V.F. Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). VF designs, sources, markets and distributes branded apparel, footwear and related products. Unless noted, operating results below are from continuing operations; cash flow figures include discontinued operations.
Key financial metrics
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Total revenue | $11.811 billion | $11.026 billion | Up 7%; includes $247.2 million from Williamson-Dickie after acquisition |
| Gross margin | 50.5% | 49.3% | Up 120 basis points |
| Operating income | $1.503 billion | $1.368 billion | Operating margin rose to 12.7% from 12.4% |
| Income from continuing operations | $721.2 million | $1.079 billion | Declined, chiefly reflecting the Tax Act charge |
| Diluted EPS from continuing operations | $1.79 | $2.56 | Down 30%; includes $1.15-per-share Tax Act impact |
| Net income, including discontinued operations | $614.9 million | $1.074 billion | 2017 discontinued operations produced a $106.3 million after-tax loss |
| Cash provided by operating activities | $1.475 billion | $1.481 billion | Relatively flat; includes discontinued operations |
| Cash and equivalents at year-end | $566.1 million | $1.228 billion | Lower after acquisition spending, repurchases and dividends |
| Debt at year-end | Approximately $2.923 billion | Approximately $2.319 billion | 2017 includes $729.4 million short-term borrowings |
| Working capital / current ratio | $1.356 billion / 1.5 | $2.383 billion / 2.4 | Liquidity measures declined |
| Debt to total capital | 44.0% | 31.9% | Higher short-term borrowing and shareholder returns contributed |
Material changes and business performance
- Outdoor & Action Sports revenue increased 7.8% to $8.212 billion; coalition profit rose 10.9% to $1.378 billion. Vans global revenue grew 19%.
- Jeanswear revenue fell 3.0% to $2.655 billion, and coalition profit declined 14.2% to $422 million, reflecting U.S. wholesale softness, customer destocking and higher product costs.
- Imagewear revenue increased 50.5% to $830 million, including $247.2 million from Williamson-Dickie. Its operating margin fell to 13.6% from 18.9%; excluding the acquisition and transition-services revenue, margin also declined.
- Direct-to-consumer revenue grew 17% and reached 32% of total revenue, compared with 29% in 2016. E-commerce revenue grew 34%; VF opened 111 stores and ended the year with 1,518.
- International revenue grew 12% and represented 41% of total revenue. Management cited growth in Europe and Asia-Pacific, particularly China.
- Williamson-Dickie was acquired on October 2, 2017 for $800.7 million in cash. VF announced an agreement to acquire Icebreaker for NZ$288 million, expected to close in the first quarter of Fiscal 2019.
- VF completed the sale of Licensed Sports Group and its JanSport collegiate business, and classified Nautica as held for sale and discontinued operations. The 2017 discontinued-operations loss included a $104.7 million Nautica goodwill impairment and an estimated $25.5 million loss on sale.
Outlook, risks and unusual items
- Management described 2017 as the start of a strategic shift focused on reshaping the portfolio, becoming more consumer- and retail-centric, expanding direct-to-consumer, and accelerating growth in Asia. It expects direct-to-consumer growth to outpace VF’s overall growth; the filing provides no specific consolidated revenue or earnings guidance.
- The Tax Act generated a provisional $465.5 million charge in the fourth quarter, including an estimated $512.4 million transition-tax component, partly offset by deferred-tax remeasurement benefits. The accounting was preliminary, with a one-year measurement period to finalize estimates. The transition tax is payable over eight years.
- VF returned approximately $1.9 billion to shareholders through $1.2 billion of share repurchases and $684.7 million of dividends. The 2017 dividend was $1.72 per share; the indicated annual rate for 2018 was $1.84.
- At year-end, $705 million of commercial paper was outstanding and approximately $1.53 billion remained available under the $2.25 billion revolving facility. Management stated that cash, operating cash flow and available credit provide adequate liquidity. The facility expires in April 2020; VF reported compliance with its covenants.
- Key risks include changing consumer preferences and spending, competition and pricing pressure, inventory forecasting, retail-channel and customer concentration, foreign exchange, reliance on global suppliers, cybersecurity, acquisition integration, tax uncertainty, weather, and potential impairment of goodwill or brands.
- Other notable items: the dividend payout ratio was 96.2% of diluted continuing-operations EPS; VF changed its fiscal year-end and planned a transition quarter from December 31, 2017 through March 31, 2018, followed by a fiscal year running April 1, 2018 through March 30, 2019. No pending material legal proceedings were reported.
Important facts for investors to verify
- Whether the provisional Tax Act accounting, including transition-tax estimates and future tax effects, changes materially as VF completes its analysis.
- Whether growth in Vans, direct-to-consumer and international markets can offset continued Jeanswear weakness and support margins after elevated growth investments.
- Williamson-Dickie’s integration, contribution to Imagewear profitability, and final purchase-price allocation; also the timing and terms of the planned Icebreaker acquisition and Nautica disposition.
- Liquidity and leverage trends, including commercial-paper usage, debt maturities, working-capital needs and the capacity to sustain dividends and repurchases.
- The potential recovery of the €31.9 million Belgian tax payment and the outcome of the ongoing Timberland IRS tax examination.