Business context and reporting period
VF Corporation’s unaudited Form 10-Q covers the second quarter and first six months of Fiscal 2019, ended September 29, 2018. Fiscal 2019 runs April 1, 2018–March 30, 2019, following a change to a fiscal year ending near March 31. Unless noted, results below are from continuing operations. Comparisons are with the periods ended September 30, 2017; prior periods were not restated for the adoption of ASC 606.
Financial performance and liquidity
| Metric | Three months ended September | Six months ended September |
|---|---|---|
| Net revenues | $3.907 billion, up 15% | $6.696 billion, up 18% |
| Operating income | $659 million; 16.9% margin vs. 17.0% | $890 million; 13.3% margin vs. 13.0% |
| Continuing-operations income | $507 million vs. $474 million | $667 million vs. $581 million |
| Diluted continuing-operations EPS | $1.26 vs. $1.19 | $1.66 vs. $1.46 |
| Gross margin | 50.1% vs. 50.2% | 50.2% vs. 50.0% |
| Cash from operating activities | $103 million vs. $217 million |
For the quarter, revenue growth included $324 million from acquisitions; foreign currency reduced reported revenue growth by about 1%. E-commerce revenue grew 48% and direct-to-consumer revenue grew 19%. Six-month revenue growth included $572 million from acquisitions. Six-month operating cash flow fell as working-capital use increased, particularly from receivables and inventory. Investing cash flow was an outflow of $218 million, including $320 million of net acquisition spending and $140 million of capital expenditures.
At September 29, cash and equivalents were $353 million; short-term borrowings were $1.571 billion and long-term debt was $2.151 billion. Working capital was $1.909 billion, the current ratio was 1.5 to 1, and debt to total capital was 47.1%. VF reported approximately $680 million of remaining availability under its $2.25 billion revolving facility after commercial paper and letters of credit. The six-month dividend was $0.92 per share; the Board later declared a $0.51 quarterly dividend.
Material changes versus the prior comparable period
- Active led growth: quarterly segment revenue increased 19% and segment profit 29%, with Vans growth and stronger direct-to-consumer sales.
- Outdoor revenue increased 6% in the quarter, including Icebreaker and Altra; segment profit rose 3%. Six-month Outdoor segment profit declined 7%, and margins were pressured by investment costs and currency.
- Work revenue more than doubled, mainly reflecting the Williamson-Dickie acquisition. Excluding that acquisition, quarterly Work revenue increased 5%; the segment’s reported quarterly operating margin fell to 12.2% from 16.3%.
- Jeans revenue declined 7% and segment profit declined 17% in the quarter, amid wholesale and direct-to-consumer weakness, product-cost pressure, and a U.S. customer bankruptcy.
- Quarterly operating margin was slightly lower despite higher sales. Acquisition and integration costs, strategic investment, relocation costs and lower acquired-business margins weighed on results; expense leverage partly offset these items.
- Six-month operating cash flow was lower than in 2017, while reported debt to total capital improved from 52.7% at September 2017 to 47.1%.
Outlook, commentary, risks and unusual items
- The filing provides no explicit earnings or revenue guidance. Management said cash, operating cash flow, borrowing capacity and capital-market access were expected to be adequate for obligations, capital spending and the planned dividend.
- VF announced plans to spin off its Jeans business, including Wrangler, Lee, Rock & Republic and VF Outlet, into a separate public company. The filing expected completion in the first half of calendar 2019, subject to approvals and other conditions; $12.5 million of related expenses were recorded in the quarter.
- VF classified Reef and Van Moer as held for sale and recorded estimated losses of $9.9 million and $22.4 million, respectively. Both sales closed after quarter-end. Nautica had been sold in April 2018.
- Management expected additional restructuring expense during Fiscal 2019. The restructuring accrual was $43.5 million at quarter-end.
- Tax Act accounting remained provisional. Depending on final transition-tax regulations, VF said it could record up to $100 million of additional tax expense. Other tax exposures include an unresolved Belgian tax matter and ongoing examinations.
- Management identified risks from the proposed Jeans spin-off and the relocation of headquarters and certain brands to the Denver area, including disruption, additional costs, employee retention and loss of business synergies. Other stated risks include consumer demand, foreign exchange, customer concentration, input costs, competition, supply-chain disruption and acquisition integration.
- Adoption of ASC 606 increased retained earnings by $2.0 million at adoption; the new standard also changed revenue timing and balance-sheet presentation. VF expected the upcoming lease standard to materially affect its balance sheet, but not materially affect its income statement.
Important facts for investors to verify
- Whether organic growth and margins remain strong after separating acquisition contributions, currency effects and ASC 606 presentation changes.
- Whether working-capital investment reverses as seasonal inventory is sold and receivables collected, and how operating cash flow develops.
- The progress, costs, financing and tax treatment of the Jeans spin-off, including whether the announced timetable is achieved.
- Final sale proceeds and adjustments for Reef and Van Moer, and any further divestiture-related charges.
- The final Tax Act transition-tax assessment and resolution of the Belgian and other tax matters.
- Execution and costs of the Denver relocation, restructuring initiatives, and integration of Williamson-Dickie, Icebreaker and Altra.