VF Corporation Reports Third Quarter Earnings, Reaffirms Full Year Fiscal 2023 EPS Outlook

VF Corporation (NYSE: VFC) has announced financial results for its third quarter (Q3'FY23) ended December 31, 2022 and a series of actions to accelerate the path to its target leverage ratio and sharpen its focus, including declaring a quarterly per share dividend of $0.30, reflecting a 41% decrease over the previous quarter’s dividend.

Q3'FY23 Financial Highlights

• Revenue down 3% (up 3% in constant dollars) to $3.5 billion
• Earnings per share (EPS) down 1% to $1.31; Adjusted EPS down 17% to $1.12

Benno Dorer, Interim President and CEO, said: “We are pleased to reaffirm the recently communicated full year 2023 EPS outlook with revenue growth at approximately 3%, after navigating an increasingly challenging fiscal Q3. Spending the last few weeks with VF's dedicated and talented teams around the world has reinforced my belief in the tremendous opportunity ahead for our company. We are committed to improving execution through a sharpened focus on the biggest consumer opportunities and enhanced operational performance. Consistent with this objective, we are shifting resource priorities across the Company, including by reducing the dividend, exploring the sale of non-core assets, cutting costs and eliminating non-strategic spend, while enhancing the focus on the consumer through targeted investments. We are confident these actions will enable a return to profitable and sustainable growth and, with that, strong shareholder value creation.”

Q3’FY23 Operating Highlights

• EMEA region down 2% and up 10% in constant dollars, the seventh consecutive quarter of double-digit growth in constant dollars
• Asia Pacific region down 7% and up 4% in constant dollars, reflecting a sequential improvement across the region and in Greater China, where sales were down 11% and down 1% in constant dollars, and continued strong growth in the rest of Asia
• Standout performance in the outdoor brands, led by The North Face® up 7% and up 13% in constant dollars, with Timberland® flat and up 6% in constant dollars
• Vans® down 13% and down 9% in constant dollars, reflecting positive performances in Europe and Asia outside of Greater China, while the Americas remained negative
• Balanced performance across both Direct to Consumer and Wholesale channels
• Supply chain challenges remained persistent in the quarter and are being addressed, with actions in place to return to full customer service at a normalized cost

FY23 Outlook*

• Total VF revenue up approximately 3% in constant dollars, within the previous outlook range
  • Vans® revenue is expected to decline by high single digits % in constant dollars, compared to the previous outlook of down mid-single digits %
  • The North Face® is expected to be up by at least 14% in constant dollars, compared to the previous outlook of up at least 12%
• Adjusted gross margin down approximately 200 basis points, compared to the previous outlook of down 100 to 150 basis points
• Adjusted operating margin approximately 9.5%, compared to the previous outlook of approximately 11.0%
• Adjusted EPS $2.05 to $2.15, within the previous outlook of $2.00 to $2.20
• Adjusted cash flow from operations** approximately $0.7 billion, compared to the previous outlook of at least $0.9 billion; Capital expenditures approximately $200 million versus the previous outlook of $230 million
• Inventory is expected to reduce by approximately $300 million during Q4'FY23

FY24 Expectations*

• Total VF revenue up by at least low-single digit % in constant dollars
• Gross and operating margin expansion
• Operating earnings to grow by double-digits
• Operating cash flow to grow faster than earnings

Actions to Accelerate Path to Target Leverage Ratio and Sharpen the Company's Focus

The Company's capital deployment priorities in the near to medium term are focused on optimizing and driving the performance of the portfolio, reducing leverage and returning capital to shareholders. VF is also evaluating and deploying a series of strategic actions to strengthen the Company's financial position and sharpen focus on its greatest value creation opportunities, including:

• Rightsizing the dividend payout to accelerate the return to the Company's target leverage ratio and provide additional financial flexibility, positioning VF to navigate the current macro-economic challenges while continuing to make investments to advance its strategy. As a result, VF's next quarterly per share payment will reduce to $0.30 from $0.51 per share. The Company expects to grow future dividends in line with earnings
• Continuing to pursue the portfolio optimization agenda. The Company is commencing a review of strategic alternatives for its Global Packs business, consisting of the Kipling®, Eastpak®, and JanSport® brands. While these iconic and profitable businesses are strong contributors of value, VF is committed to ensuring they are optimally positioned to achieve their full potential while enhancing management focus on the Company’s greatest strategic priorities
• Concluding a number of asset sales during H2'FY23, including the sale and leaseback of VF's European headquarters in Stabio, Switzerland
• Reducing working capital and aligning inventories to optimal levels, without compromising brand equity
• Increasing our efforts to reduce costs in order to point resources toward the Company's highest value creation opportunities, including completing the previously announced actions which will deliver approximately $225 million in annualized savings once complete in FY24

Matt Puckett, CFO, said: “As we close FY23 and move into FY24, we have clear plans in place to address the ongoing challenging macro-economic environment in the near term. I am confident the actions we are taking will lead to improved operating performance and will strengthen the Company's financial position, enabling VF to deliver long-term, sustainable and profitable growth.”

* FY23 outlook and FY24 expectations assume no additional significant COVID-19 related lockdowns in any key commercial or production regions and no significant worsening in global inflation rates and consumer sentiment
** Excludes the impact of an $876 million payment VF made on October 19, 2022 to the U.S. Treasury for the dispute regarding the timing of income inclusion associated with VF's acquisition of Timberland in 2011, as previously disclosed

Q3'FY23 Income Statement Review

• Revenue $3.5 billion, down 3% (up 3% in constant dollars) with the big four brands down 3% (up 2% in constant dollars) and the balance of the portfolio down 2% (up 5% in constant dollars)
  • The North Face® revenue $1.3 billion, up 7% (up 13% in constant dollars)
  • Vans® revenue $0.9 billion, down 13% (down 9% in constant dollars)
• Gross margin 54.9%, down 120 basis points; Adjusted gross margin 54.9%, down 140 basis points due primarily to increased promotions
• Operating margin 14.6%, down 410 basis points; Adjusted operating margin 14.9%, down 280 basis points
• Earnings per share (EPS) $1.31, down 1%; Adjusted EPS $1.12, down 17%

Q3'FY23 Balance Sheet Review

• Inventories declined by $158 million during Q3’FY23 and increased by 101% relative to last year; excluding the increase of in-transit inventory of approximately $415 million, the increase was approximately 75% relative to last year, primarily driven by core and excess replenishment inventory
  • VF modified terms with the majority of its suppliers in the first quarter of fiscal 2023 to take ownership of inventory near point of shipment rather than destination
• Accounts payable increased 62%, which was largely driven by the modified terms with the majority of suppliers

Q3’FY23 Shareholder Returns

• Return of $198 million to shareholders through cash dividends
• VF’s Board of Directors declared a quarterly dividend of $0.30 per share, reflecting a 41% decrease from the previous quarter’s dividend. This dividend will be payable on March 21, 2023, to shareholders of record at the close of business on March 10, 2023. Subject to approval by its Board of Directors, VF intends to continue to pay quarterly dividends

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.

VF's supply chain is currently fully operational. Suppliers are complying with local public health advisories and governmental restrictions. Most final product manufacturing and assembly suppliers are back to normal operating levels, though manufacturing and freight lead times remain elevated. 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.

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

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

In the APAC region, including Mainland China, 4% of stores were closed at the beginning of the third quarter with a peak of 27% of stores (including partner doors) closed and an average of 11% of stores closed throughout the quarter. At the end of the third quarter, 3% of stores were closed and, as of today, no 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.