VF Corp cut its full-year revenue and profit forecast on Thursday after missing Wall Street estimates for third-quarter revenue.

The company now expects to post annual revenue of $11.75 billion, compared with its prior forecast of $11.8 billion. It also expects adjusted profit per share to be about $3.30, compared with its prior range of $3.32 to $3.37.

Net revenue for the third quarter ended December 28 rose to $3.38 billion from $3.23 billion a year earlier, but fell short of the average analyst estimate of $3.43 billion, Excluding items, VF earned $1.23 per share in the quarter, beating the consensus estimate of $1.21.

“Our third quarter performance was strong and our year-to-date results are at the high end of our long-term growth objectives. Despite a mixed holiday season in the US, we’re on track to deliver solid performance and are well positioned for continued growth and value creation in fiscal year 2021,” said Steve Rendle, VF’s chairman, president and CEO, in a statement.

Discontinued Operations – Kontoor Brands Business

On May 22, 2019, VF completed the spin-off of its Jeans business, which included the Wrangler, Lee and Rock & Republic brands, as well as the VF Outlet business, into an independent, publicly-traded company under the name Kontoor Brands, Inc.. Accordingly, the company has removed the assets and liabilities of the Jeans business as of this date and included the operating results and cash flows of the business in discontinued operations for all periods presented.

Adjusted Amounts – Excluding the Occupational Work Business

On January 21, 2020, VF announced that it is commencing a review of strategic alternatives for the occupational portion of its Work segment. As defined in the January 21, 2020 news release, the occupational portion of the Work segment primarily consists of nine brands and businesses: Red Kap, VF Solutions, Bulwark, Workrite, Walls, Terra, Kodiak, Work Authority and Horace Small. The proposed transaction does not include the Dickies and Timberland PRO brands.

This release refers to certain “excluding the occupational Work business” amounts, which exclude the estimated historical and forward-looking results of the occupational Work group of brands. These excluded amounts are not indicative of the results of the occupational Work businesses as a standalone entity, and are not representative of VF’s discontinued operations in the event of a disposition. VF’s analysis of the disposition of the occupational Work businesses has not been completed and is subject to change based on the final structure of any potential transaction.

Adjusted Amounts – Excluding Transaction and Deal Related Expenses, Costs Related to Office Relocations and Specified Strategic Business Decisions, Pension Settlement Charges, and the Impact of Swiss Tax Legislation

The adjusted amounts in this release exclude transaction and deal-related expenses associated with the acquisitions and integration of the Icebreaker and Altra brands. The adjusted amounts in this release also exclude transaction expenses associated with the completed spin-off of the Jeans business. Total transaction and deal-related expenses were approximately $22 million in the first nine months of fiscal 2020. Additionally, the amounts also exclude an adjustment to tax expense in the third quarter of fiscal 2020 of approximately $10 million associated with the loss on sale for the Reef divestiture.

The adjusted amounts in this release exclude costs primarily associated with the previously announced relocation of VF’s global headquarters and certain brands to Denver, Colorado. The adjusted amounts in this release also exclude costs related to strategic business decisions in South America and the operating results of jeanswear wind down activities in South America following the spin-off of Kontoor Brands. Total costs were approximately $16 million in the third quarter of fiscal 2020 and approximately $51 million in the first nine months of fiscal 2020.
The adjusted amounts in this release exclude a noncash pension settlement charge. The pension settlement charge was a result of actions taken to reduce risk, volatility and the liability associated with VF’s U.S. pension plan. Total expense was approximately $23 million in the third quarter of fiscal 2020 and the first nine months of fiscal 2020.

The adjusted amounts in this release exclude the impact of recent Swiss tax legislation. On May 19, 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Act”). Certain provisions of the Swiss Tax Act were enacted during fiscal 2020, which resulted in adjustments to deferred tax positions of approximately $164 million in the first nine months of fiscal 2020. It is expected that additional provisions may be enacted in subsequent periods, resulting in further adjustments.

Combined, the above items negatively impacted earnings per share by 10 cents per share during the third quarter of fiscal 2020 and positively impacted earnings per share by 20 cents per share during the first nine months of fiscal 2020. All adjusted amounts referenced herein exclude the effects of these amounts.

Third Quarter Fiscal 2020 Income Statement Review

  • Revenue increased 5 percent (up 6 percent in constant dollars) to $3.4 billion, driven by VF’s largest brands, and our International and Direct-to-Consumer platforms. Excluding the occupational Work business, revenue increased 6 percent (up 7 percent in constant dollars).
  • Gross margin increased 110 basis points to 55.7 percent, primarily driven by favorable mix shift toward higher margin businesses and timing of net foreign currency transaction gains. On an adjusted basis, gross margin increased 100 basis points to 55.7 percent.
  • Operating income on a reported basis was $579 million. On an adjusted basis, operating income increased 11 percent (up 12 percent in constant dollars) to $595 million. Excluding the occupational Work business, operating income increased 14 percent (up 15 percent in constant dollars). Operating margin on a reported basis increased 100 basis points to 17.1 percent. Adjusted operating margin increased 100 basis points to 17.6 percent.
  • Earnings per share was $1.13 on a reported basis. On an adjusted basis, earnings per share increased 14 percent to $1.23.

Segment Performance

In the Outdoor segment, sales in the quarter grew 4.1 percent to $3.8 billion from $3.65 billion. On a currency-neutral basis, sales were up 6 percent. Operating profit gained 2.4 percent to $525.1 million from $512.6 million and added 4 percent currency-neutral. Outdoor brands include Altra, Icebreaker, Smartwool and The North Face.

