VF Corp. Loses Appeal On Tax Dispute Tied to Timberland Acquisition

VF Corp. reported in a regulatory filing that The U.S. Court of Appeals for the First Circuit decided in favor of the Internal Revenue Service in a tax issue connected to its Timberland acquisition in September 2011.

In January 2022, The U.S. Tax Court ruled that VF Corp. owed nearly $505 million more in taxes after it underreported income tied to transferring intangible property. The Court found that the LLC’s outbound transfer of intangible property to a foreign holding company resulted in “immediately recognizable ordinary income.”

VF Corp. wrote in its regulatory filing with the U.S. Securities and Exchange Commission, “The company is disappointed with The Appeals Court’s decision, as it believes the decision of The U.S. Tax Court was in error based on the technical merits.”

VF Corp. said that as disclosed in the company’s most recent 10-Q for the fiscal first quarter ended July 1, 2023, on October 19, 2022, the company paid $875.7 million related to the disputed 2011 taxes with interest, which was recorded as an income tax receivable. As a result of The Appeals Court’s ruling, and as previously disclosed, the net impact to VF’s tax expense was estimated to be up to $730.0 million, plus the reversal of accrued interest income of approximately $19.6 million.

VF said the estimated non-cash increase in tax expense will be made during the second quarter of fiscal 2024, and the decision had no impact on the company’s cash and debt outlook for its fiscal year ended March.

In an analyst note on Monday, Jim Duffy, who covers VF Corp. for Stifel, called The Appeals Court’s ruling “disappointing,” given that the company could have used the funds to accelerate efforts to reduce debt. He wrote, “We had considered the potential cash recapture to represent 0.5x windfall to net leverage.”

Duffy said the tax issue impacts GAAP EPS by $1.86 for VF’s current fiscal year.

Stifel’s FY24 GAAP EPS estimate was reduced to 18 cents a share from $2.05, while Stifel’s adjusted EPS estimate remains $2.05.

Duffy reiterated his “Buy” rating on VF Corp. at a $30 price target. He wrote, “Ultimately, we believe risk/reward remains favorable for VFC, with the case for a turnaround under new leadership to improve financial leverage (we estimate 3.5x net leverage by FY24 year-end), return the Vans brand to growth (we conservatively estimate F1Q25), and return to an M-HSD revenue growth cadence with sustainable profitability improvement.”