V.F. Corporation — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended March 28, 2020 (52 weeks). This summary distinguishes full-year results from the fourth quarter. Unless noted, financial results are from continuing operations; the Jeans business and Occupational Workwear business are reported as discontinued operations.
Business context
VF is a global apparel, footwear and accessories company with Outdoor, Active and Work reportable segments. Its largest brands include Vans, The North Face, Timberland and Dickies. Direct-to-consumer sales represented 41% of fiscal 2020 revenue; international markets represented 47%.
Key financial results
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Revenue | $10.49 billion | $10.27 billion |
| Gross margin | 55.3% | 54.6% |
| Operating income / margin | $927.8 million / 8.8% | $1.19 billion / 11.6% |
| Continuing-operations income | $629.1 million | $870.4 million |
| Diluted EPS from continuing operations | $1.57 | $2.17 |
| Operating cash flow from continuing operations | $800.4 million | $1.24 billion |
| Cash and equivalents at year-end | $1.37 billion | $402.2 million |
| Working capital / current ratio | $1.52 billion / 1.5 | $1.09 billion / 1.5 |
| Debt to total capital | 60.8% including operating lease liabilities | 39.3% |
Gross margin improved mainly from a shift toward higher-margin businesses and favorable foreign-currency transaction effects. Operating margin fell because of a $323.2 million noncash Timberland goodwill impairment, increased strategic investment and weaker fourth-quarter results. Fiscal 2020 continuing-operations income also included a $93.6 million Swiss tax-reform benefit, a $59.8 million debt-extinguishment loss, pension settlement charges and a $48.3 million currency-translation charge related to South American entity liquidations.
Fiscal 2020 segment revenue and profit were: Active, $4.92 billion and $1.14 billion; Outdoor, $4.64 billion and $516.1 million; Work, $886.4 million and $50.4 million. Active revenue grew 4%, largely reflecting Vans; Outdoor revenue was flat; Work revenue was flat, while Work segment profit declined 25%. The Occupational Workwear business was moved to discontinued operations, so the continuing Work segment does not represent the full historical Work business.
Fourth quarter: Revenue was $2.10 billion, down 11% year over year. Operating loss was $256.8 million and loss from continuing operations was $483.1 million, compared with operating income of $126.4 million and continuing-operations income of $75.6 million in the prior-year quarter. The quarter included the Timberland impairment and was materially affected by COVID-19.
Cash, debt and capital allocation
At March 28, 2020, short-term borrowings were $1.23 billion and long-term debt was $2.61 billion; the filing describes total debt of approximately $3.8 billion. Operating lease liabilities were an additional $1.37 billion. VF reported $1.52 billion of working capital and a 1.5 current ratio. Fiscal 2020 cash provided by financing activities was $309.7 million, reflecting borrowing and debt issuance, the Kontoor Brands-related cash transfer, dividends and repurchases.
VF paid $748.7 million in dividends and repurchased $1.0 billion of shares during the year. In response to the pandemic, it paused share repurchases. After year-end it issued $3.0 billion of senior notes, used part of the proceeds to repay $2.0 billion drawn on its revolving facility, and reported approximately $3.0 billion of cash and $2.2 billion of remaining revolver availability after those transactions. The board declared a $0.48-per-share dividend payable June 22, 2020; management said it intended to maintain regular dividends, subject to board approval.
Material changes and unusual items
- VF completed the spin-off of its Jeans business, now Kontoor Brands, on May 22, 2019. The transaction generated $906.1 million in cash to VF, net of cash transferred, and the Jeans business is presented as discontinued operations.
- VF classified Occupational Workwear as held for sale and discontinued operations in the fourth quarter and expected to divest it within 12 months. Its fiscal 2020 discontinued-operations income was $91.2 million, including $11.1 million of goodwill and intangible-asset impairment charges.
- Timberland’s fourth-quarter impairment reduced goodwill by $323.2 million. VF reported remaining Timberland reporting-unit goodwill of $409.1 million at year-end; further impairment is possible if projected recovery does not occur.
- VF issued €1.0 billion of euro-denominated notes in February 2020, including a 2028 green bond, and redeemed its $500 million 2021 notes in March. In April, credit-rating agencies affirmed ratings but changed their outlooks to negative.
- VF adopted lease accounting requirements in fiscal 2020, recognizing operating lease right-of-use assets and liabilities; prior-year balance-sheet figures were not restated.
Outlook, commentary and risks
Management said COVID-19 had significantly harmed fourth-quarter results and created substantial uncertainty. It expected fiscal 2021 first-quarter revenue to decline approximately 50% year over year, with a significant negative effect on full-year revenue, income and cash flow. Store closures, reduced traffic after reopening and a highly promotional market were expected to pressure demand and margins. The filing provides no clear full-year fiscal 2021 earnings or revenue forecast.
VF said it believed available cash, operating cash flow and financing capacity were sufficient to meet obligations, but cautioned that the pandemic’s duration and severity could make mitigation measures inadequate. Key risks include consumer-demand and retail disruption, inventory and markdown exposure, supplier and logistics interruptions, foreign-exchange movements, trade and tariff changes, customer credit risk, technology and data-security risks, and potential additional impairment charges.
Contingencies include an IRS dispute over the timing of income associated with the 2011 Timberland acquisition. VF stated it did not expect a material adverse outcome; if the IRS prevailed, the filing estimates up to $158 million of net interest expense and approximately $136 million of additional tax expense. The Belgium tax-ruling matter also remained unresolved. VF reported no pending material legal proceedings other than routine litigation.
Most important facts for investors to verify
- Actual fiscal 2021 sales, margins and cash generation against management’s approximately 50% first-quarter revenue-decline expectation.
- Liquidity, debt levels, covenant headroom and the effect of post-year-end note issuance and revolver repayment.
- Timberland and other brand performance relative to impairment assumptions, including the risk of further write-downs.
- Progress, timing and proceeds from the planned Occupational Workwear divestiture, and the resulting continuing-business profile.
- Dividend sustainability and the timing of any resumption of share repurchases amid pandemic-related cash needs.
- Developments in the IRS and Belgium tax matters and any resulting cash-tax exposure.