Moody’s Investors Service changed VF Corp.’s outlook to negative from stable, reflecting the company’s weaker-than-expected near-term operating performance expectations, increasingly challenging operating environment and higher-than-expected debt levels.
Moody’s said the combination of these factors had resulted in VF’s leverage profile not improving to the level expected when it acquired the Supreme brand in December 2020.
For the twelve months ended July 2, 2022, debt/EBITDA was 3.2 times, a level that is still higher than Moody’s 2.75 times level commensurate with the Baa1 rating.
Moody’s said VF is facing near-term challenges related to underperformance in its largest and most profitable brand, Vans, as well as large customer inventory destocking in Dickies.
The company also faces a slower-than-expected recovery in China, Moody’s said, due to ongoing COVID-related disruptions and elevated inventory levels that are expected to lead to a highly promotional sales environment.
Moody’s said these issues are occurring in an increasingly challenging consumer spending environment and have resulted in the company reducing revenue and earnings guidance for its fiscal year ending March 2023.
When coupled with a currently high dividend payout and the available free cash flow, Moody’s forecasted VF Corp. would also deteriorate over the near-to-intermediate term. Moody’s said that, in addition, VF would increase debt by using a delayed draw term loan to fund a gross tax and interest payment of $857.5 million in connection with its appeal of an adverse ruling related to the 2011 acquisition of Timberland.
When adding the incremental debt, pro forma leverage exceeds 3.5 times as of July 2, 2022.
Moody’s also affirmed VF’s ratings, including the Baa1 senior unsecured rating, the (P)Baa1 senior unsecured shelf rating and senior unsecured medium-term note program rating, the (P)Baa3 preferred shelf rating, the (P)Baa2 subordinate shelf rating, and Prime-2 commercial paper rating.
The affirmation of VF’s Baa1 rating reflects VF’s position as one of the world’s largest apparel companies, its diverse portfolio of known brands, and its record of driving revenue and improving credit metrics over the longer term via profitable growth and debt reduction.
Its affirmation of VF’s Prime-2 rating reflects Moody’s expectation that the company will maintain adequate liquidity to fund cash flow over the next twelve months, including seasonal working capital, capital expenditures and dividends.
Moody’s expects VF Corp. to successfully refinance the €850 million notes due September 20, 2023, ahead of maturity.
As of July 2, 2022, VF had $528 million of balance sheet cash and ample excess availability under its unrated $2.25 billion unsecured revolving credit facility due 2026. The credit facility supports its $2.25 billion commercial paper program, which had around $821 million outstanding as of July 2, 2022.
Moody’s wrote in its analysis, “VF’s Baa1 rating is supported by its significant scale as one of the world’s largest apparel companies, with broad industry diversification by product and distribution channel. VF owns several well-known brands with strong market positions in their segments such as Vans, The North Face, Timberland, Dickies, and Supreme, with a successful long-term track record of driving sustainable organic revenue growth across its portfolio as well as strong EBIT coverage of interest which currently approached 9.5 times. VF’s credit profile also reflects governance considerations, particularly its willingness to pursue growth through acquisition and tolerance for higher debt and leverage, as evidenced by the December 2020 acquisition of Supreme during the pandemic, as well as its currently high dividend payout which limits free cash flow available for investment or debt reduction. While the company has a longer-term track record of suspending share repurchases, reducing acquisition debt and leverage, and maintaining strong credit metrics, leverage has remained stubbornly high and will likely take 18-to-24 months to return to levels commensurate with the rating.”
Photo courtesy VF Corp.
