VF Corporation — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2022, through January 1, 2022. The comparable periods ended December 26, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
VF operates Outdoor, Active and Work segments. Results are from continuing operations unless stated otherwise. The comparison reflects recovery from COVID-affected prior-year demand and store closures, as well as Supreme, acquired in December 2020. VF sold its Occupational Workwear business on June 28, 2021; it is reported as discontinued operations.
| Metric | Q3 FY22 | Q3 FY21 | Nine months FY22 | Nine months FY21 |
|---|---|---|---|---|
| Net revenue | $3,624.4 | $2,971.5 | $9,017.2 | $6,656.2 |
| Operating income | $678.4 | $412.0 | $1,439.8 | $485.1 |
| Income from continuing operations | $517.8 | $327.7 | $1,135.8 | $293.2 |
| Diluted EPS from continuing operations | $1.32 | $0.83 | $2.89 | $0.75 |
| Gross margin | 56.1% | 54.7% | 55.3% | 52.9% |
| Operating margin | 18.7% | 13.9% | 16.0% | 7.3% |
Q3 revenue increased 22%; nine-month revenue increased 35%. Supreme contributed $193.2 million of Q3 and $438.5 million of nine-month revenue. Q3 segment revenue increased 23% in Outdoor, 25% in Active and 6% in Work. Direct-to-consumer revenue rose 30% in the quarter and represented 55% of total revenue. Greater China revenue declined 6% in Q3 amid renewed COVID disruption.
Nine-month net income was $1,306.1 million, including $170.3 million from discontinued operations. That discontinued result included an estimated $145.6 million after-tax gain on the Workwear sale; it should not be treated as recurring continuing earnings.
Cash flow, balance sheet and capital
- Cash and liquidity: Cash and equivalents were $1,333.8 million at January 1, 2022. The $2.25 billion revolving credit facility had approximately $2.2 billion available; VF reported covenant compliance.
- Cash flow: Nine-month cash from operating activities was $791.3 million, down from $1,084.3 million. Investing activities provided $953.9 million, including $616.5 million net proceeds from the Workwear sale and $598.8 million from short-term investment maturities/sales. Financing activities used $1,257.7 million.
- Debt: Long-term debt, including its current portion, was $5,147.3 million; short-term borrowings were $106.0 million. VF redeemed $500 million of 2.050% notes due April 2022 and recorded a $3.6 million extinguishment loss. The company’s net debt-to-total-capital measure was 59.4%.
- Working capital and inventory: Working capital was $1,376.8 million and the current ratio was 1.4:1. Inventory was $1,287.2 million, up from $1,061.8 million at March 2021.
- Shareholder returns: VF repurchased 4.0 million shares for $300 million in the first nine months. Dividends paid were $1.48 per share; a $0.50 quarterly dividend was declared for payment in March 2022.
Changes, outlook and risks
- Gross margin improved, primarily on fewer promotions and more full-price sales, partly offset by expedited freight costs. SG&A leverage helped margins, although spending increased with higher revenue, digital and direct-to-consumer investment, advertising, distribution costs and Supreme.
- A $158 million year-to-date reduction in the estimated Supreme earn-out liability benefited SG&A; the remaining liability was $49 million at January 1, 2022. The earn-out period was scheduled to end January 31, 2022.
- Management did not provide a specific revenue or earnings forecast in the supplied filing text. It said it expected continued business disruption from COVID-19 and believed VF had sufficient liquidity and flexibility to meet obligations. A multi-year transformation initiative is intended to generate global cost savings to support transformation and growth priorities.
- Supply chain constraints—including supplier capacity, port congestion, longer transit times and logistics challenges—delayed products and prompted expedited freight. Management also cited the possibility of further store closures and continuing COVID-related uncertainty.
- The new voluntary supplier-financing program had $99 million outstanding at quarter-end and was temporarily suspended after quarter-end for modifications.
- Tax matters include an IRS dispute related to the 2011 Timberland acquisition. If the IRS prevails, VF estimated up to $196.7 million of net interest expense and approximately $136.3 million of additional tax expense. Separately, a €35 million tax and interest receivable relating to Belgium’s excess-profit tax regime may not be recovered if the case is resolved adversely.
- Other risks identified include consumer demand and fashion shifts, competition, foreign exchange, cybersecurity, supplier and distribution continuity, and VF’s ability to execute its transformation and integrate Supreme. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
Key facts for investors to verify
- How much reported growth and margin improvement reflects durable underlying demand versus COVID-affected comparisons, Supreme, and the $158 million earn-out remeasurement benefit?
- Whether inventory growth, expedited freight and supply-chain delays affect future sales, margins or cash conversion.
- The final Supreme earn-out payment and whether the business delivers expected growth and integration benefits.
- Developments in the Timberland IRS dispute and the Belgium tax case, including any change in the stated exposure or receivable.
- Cash generation, debt reduction, liquidity and covenant headroom, particularly as dividends and share repurchases continue.