VF Corp. reported sales on a currency-neutral basis rose 7 percent in its fiscal first quarter ended July 2 as 37 percent growth at The North Face offsetting a 4 percent slide at Vans. Earnings and sales were below analyst targets, and VF lowered its guidance for the year to reflect ongoing negative impacts from foreign currency fluctuations.

Q1 FY23 Financial Highlights

  • Revenue $2.3 billion, up 3 percent (up 7 percent in constant dollars) with big four brands up 2 percent (up 6 percent in constant dollars) and the balance of the portfolio up 9 percent (up 16 percent in constant dollars. The North Face revenue $0.5 billion, up 31 percent (up 37 percent in constant dollars). Vans revenue $0.9 billion, down 7 percent (down 4 percent in constant dollars);
  • Gross margin 53.9 percent, down 260 basis points. Adjusted gross margin 54.1 percent, down 260 basis points;
  • Operating margin 2.8 percent, down 640 basis points. Adjusted operating margin 3.4 percent, down 340 basis points;
  • Earnings (loss) per share (EPS) $(0.14), down 137 percent. Adjusted EPS $0.09, down 68 percent; and
  • Return of $194 million to shareholders through cash dividends.

EPS at 9 cents on an adjusted basis was lower than Wall Street’s consensus estimate of 14 cents a share. Revenue of $2.3 billion was below Wall Street’s consensus target of $2.4 billion.

FY23 Financial Outlook

  • VF is maintaining its currency-adjusted FY23 outlook while revising its earnings outlook on a reported dollar basis to reflect ongoing negative impacts from foreign currency fluctuations. It now expects an adjusted EPS of $3.05 to $3.15, implying 4 percent to 7 percent growth versus the prior year on a constant dollar basis. Previous guidance called for EPS in the range of $3.30 to $3.40;
  • Total VF revenue is up at least 7 percent in constant dollars, unchanged from the previous outlook;
  • Adjusted gross margin is up slightly versus the previous outlook of up approximately 50 basis points;
  • Adjusted operating margin is approximately 13.2 percent versus the previous outlook of approximately 13.6 percent;
  • Adjusted cash flow from operations approximately $1.2 billion. Capital expenditures are approximately $250 million, both unchanged versus the previous outlook, which excludes the impact of a payment VF anticipates making in FY23 of approximately $857 million plus additional accrued interest relating to an assessment from the IRS for the dispute regarding the timing of income inclusion associated with VF’s acquisition of Timberland in 2011, as previously disclosed;
  • VF FY23 outlook assumes no additional significant COVID-19-related lockdowns in key commercial or production regions, and no significant worsening in global inflation rates and consumer sentiment.

Steve Rendle, Chairman, President and CEO said, “We delivered solid top-line results in Q1, ahead of our initial expectations, led by strong consumer engagement with our outdoor, streetwear and active brands amidst a softer consumer environment and inflationary pressures. Importantly, we are maintaining our operating outlook for FY23, a testament to the resiliency of our purpose-built family of brands. I remain impressed by our teams, whose passion, perseverance and execution continue to drive our success. While uncertainty persists across geographies and marketplaces from ongoing macro-economic headwinds, we are focused on the things we can control and will continue our strategic investments to ensure long-term, sustainable and profitable growth.”

First Quarter Fiscal 2023 Income Statement Review

  • Revenue increased 3 percent (up 7 percent in constant dollars) to $2.3 billion, driven by increases in the EMEA and Americas regions, partially offset by a decline in the APAC region primarily due to COVID lockdowns in China;
  • Gross margin decreased 260 basis points to 53.9 percent, primarily driven by mix and higher freight costs partially offset by price increases. On an adjusted basis, gross margin decreased 260 basis points to 54.1 percent;
  • Operating income on a reported basis was $63.4 million. On an adjusted basis, operating income decreased 48 percent (down 40 percent in constant dollars) to $77.5 million. Operating margin on a reported basis was 2.8 percent. Adjusted operating margin decreased 340 basis points to 3.4 percent; and
  • Earnings (loss) per share was $(0.14) on a reported basis. On an adjusted basis, earnings per share decreased 68 percent (down 59 percent in constant dollars) to $0.09.

COVID-19 Update
VF modified its business practices, including temporarily closing offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures, including social distancing and quarantines. The majority of its supply chain is currently operational. Raw material suppliers in China are operational, though the eight-week lockdown in China during VF’s first quarter resulted in logistics challenges that are contributing to ongoing product delays. Suppliers are complying with local public health advisories and governmental restrictions. Most final product manufacturing and assembly suppliers are back to normal operating levels. VF is working with its suppliers to minimize disruption and is expediting freight as needed. VF’s distribution centers are operational, following local government guidelines while maintaining enhanced health and safety protocols.

In North America, no stores were closed during the first quarter. Currently, all stores are open. In the EMEA region, no stores were closed during the first quarter. Currently, all stores are open. In the APAC region, including China, 12 percent of stores, including partners, were closed at the beginning of the first quarter, with a peak of 23 percent of stores closed and an average of 14 percent of stores closed throughout the quarter. No stores were closed at the end of the first quarter, and all stores are currently open. As COVID-19 uncertainty continues, VF expects ongoing disruption to its business operations.

Balance Sheet Highlights
Inventories were up 92 percent compared to last year, driven by an increase of in-transit inventory of approximately $550 million as VF modified terms with the majority of its suppliers to take ownership of inventory near the point of shipment rather than the destination. Accounts payable also increased 91 percent, which was largely driven by the increase of in-transit inventory. VF returned approximately $194 million of cash to shareholders through quarterly dividends.

Dividend Declared
VF’s Board of Directors declared a quarterly dividend of $0.50 per share, payable on September 20, 2022, to shareholders of record on September 12, 2022. Subject to approval by its Board of Directors, VF intends to continue to pay its regularly scheduled cash dividend.

Photo courtesy The North Face