VF Corporation — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended June 27, 2020, compared with the three months ended June 29, 2019. Fiscal 2021 runs through April 3, 2021. Unless noted, results below are for continuing operations; Occupational Workwear and the previously spun-off Jeans business are presented as discontinued operations.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net revenues | $1.076 billion | $2.051 billion |
| Gross margin | 52.9% | 56.3% |
| Operating income (loss) | $(246.8) million | $96.0 million |
| Continuing-operations net income (loss) | $(277.7) million | $65.3 million |
| Diluted EPS, continuing operations | $(0.71) | $0.16 |
| Cash used by operating activities, continuing operations | $10.5 million | $76.2 million |
Consolidated net loss was $285.6 million, including a $7.9 million after-tax loss from discontinued operations. SG&A was $816.2 million (75.8% of revenue), versus $1.058 billion (51.6%) in the prior-year quarter. Net interest expense was $27.9 million versus $15.6 million. The effective tax rate was 11.2%, versus 24.0%.
At June 27, 2020, cash and equivalents were $2.145 billion and short-term investments were $700 million. Current assets were $6.261 billion and current liabilities $1.715 billion; VF reported a 3.5-to-1 current ratio. Long-term debt was $5.610 billion and short-term borrowings $19.3 million. The company-reported net debt to total capital ratio was 63.1%, a measure that includes operating lease liabilities and nets unrestricted cash.
Continuing-operations investing cash outflow was $783.2 million, including $700 million of short-term investment purchases; capital expenditures were $69.2 million. Financing provided $1.563 billion, including proceeds from a $3.0 billion senior-notes issuance, partly offset by debt repayments and $186.7 million of dividends. The quarter’s consolidated operating cash flow was a $3.2 million outflow.
Material changes and business trends
- Revenue fell 48% year over year, primarily due to COVID-19 disruption; foreign currency reduced revenue growth by 1 percentage point. Wholesale and direct-to-consumer revenue both declined.
- By segment, Outdoor revenue fell 44% to $341.2 million and its segment loss widened to $160.7 million; Active revenue fell 54% to $571.3 million, with $7.1 million segment profit; Work revenue fell 19% to $162.4 million and recorded an $11.4 million segment loss.
- Direct-to-consumer revenue decreased 37%, while e-commerce revenue increased 78%. Direct-to-consumer represented 51% of revenue, compared with 42% a year earlier. International revenue declined 39%; Greater China revenue was flat, including a 3% unfavorable currency impact.
- Gross margin contracted 340 basis points, mainly from increased promotions to clear excess inventory, partly offset by favorable business and channel mix. SG&A dollars declined due to cost controls and government relief, but rose sharply as a percentage of sales because of lower revenue.
- Other expense included a $42.4 million charge from releasing currency translation balances following the substantial liquidation of foreign entities in parts of South America. Restructuring charges were $22.5 million, compared with $4.3 million a year earlier.
Outlook, risks and contingencies
- Management expected continued significant COVID-19 disruption in Fiscal 2021 and forecast second-quarter revenue to decline by less than 25% versus the prior-year quarter. The filing did not provide full-year revenue or earnings guidance. Management also expected a significant negative effect on Fiscal 2021 cash flows.
- VF reported that store reopenings remained vulnerable to renewed closures; approximately 120 North American stores had temporarily reclosed after quarter-end. Supply-chain interruptions, weak consumer demand, promotional pressure and elevated inventory were ongoing concerns.
- Management said liquidity was sufficient to meet obligations, citing approximately $2.8 billion of cash and short-term investments and about $2.2 billion available under the revolving facility, subject to restrictions. The amended credit agreement requires at least $750 million of minimum liquidity; VF reported covenant compliance.
- VF paused share repurchases and said it intended, subject to board approval, to continue its regular dividend; it was not then contemplating suspension. The board subsequently declared a $0.48-per-share dividend payable September 21, 2020.
- The Occupational Workwear business was classified as held for sale and discontinued operations; VF expected to divest it during Fiscal 2021. Its reported Q1 revenue was $125.3 million, included with discontinued-operation information.
- Credit rating outlooks were negative at both S&P and Moody’s. In an IRS dispute over timing of income inclusion related to the 2011 Timberland acquisition, VF said that if the IRS prevailed, net interest expense could be up to $165 million and tax expense could increase by approximately $136 million; management did not expect a material adverse effect. The EU/Belgian excess-profits tax matter also remained unresolved.
- COVID-19 relief under the CARES Act and other government programs reduced SG&A by $50.4 million in the quarter. The duration and severity of the pandemic, including possible renewed restrictions, remained uncertain.
Most important facts for investors to verify
- Whether revenue, margins and cash generation recover as stores reopen, and whether the stated second-quarter revenue outlook is achieved.
- Inventory levels, promotional activity and the pace of wholesale orders, particularly in Outdoor and Active.
- Liquidity, debt servicing capacity, covenant headroom and the sustainability of the dividend amid the company-reported 63.1% net debt to total capital ratio.
- Progress, timing and financial effects of the Occupational Workwear divestiture.
- Potential outcomes of the IRS and EU/Belgian tax matters, and the continuing impact of COVID-19-related relief and restructuring charges.