Business context and reporting period
VF Corporation’s unaudited Form 10-Q covers the second quarter and first six months of Fiscal 2023. The quarter ended October 1, 2022; comparisons are with the corresponding 2021 fiscal periods. Amounts below are in U.S. dollars. VF reports Outdoor, Active and Work segments; Occupational Workwear was sold in June 2021 and is presented as discontinued operations.
Financial performance and liquidity
| Metric | Q2 FY23 | Prior-year quarter | Six months FY23 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $3.081bn | $3.198bn | $5.342bn | $5.393bn |
| Gross margin | 51.4% | 53.7% | 52.4% | 54.8% |
| Operating income (loss) | ($90.8m) | $558.5m | ($27.5m) | $761.4m |
| Continuing-operations net income (loss) | ($118.4m) | $464.1m | ($174.4m) | $618.0m |
| Diluted continuing-operations EPS | ($0.31) | $1.18 | ($0.45) | $1.57 |
Quarterly revenue declined 4%; foreign exchange reduced revenue by $195m, partly offset by $77m of organic growth. Six-month revenue declined 1%. Q2 gross margin fell 230 basis points, primarily from higher costs and increased discounting and promotions, partly offset by price increases. The $421.9m Supreme goodwill and trademark impairment was a major contributor to the operating loss; it comprised $229.0m of goodwill and $192.9m of indefinite-lived trademark impairment.
Q2 segment revenue/profit: Outdoor $1.555bn/$260.4m; Active $1.260bn/$180.3m; Work $265.2m/$39.5m. Active revenue fell 9% and profit fell 37%; Work revenue fell 11% and profit fell 36%. Outdoor revenue rose 3%, while profit declined 8%.
For the six months, operating cash flow was negative $914m, compared with negative $177m in the prior-year period; management attributed the deterioration principally to working-capital use and lower earnings. Inventory was $2.750bn at October 1, up from $1.419bn at fiscal year-end, reflecting seasonality, increased in-transit inventory and softer demand. Cash and equivalents were $553m. Short-term borrowings were $1.693bn, current long-term debt $832m and long-term debt $3.526bn. Reported working capital was $342m, the current ratio 1.1:1 and net debt to total capital 68.9%.
Material changes, outlook and risks
- Management described inflation, weaker consumer sentiment, elevated inventories, promotional activity and a strong U.S. dollar as near-term challenges. COVID-19 disruption, particularly in China, continued to affect demand and operations; Russia and Ukraine represented less than 1% of Fiscal 2022 revenue.
- VF reported no specific full-year revenue or earnings guidance in the supplied filing text. It said operating results for the interim period are not necessarily indicative of the full fiscal year and stated it believes it has sufficient liquidity and flexibility to meet obligations.
- After quarter-end, VF drew $800m under a delayed-draw term loan on October 18, 2022, with maturity no later than December 30, 2024. On October 19 it paid $875.7m for disputed taxes and interest related to the Timberland acquisition tax case, recording the payment as a tax receivable based on its position. VF is appealing the adverse Tax Court decision; if upheld, the receivable may not be recovered and the estimated net tax-expense impact could be up to $730m.
- Credit outlooks had been revised to negative; S&P downgraded VF’s long-term debt rating to BBB+ on October 31. VF reported covenant compliance at quarter-end. The company also reinstated its supplier finance program; $201.2m payable through the program was included in accounts payable at quarter-end. Extended supplier payment terms are expected to benefit FY23 operating cash flow, but management did not expect a material long-term liquidity impact.
- Other unusual items included a $91.8m pension settlement charge in the first six months and $51.9m of restructuring charges. Future Supreme impairment remains possible if forecasts, foreign exchange, discount rates or valuation multiples worsen. The filing also identifies consumer demand, costs, supply chains, currency and geopolitical conditions as risks.
Most important facts for investors to verify
- Inventory levels, sell-through and discounting, particularly given the sharp inventory build and operating cash outflow.
- Progress in Active and Work, including Vans and Dickies, and whether Outdoor growth can sustain segment profitability.
- The cash, debt and liquidity effects of the $875.7m tax payment and $800m term-loan draw, along with upcoming debt maturities and credit-rating developments.
- Developments in the Timberland tax appeal and potential recoverability of the tax receivable.
- Supreme’s performance and the assumptions supporting its valuation after the impairment; the filing does not provide clear numeric full-year guidance.