VF Corporation Reports Balanced Performance In Q2, Revises Full Year Fiscal 2023 Outlook

VF Corporation (NYSE: VFC) has announced financial results for its second quarter (Q2'FY23) ended October 1, 2022.

Q2'FY23 Financial Highlights

• Revenue $3.1 billion, declined 4% (up 2% in constant dollars) with big four brands down 5% (up 1% in constant dollars) and the balance of the portfolio up 4% (up 13% in constant dollars)
  • The North Face® revenue $1.0 billion, up 8% (up 14% in constant dollars)
  • Vans® revenue $1.0 billion, down 13% (down 8% in constant dollars)
• Gross margin 51.4%, down 230 basis points; Adjusted gross margin 51.5%, down 240 basis points
• Operating margin (2.9)%, down 2,040 basis points; Adjusted operating margin 12.3%, down 440 basis points
• Earnings (loss) per share (EPS) $(0.31), down 126%; Adjusted EPS $0.73, down 34%
• Return of $194 million to shareholders through cash dividends

H1'FY23 Financial Highlights

• Revenue $5.3 billion, down 1% (up 4% in constant dollars) with big four brands down 2% (up 3% in constant dollars) and the balance of the portfolio increasing 6% (up 14% in constant dollars)
  • The North Face® revenue $1.4 billion, up 15% (up 21% in constant dollars)
  • Vans® revenue $1.9 billion, down 10% (down 6% in constant dollars)
• Gross margin 52.4%, down 240 basis points; Adjusted gross margin 52.6%, down 250 basis points
• Operating margin (0.5)%, down 1,460 basis points; Adjusted operating margin 8.5%, down 420 basis points
• Earnings (loss) per share $(0.45), down 129%; Adjusted EPS $0.81, down 41%
• Return of $388 million to shareholders through cash dividends

FY23 Financial Outlook

• VF is maintaining its constant dollar revenue outlook but revising its earnings outlook to reflect increased negative impacts from foreign currency fluctuations as well as heightened inventory levels and increased promotional activity in the marketplace
• Total VF revenue up 5% to 6% in constant dollars, unchanged from the previous outlook
• Adjusted gross margin down 100 to 150 basis points, compared to the previous outlook of down 50 basis points
• Adjusted operating margin 11.0%, compared to the previous outlook of approximately 12.0%
• Adjusted EPS is now expected to be in the range of $2.40 to $2.50, versus $3.18 in the prior year and compared to the previous outlook of $2.60 to $2.70
• Adjusted cash flow from operations at least $0.9 billion, compared to the previous outlook of $1.0 billion; Capital expenditures approximately $230 million versus the previous outlook of $240 million
  • Excludes the impact of an $876 million payment VF made on October 19, 2022 to the Internal Revenue Service (IRS) for the dispute regarding the timing of income inclusion associated with VF's acquisition of Timberland in 2011, as previously disclosed
• VF's FY23 outlook assumes the following:
  • No additional significant COVID-19 related lockdowns in any key commercial or production regions
  • No significant worsening in global inflation rates and consumer sentiment

Steve Rendle, Chairman, President and CEO of VF said:

"VF’s balanced performance in Q2 demonstrates the resiliency of our brand portfolio against a more disrupted global marketplace. Our purpose built portfolio of iconic, deeply-loved brands continues to benefit from tailwinds in the outdoor, active, streetwear and workwear spaces while we also actively address the near-term challenges at Vans, the ongoing COVID-related disruption in China, and the broader macro-economic and geopolitical headwinds, which have created tremendous uncertainty for all businesses and consumers.

In the near term, in light of the challenging environment, we are acting proactively to generate increased revenue through the balance of the year while protecting profitability by tightly controlling all non-strategic spend. I am confident in our ability to deliver on our targets and to maximize the potential of all our brands when the environment improves. We will remain focused on the things we can control and will continue leveraging VF’s unique business model and competitive strengths to drive consistent, sustainable and profitable growth."

All per share amounts are presented on a diluted basis. This release refers to “reported” and “constant dollar” amounts, terms that are described under the heading below “Constant Currency - Excluding the Impact of Foreign Currency.” Unless otherwise noted, “reported” and “constant dollar” amounts are the same. This release also refers to “continuing” and “discontinued” operations amounts, which are concepts described under the heading below “Discontinued Operations - Occupational Workwear Business.” Unless otherwise noted, results presented are based on continuing operations. This release also refers to “adjusted” amounts, a term that is described under the heading below “Adjusted Amounts - Excluding Transaction and Deal Related Activities, Costs Related to Specified Strategic Business Decisions, Noncash Impairment Charges and Pension Settlement Charge.” Unless otherwise noted, “reported” and “adjusted” amounts are the same.

Second Quarter Fiscal 2023 Income Statement Review

• Revenue decreased 4% (up 2% in constant dollars) to $3.1 billion driven by increases in the EMEA and APAC regions partially offset by lower sales in the Americas region.
• Gross margin decreased 230 basis points to 51.4%, primarily driven by higher costs and promotional activity partially offset by price increases. On an adjusted basis, gross margin decreased 240 basis points to 51.5%.
• Operating income (loss) on a reported basis was $(90.8) million. Operating margin on a reported basis was (2.9)%. On an adjusted basis, operating income decreased 29% (down 22% in constant dollars) to $378.7 million. Adjusted operating margin decreased 440 basis points to 12.3%.
• Earnings (loss) per share was $(0.31) on a reported basis. On an adjusted basis, earnings per share decreased 34% (down 27% in constant dollars) to $0.73.

COVID-19 Update

To help mitigate the spread of COVID-19 and in response to public health advisories and governmental actions and regulations, VF has modified its business practices in certain locations, including the temporary closing of offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures including social distancing and quarantines.

The majority of VF's supply chain is currently operational. Raw material suppliers in China are currently operational, though the 8-week lockdown in China during VF's first quarter resulted in logistics challenges which continue to contribute to ongoing product delays. Suppliers are complying with local public health advisories and governmental restrictions. Most final product manufacturing and assembly suppliers are largely back to normal operating levels. VF is working with its suppliers to minimize disruption and is employing expedited freight strategically as needed. VF's distribution centers are operational in accordance with local government guidelines while maintaining enhanced health and safety protocols.

In North America, no stores were closed during the second quarter. Currently, all stores are open.

In the EMEA region, no stores were closed during the second quarter due to COVID-19. Currently, all stores are open.

In the APAC region, including Mainland China, no stores were closed at the beginning of the second quarter with a peak of 7% of stores (including partner doors) closed and an average of 3% of stores closed throughout the quarter. At the end of the second quarter, 4% of stores were closed and, as of today, 7% of stores are closed.

VF is continuing to monitor the evolution of COVID-19 globally and will comply with guidance from government entities and public health authorities to prioritize the health and well-being of its employees, customers, trade partners and consumers.

Balance Sheet Highlights

Inventories were up 88% compared with the same period last year, partially driven by an increase of in-transit inventory of approximately $510 million as VF modified terms with the majority of its suppliers in the first quarter of fiscal 2023 to take ownership of inventory at point of shipment rather than destination. Accounts payable increased 91%, which was largely driven by the increase of in-transit inventory. VF returned approximately $194 million of cash to shareholders through dividends during the quarter.

Dividend Declared

VF’s Board of Directors declared a quarterly dividend of $0.51 per share, reflecting a 2% increase over the previous quarter’s dividend. This dividend will be payable on December 20, 2022, to shareholders of record at the close of business on December 12, 2022. Subject to approval by its Board of Directors, VF intends to continue to pay its regularly scheduled cash dividend