations in the prior-year comparison.
Financial performance and position
| Metric | Three months ended Dec. 2022 | Prior-year quarter | Nine months ended Dec. 2022 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $3.531 billion | $3.624 billion | $8.873 billion | $9.017 billion |
| Gross margin | 54.9% | 56.1% | 53.4% | 55.3% |
| Operating income / margin | $516 million / 14.6% | $678 million / 18.7% | $489 million / 5.5% | $1.440 billion / 16.0% |
| Net income from continuing operations | $508 million | $518 million | $333 million | $1.136 billion |
| Diluted EPS from continuing operations | $1.31 | $1.32 | $0.86 | $2.89 |
| Operating cash flow | Not presented for the quarter | $(833) million | $791 million |
Quarterly revenue fell 3%; nine-month revenue fell 2%. Nine-month results included $422 million of Supreme goodwill and trademark impairments. Cash and equivalents were $571 million at December 31. Total debt was approximately $6.4 billion; net debt to total capital was 68.7%, versus 61.0% at March 2022. Working capital was $698 million and the current ratio was 1.2 to 1. VF had approximately $1.3 billion available under its revolving credit facility and was in compliance with its covenants.
Material changes versus prior comparable periods
- Outdoor was the relative bright spot: quarterly revenue rose 4% to $2.0 billion, while segment profit increased 1% to $457 million.
- Active quarterly revenue declined 11% to $1.3 billion and segment profit declined 42% to $147 million. Vans weakness and lower Asia-Pacific demand, including COVID-related disruption in Greater China, weighed on results.
- Work quarterly revenue fell 6% to $269 million and segment profit fell 61% to $18 million.
- Quarterly gross margin declined 120 basis points, primarily due to promotions and higher material costs. SG&A rose as a share of revenue to 40.3% from 37.4%.
- Nine-month operating cash flow moved to an outflow, driven by working-capital use, including a $1.2 billion inventory increase and the $875.7 million tax-related payment. Investing cash flow was an outflow of $207 million, versus $954 million provided in the prior period, which included proceeds from business and investment sales.
- Inventory reached $2.592 billion, up from $1.419 billion at March 2022, reflecting higher in-transit goods, supply-chain timing, cancellations and softer demand.
Outlook, management commentary, risks and unusual items
- The filing gives no specific full-year revenue or earnings guidance. Management cited inflation, weaker consumer sentiment, elevated inventory and promotions, a strong U.S. dollar, higher interest rates, supply-chain volatility and continuing COVID-related disruption as near-term challenges.
- On February 2, 2023, the board declared a quarterly dividend of $0.30 per share, down 41% from the $0.51 paid in the reported quarter. Management said the reduction is intended to strengthen the balance sheet, accelerate deleveraging and preserve flexibility. Future dividends remain subject to board approval.
- VF drew $1.0 billion under a delayed-draw term loan, maturing December 2024, at a weighted-average interest rate of 5.17% at period-end. Commercial paper borrowings were $889.9 million; credit outlooks from S&P and Moody’s were negative.
- VF paid $875.7 million in disputed taxes and interest related to the IRS case concerning Timberland’s 2011 acquisition. The payment is recorded as a tax receivable while VF appeals an adverse Tax Court decision. If the decision is upheld, the company estimates a potential tax-expense impact of up to $730 million, plus reversal of accrued interest income.
- Supreme impairment charges totaled $421.9 million in the nine-month period, reflecting higher discount rates and weaker foreign-exchange assumptions. Further impairment is possible if brand performance, forecasts, currency rates or valuation assumptions deteriorate.
- Steve Rendle retired as CEO and board chair on December 2, 2022. Board member Benno Dorer became interim CEO; the board began a search for a permanent CEO.
- Restructuring charges were $63 million for the nine months. Other significant items included a $91.8 million pension settlement charge and a $98.8 million net discrete tax benefit for the nine-month period.
Important facts for investors to verify
- Whether Active and Vans revenue and margins stabilize, and whether Outdoor growth can continue.
- Inventory normalization, promotional intensity, supply-chain execution and related cash conversion.
- Debt reduction, borrowing costs, covenant headroom and the implications of negative credit outlooks.
- Progress and outcome of the Timberland tax appeal, including recoverability of the $875.7 million receivable and potential tax exposure.
- Supreme’s performance and assumptions supporting its remaining goodwill and trademark values.
- Permanent CEO appointment and the sustainability of the reduced dividend.