VF Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended June 29, 2019. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
VF completed the spin-off of its Jeans business, including Wrangler, Lee, Rock & Republic and VF Outlet, on May 22, 2019. The business is presented as discontinued operations for both periods. Continuing operations comprise Outdoor, Active and Work segments.
Key financial metrics
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net revenue, continuing operations | $2,271.5 | $2,137.1 |
| Operating income | $133.3 | $113.1 |
| Income from continuing operations | $97.2 | $61.4 |
| Diluted EPS from continuing operations | $0.24 | $0.15 |
| Total net income, including discontinued operations | $49.2 | $160.4 |
| Gross margin | 54.4% | 53.0% |
| Operating margin | 5.9% | 5.3% |
- Revenue increased 6%. The filing attributes the change to $234.6 million of organic growth and $11.8 million from Altra, offset by $61.3 million from dispositions and $50.7 million of unfavorable currency impact.
- Direct-to-consumer revenue rose 14%; e-commerce revenue rose 24%. Direct-to-consumer represented 39% of revenue.
- Continuing-operations operating cash flow was negative $79.4 million, versus positive $99.3 million. Total operating cash flow, including discontinued operations, was negative $66.2 million, versus positive $277.1 million.
- Investing cash flow from continuing operations was positive $1.7 million, versus negative $111.7 million. Financing cash flow was positive $123.9 million, versus negative $344.0 million; it included $906.1 million received from Kontoor Brands, net of cash transferred, and repayment of short-term borrowings.
- Cash and equivalents were $606.1 million. Short-term borrowings were $67.7 million and long-term debt was $2,126.8 million. The company reported $1,370.5 million of present-value operating and finance lease liabilities.
- Working capital was $2,043.7 million and the current ratio was 2.0 to 1. Debt to total capital was 46.2%, including operating lease liabilities; excluding those liabilities, it was 34.6%.
Changes versus the prior-year quarter
- Active revenue increased 8% and segment profit increased 14%; Vans revenue grew 20%. Outdoor revenue increased 7%, while the segment remained loss-making. Work revenue was approximately flat and segment profit declined 4%.
- Gross margin expanded 140 basis points, attributed mainly to business mix and favorable foreign-currency transaction effects. SG&A increased to 48.5% of revenue from 47.7%, reflecting headquarters and brand relocation costs and strategic decisions, partly offset by expense leverage and an approximately $11 million real-estate sale gain.
- Net interest expense declined $9.9 million, primarily reflecting lower short-term borrowings. The effective tax rate rose to 21.5% from 10.8%; the prior-year rate benefited from discrete tax items.
- Total net income fell despite higher continuing-operations income, principally because discontinued operations reported a $48.0 million loss versus $99.0 million of income. The current-period Jeans results included $59.5 million of separation and related expenses.
Outlook, commentary and risks
- The filing provides no specific forward revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of the full fiscal year. Management states that cash, operating cash generation, credit facilities and borrowing capacity are expected to provide adequate liquidity for obligations, capital expenditures, planned dividends and investment opportunities.
- Management notes that operating cash flow is typically lower in the first half of the calendar year as inventory builds ahead of peak sales periods.
- The company reported approximately $2.2 billion available under its $2.25 billion global credit facility at quarter-end. It paid $202.5 million in dividends and made no open-market share repurchases during the quarter.
- Unusual items include the $11.3 million sale-leaseback gain, $12.0 million of incremental stock-compensation cost recognized in connection with the spin-off, and adoption of lease accounting that added right-of-use assets and lease liabilities to the balance sheet.
- Tax contingencies include an IRS dispute over the timing of income inclusion related to the 2011 Timberland acquisition. If the IRS prevails, the filing estimates up to $137 million of net interest expense and approximately $136 million of additional tax expense. The company also disclosed unresolved Belgium tax litigation and said the Swiss Tax Act is expected to have a material impact on tax expense, with the effect still under evaluation.
- Highlighted risks include the effects of the Jeans spin-off, potential loss of synergies, headquarters relocation disruption and costs, currency movements, consumer demand, competition, supply-chain and data-security issues, and tax, legal and geopolitical developments.
Investor facts to verify
- How recurring operating performance compares after separating organic growth from currency, acquisitions, divestitures and spin-off-related costs.
- Whether Active and Outdoor growth, including Vans and direct-to-consumer performance, can be sustained while managing investment and product-cost pressures.
- Working-capital needs and cash-flow conversion through the seasonally stronger sales periods.
- The effect of lease liabilities on leverage and liquidity, and the commitments from distribution-center leases not yet commenced.
- Developments in the IRS, Belgium and Swiss tax matters and the ultimate costs of the spin-off and headquarters relocation.