VF Corporation — Q1 Fiscal 2024 Form 10-Q
Reporting period: First quarter of Fiscal 2024, the three months ended July 1, 2023; comparable quarter ended July 2, 2022. VF sells apparel, footwear and related products through its Outdoor, Active and Work segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY24 | Q1 FY23 |
|---|---|---|
| Net revenue | $2.086 billion | $2.262 billion |
| Gross margin | 52.8% | 53.9% |
| Operating income (loss) | $(9.0) million | $63.4 million |
| Net loss | $(57.4) million | $(56.0) million |
| Diluted loss per share | $(0.15) | $(0.14) |
| Cash from (used in) operations | $163.6 million | $(358.3) million |
Revenue fell about 8% year over year, primarily reflecting weakness in Active; foreign exchange reduced revenue by $3.6 million. Higher promotional activity was the primary reason gross margin declined 110 basis points. SG&A fell $45.2 million, but increased as a share of revenue to 53.2% from 51.1%. Net interest expense rose $18.5 million, primarily due to higher and additional long-term borrowings. The prior-year quarter included a $91.8 million pension settlement charge; excluding that unusual item, the current-quarter operating comparison remains weaker.
- Segments: Outdoor revenue rose 8% to $829.7 million; segment loss narrowed to $43.7 million from $46.9 million. Active revenue fell 15% to $1.066 billion and segment profit fell 42% to $123.8 million. Work revenue fell 20% to $190.6 million and segment profit fell 81% to $6.8 million.
- Channels and regions: Wholesale revenue declined 12% and direct-to-consumer revenue declined 3%; DTC represented 47% of revenue. International revenue increased 3%, including 24% growth in Greater China, while Europe revenue declined 2%.
- Cash flow: Operating cash flow improved year over year, mainly because cash used by working capital was lower. Inventories used $493.7 million of cash. Investing activities used $90.6 million, including $61.8 million of capital expenditures; financing activities used $71.9 million, including $116.6 million of dividends.
Financial position and liquidity
- At July 1, cash and equivalents were $806.5 million; inventories were $2.787 billion, up from $2.341 billion a year earlier. Management attributed elevated inventory in certain markets to earlier purchasing amid supply-chain lead times and softer demand.
- Total borrowings were approximately $6.710 billion, comprising $58.5 million of short-term borrowings, $928.7 million of current long-term debt and $5.722 billion of long-term debt. The current portion includes €850 million of notes due in September 2023. Average debt was $6.8 billion in the quarter versus $5.4 billion a year earlier; weighted-average interest rates were 3.1% and 2.1%, respectively.
- Working capital was $1.397 billion and the current ratio was 1.4 to 1. Net debt to total capital was 73.1%, up from 64.6% a year earlier. VF had approximately $2.2 billion available under its $2.25 billion revolving credit facility and reported compliance with its covenants.
- Accounts payable included $931.0 million owed to suppliers eligible for VF’s supply-chain financing program, versus $506.5 million a year earlier. Eligible supplier payment terms are generally within 90 days; VF says the program does not change those terms.
Outlook, risks and unusual items
The filing does not provide specific Fiscal 2024 revenue or earnings guidance. Management expects continued near-term disruption and challenges from inflation, higher interest rates, weaker consumer sentiment, elevated inventories and promotional activity. It says VF believes it has sufficient liquidity and flexibility to meet obligations. Cash generation is seasonally lower during the first half of the calendar year as inventory builds.
Bracken Darrell was appointed President and CEO effective July 17, 2023, succeeding interim CEO Benno Dorer. VF’s capital priorities include improving the current portfolio, reducing leverage and returning capital through dividends. The company paid $0.30 per share in the quarter and declared another $0.30 quarterly dividend payable September 20, 2023, subject to the stated record date.
Material contingency: VF has recorded an $875.7 million income-tax receivable after paying disputed taxes and interest related to the 2011 Timberland acquisition. VF is appealing a Tax Court decision in favor of the IRS. If the decision is upheld, the receivable may not be recovered; VF estimates a potential net tax-expense impact of up to $730 million, plus reversal of approximately $19.6 million of accrued interest income. The appeal outcome is uncertain.
Other risks include apparel demand and brand performance, discounting and margin pressure, foreign exchange, supply-chain and inventory management, borrowing costs, executive transition, and tax and legal matters. VF recorded no goodwill impairment in the quarter; prior fiscal-year Supreme trademark and goodwill impairments contributed to year-over-year balance-sheet declines.
Most important facts for investors to verify
- Whether Active, particularly Vans in the Americas, stabilizes and whether Outdoor growth can offset weakness in Active and Work.
- Inventory levels, promotional intensity, gross-margin trajectory and seasonal cash conversion.
- Debt maturities, refinancing or repayment plans, interest costs and covenant headroom as leverage remains elevated.
- Developments in VF’s Timberland tax appeal and the recoverability of the $875.7 million receivable.
- Execution under the new CEO and whether management provides or revises full-year guidance in subsequent filings.