The hits keep coming for Vans and TNF parent VF Corp. as it now has to deal with a rating downgrade from S&P Global Ratings on the heels of a brutal fiscal third-quarter report, staff cuts, declining sales across all major brands, and an activist investor that is seeking seats on the Board of Directors—and more cuts. All this comes as the company’s new CEO, Bracken Darrell, attempts to lead the consolidator of outdoor and street lifestyle brands out of its doldrums and into a new, fresher, skinnier, and more profitable future. 

The problem? Debt. Six billion dollars of debt.

S&P Global Ratings reported last week that VF’s fiscal third-quarter earnings results indicated that credit metrics would continue to deteriorate, leading to leverage nearly 5x in fiscal 2024, and highlighted that (what S&P called) the company’s strongest brand, The North Face, declined 10 percent in the most recent quarter.

“We lowered our issuer credit rating to ‘BBB-‘ from ‘BBB’ and our short-term and commercial paper ratings to ‘A-3’ from ‘A-2’. The outlook is negative,” the report reads.

Then, the kicker. S&P wants a smaller VF to manage the reduction in debt as they see only one way to achieve it in the near term – and that means divestiture of something big. Not an Icebreaker or a Jansport; S&P thinks one or two of the big brands must go. But they also question later in the report if a down-sized VF could continue to drive the broader business with smaller brands.

“We have lowered our forecast and now believe VF will have to sell sizeable brands (that’s brands plural for those in the back row) to meaningfully reduce leverage in the near term,” S&P wrote. 

“The negative outlook indicates that we could lower the ratings if credit metrics do not improve within the next 12 to 24 months, including S&P Global Ratings-adjusted debt to EBITDA below 4x,” the analysts wrote.

In the report, the analysts wrote that they revised their base-case forecast downward to account for recent declines that they expect will continue in VF’s four major brands: The North Face, Vans, Timberland, and Dickies.

“The wholesale channel continues to be a weakness for most peers; however, the severity of VF’s decline (26 percent) is an outlier,” the analysts wrote. “The company’s direct-to-consumer business, a better performing channel for peers, was also down 8 percent, further highlighting brand issues beyond Vans.”

The analysts acknowledged VF’s and Bracken Darrell’s efforts in its Reinvent transformation program but questioned if Vans could turn around by 2025 given its “waning resonance with consumers.”

“We forecast performance will continue to worsen for the remainder of the fiscal year ended in March 2024, making it more challenging to reduce leverage absent significant asset sales,” analysts suggested. “We forecast leverage will peak near 5x in fiscal 2024 as VF incurs expenses to reach the $300 million cost-savings target and revenue continues to decline. We now forecast revenues to decline 10 percent (from our previous expectation of 6 percent) and for EBITDA margin to decline 200 basis points year over year. For fiscal 2025, we assume flat revenue and EBITDA margin improvement from cost savings combined with debt repayment, reducing leverage toward 4x.”

The analysts further noted that Darrell emphasized that asset sales would restore the balance sheet and leverage toward its gross target of 2.5x.

“The company will review its brands to determine if they are in expanding markets, they are market leaders and VF adds value to the business,” the report continues. “Given the forecast reported EBITDA for March 2024 and 2025, we believe the company will need to reduce debt by almost $4 billion to hit the target. This implies sizable asset sales, with the potential for one or two of VF’s big four brands to be sold. While this will allow the company to reduce its high debt burden faster, it also reduces its brand diversity and puts more pressure on the remaining underperforming brands to turn around.”

S&P expects VF to repay about $1.75 billion of its upcoming debt maturities, namely those due in December 2024 and April 2025, with discretionary cash flow (DCF after capital expenditure, dividends, and share repurchases) and some commercial paper borrowings.

“We forecast it will apply about $300 million of DCF in 2024 and $580 million in 2025 to permanent debt reduction,’ the report suggested. “This is prudent because refinancing this debt at higher interest rates will pressure cash flow. At this time, we believe VF remains committed to a conservative financial policy and will abstain from mergers and acquisitions (M&A) and share repurchases with the goal of restoring gross leverage to its target. We note Engaged Capital’s and Legion Partners’ recent activist campaigns are focused on debt reduction and cost savings, which are in line with improving credit quality.”

The analysts suggested that the negative outlook reflected that they could lower the ratings within the next 12 to 24 months.

“We could lower the rating if VF does not restore its core brands to growth or is not successful in divesting certain assets and using proceeds to reduce debt, leading to leverage sustained over 4x,” the analysts wrote, and said this could happen if:

  • Further declines at Vans, or one of its other major brands, fall out of favor due to fashion missteps or changing consumer tastes;
  • A weak macro-environment reduces consumer demand for discretionary products such as apparel and footwear;
  • Continued supply chain challenges result in additional inventory dislocation and seasonal misses, reducing profitability and cash flow; or
  • The company pursues a sizable acquisition whereby S&P views financial policy as more aggressive or the ratings agency does not expect leverage to return below 4x within two years.

“If we lower the issuer credit rating to ‘BB+’, we would also lower our short-term and commercial paper rating to ‘B,'” the analysts suggested.

S&P defines an obligation with a ‘B’ rating as more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor can meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments on the obligation.

The analysts closed with an olive branch, perhaps to push the company but also suggesting there is light at the end of the tunnel.

“We could revise the outlook to stable if we expect VF will restore leverage below 4x, where we would expect it to operate under most conditions,” said the analysts, and suggested this could happen if the company:

  • Continues to prioritize debt repayment over shareholder returns and uses proceeds from asset sales to reduce debt permanently;
  • Stabilizes performance of Vans, one of its largest brands, and returns to growth; and
  • Outperforms its base-case forecast and successfully winds down its inventory when consumer demand and sentiment are weak.

Dang. Did Bracken know he was signing up for this?

 Image courtesy The North Face


See below for more SGB Media coverage of the on-going issues at VF Corp. and its brands.

VF Corp. Aligns with Activist Investor, Appoints New Indie Board Member

EXEC: VF Sees The North Face Fiscal Q3 Results “Worse Than Expectations”

EXEC: Vans Falls 29 Percent in Q3; Inventory Down as Brand Helps Create OTB

VF Corp. Data Breach Impacting Ability to Ship Orders