V.F. Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (52 weeks); comparisons are with FY 2015, also 52 weeks. Unless stated otherwise, financial results below are for continuing operations. VF sold its Contemporary Brands coalition in August 2016; its results are reported as discontinued operations.
Business context
VF designs, sources, markets and distributes apparel, footwear and related products through more than 30 brands. Its four continuing reportable coalitions are Outdoor & Action Sports, Jeanswear, Imagewear and Sportswear. Direct-to-consumer operations accounted for 28% of revenue, up from 26% in 2015; international markets accounted for 38%. The company said its long-term priorities include product innovation, consumer engagement, direct-to-consumer growth and geographic expansion.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $12.019 billion | $12.033 billion |
| Gross margin | 48.4% | 48.2% |
| Operating income | $1.499 billion | $1.788 billion |
| Operating margin | 12.5% | 14.9% |
| Income from continuing operations | $1.173 billion | $1.315 billion |
| Diluted EPS from continuing operations | $2.78 | $3.04 |
| Net income, including discontinued operations | $1.074 billion | $1.232 billion |
| Cash from operating activities | $1.478 billion | $1.203 billion |
- Revenue was essentially flat. Operations contributed $81 million, offset by a $95 million unfavorable foreign-currency impact.
- Gross margin improved 20 basis points, reflecting pricing, lower product costs and favorable business mix, partly offset by currency and restructuring.
- Operating margin fell 240 basis points. VF attributed the decline to special charges, foreign exchange and investments in growth initiatives.
- The effective tax rate was 17.2%, versus 23.0% in 2015; the 2016 rate included $44.5 million of net discrete tax benefits. Net interest expense was $85.6 million.
- Coalition revenue and profit were mixed: Outdoor & Action Sports revenue rose 1.8% while profit declined 3.2%; Jeanswear revenue fell 2.0% and profit 8.1%; Imagewear revenue rose 2.0% and profit 13.8%; Sportswear revenue fell 15.6% and profit 53.5%.
Liquidity, debt and capital allocation
- At year-end, cash and equivalents were $1.228 billion; working capital was $2.508 billion and the current ratio was 2.4, compared with 2.1 in 2015.
- Total borrowings were approximately $2.319 billion, including $26 million of short-term borrowings, $254 million of current long-term debt and $2.039 billion of long-term debt. Debt to total capital was 31.9%, up from 25.6%.
- Operating cash flow increased $275 million year over year, principally because a $250 million discretionary U.S. pension contribution made in 2015 did not recur, alongside lower working-capital cash use.
- Capital expenditures were $175.8 million; software purchases were $44.2 million. Investing cash outflow was $112.4 million, including $116.0 million of proceeds from the Contemporary Brands sale.
- VF issued €850 million of 0.625% notes due 2023, using proceeds partly to repay commercial paper. It had no commercial paper outstanding at year-end and $2.23 billion available under its $2.25 billion revolving facility, which expires in April 2020.
- VF repurchased $1.0 billion of stock and paid $636 million in dividends. The annual dividend was $1.53 per share; the indicated 2017 rate was $1.68.
Material changes, outlook and risks
- Special and unusual items: FY 2016 included $79.6 million of goodwill and intangible-asset impairment, $58.1 million of restructuring charges and a $50.9 million pension settlement charge. Together, these reduced continuing-operations after-tax income and diluted EPS by $139.2 million and $0.33, respectively.
- Portfolio actions: VF completed the Contemporary Brands sale for $116.9 million and recorded a $104.4 million after-tax disposal loss. Management decided to merge lucy into The North Face during 2017, writing off lucy’s remaining goodwill and trademark assets.
- Restructuring: The company expects substantially all 2016 restructuring activities to be completed by the end of 2017 and said it does not expect additional costs related to those actions.
- Licensed Sports Group: VF is reviewing strategic alternatives for the business. Major League Baseball will not renew the Majestic uniform license after the 2019 season; VF’s impairment analysis found no impairment at year-end, but results may differ from forecasts.
- Management outlook: VF expects direct-to-consumer revenue to continue growing faster than company-wide revenue. It forecast a 2017 annual tax rate of approximately 20% and pension expense of approximately $39.3 million. The filing provides no clear consolidated revenue or EPS guidance.
- Tax contingency: In January 2017, VF paid €31.9 million ($33.9 million) following a Belgian tax assessment concerning prior excess-profit benefits. VF expects to record a receivable based on its appeals; if the matter is resolved adversely, the amount may not be recovered.
- Principal risks: Consumer-spending and retail-channel weakness, changing fashion and weather, competition and pricing pressure, inventory forecasting, foreign-currency exposure, reliance on wholesale customers and global suppliers, cybersecurity, and potential impairment of goodwill or trademarks. The ten largest customers represented 21% of revenue; the largest represented 9%.
Most important facts for investors to verify
- Whether core-brand and direct-to-consumer growth can offset softness in wholesale, Jeanswear and Sportswear, and whether margins recover after restructuring and investment spending.
- Performance and valuation assumptions for Nautica, Reef and Licensed Sports Group, including the financial effect of losing the MLB license after 2019.
- Resolution and recoverability of the €31.9 million Belgian tax payment, alongside the company’s broader tax exposures.
- Debt repayment and cash-return capacity, including the 2017 $250 million note maturity, dividends, repurchases and pension funding needs.
- Whether the 2016 special charges are genuinely nonrecurring and whether the announced restructuring delivers the expected cost and profit improvements.