In the Active segment, sales increased 9.3 percent to $3.89 billion from $3.56 billion and grew 10 percent on a currency-neutral basis. Operating earnings rose 10.0 percent to $982.2 million from $893.1 million and advanced 12 percent on a currency-neutral basis. Active brands include Eagle Creek, Eastpak,  JanSport, Kipling, Napapijri and Vans.

In the Work segment, sales were down 0.7 percent to $1.34 billion from $1.35 billion and were flat on a currency-neutral basis. Operating earnings were down 9.8 percent to $140.8 million from $156.4 million and declined 10 percent currency-neutral.

Brand Performance

Among major brands, Vans’ sales grew 13 percent currency-neutral on a global basis as sales increased 9 percent in the Americas, 16 percent in EMEA and 23 percent in the APAC region. On a reported basis, sales grew 12 percent globally, 9 percent in the Americas, 14 percent in EMEA and 23 percent in APAC.

The North Face’s sales grew 4 percent currency-neutral on a global basis as sales climbed 4 percent in the Americas, 17 percent in EMEA and 15 percent in the APAC region. On a reported basis, sales grew 8 percent globally, 4 percent in the Americas, 15 percent in EMEA and 13 percent in APAC.

Timberland’s sales were down 4 percent currency-neutral on a global basis as sales declined 4 percent in the Americas and 7 percent in EMEA while gaining 1 percent in the APAC region. On a reported basis, sales were down 5 percent globally with declines of 4 percent in the Americas and 9 percent in EMEA. Reported sales were flat in the APAC region.

Dickies’ sales grew 13 percent currency-neutral on a global basis as sales increased 7 percent in the Americas, 6 percent in EMEA and 46 percent in the APAC region. On a reported basis, sales grew 13 percent globally, 7 percent in the Americas, 5 percent in EMEA and 45 percent in APAC.

Regional Performance 

By region, the U.S. grew 3 percent on both a currency-neutral and reported basis. The EMEA increased 6 percent on a currency-neutral basis and grew 4 percent on a reported basis. The APAC region increased 15 percent on a currency-neutral basis and grew 14 percent on a reported basis. In China, sales increased 32 percent on a currency-neutral basis and grew 30 percent on a reported basis.

In the Americas, sales gained 9 percent on both a currency-neutral and reported basis.

Overall, international sales advanced 9 percent on a currency-neutral basis and grew 8 percent on a reported basis

Channel Performance

Wholesale sales increased 4 percent on a currency-neutral basis and 3 percent on a reported basis. Direct-to-consumer sales advanced 11 percent on a currency-neutral basis and grew 10 percent on a reported basis. Digital jumped 19 percent on a currency-neutral basis and grew 17 percent on a reported basis.

Balance Sheet Highlights

  • Inventories were up 12 percent compared with the same period last year. Excluding the occupational Work business, inventories were up 8 percent. During the quarter, VF returned approximately $189 million of cash to shareholders through dividends. The company also repurchased approximately $500 million of shares and has $3.3 billion remaining under its current share repurchase authorization.

Adjusted Full Year Fiscal 2020 Outlook

VF’s outlook for full year fiscal 2020 is on an adjusted continuing operations basis, which includes the occupational Work business, unless otherwise noted, and has been updated to include the following:

  • Revenue is now expected to be approximately $11.75 billion, reflecting an increase of approximately 5 percent (7 percent on a constant dollar basis excluding the impact of acquisitions and divestitures). This compares to a previous expectation of approximately $11.8 billion, reflecting an increase of approximately 6 percent (approximately 8 percent on a constant dollar basis excluding the impact of acquisitions and divestitures). Excluding the occupational Work business, revenue is expected to increase approximately 6 percent (approximately 8 percent on a constant dollar basis excluding the impact of acquisitions and divestitures).
  • By segment, revenue for Outdoor is now expected to increase approximately 4 percent (approximately 5 percent on a constant dollar basis, excluding the impact of acquisitions). This compares to the previous expectation of an increase in revenue of approximately 5 percent (6 percent to 7 percent on a constant dollar basis, excluding the impact of acquisitions). Revenue for Active is now expected to increase approximately 8 percent (approximately 12 percent on a constant dollar basis, excluding the impact of divestitures). This compares to the previous expectation of an increase in revenue of approximately 8 percent to 9 percent (11 percent to 12 percent on a constant dollar basis, excluding the impact of divestitures). Revenue for Work is now expected to increase approximately 1 percent (2 percent to 3 percent on a constant dollar basis, excluding the impact of divestitures). This compares to the previous expectation of an increase in revenue of approximately 2 percent to 3 percent (4 percent to 5 percent on a constant dollar basis, excluding the impact of divestitures). Excluding the occupational Work business, Work revenue is expected to increase approximately 3 percent (6 percent to 7 percent on a constant dollar basis excluding the impact of divestitures).
  • International revenue is now expected to increase approximately 6 percent, or approximately 9 percent on a constant dollar basis, excluding the impact of acquisitions and divestitures. This compares to the previous expectation of an increase in revenue of approximately 4 percent to 5 percent, or approximately 8 percent to 9 percent on a constant dollar basis, excluding the impact of acquisitions and divestitures.
  • Direct-to-consumer revenue is now expected to increase approximately 9 percent to 10 percent (10 percent to 11 percent on a constant dollar basis), including about 20 percent growth in Digital on a constant dollar basis, excluding the impact of acquisitions and divestitures. This compares to the previous expectation of an increase in revenue of approximately 11 percent to 12 percent (12 percent to 13 percent on a constant dollar basis), including about 25 percent growth in Digital on a constant dollar basis, excluding the impact of acquisitions and divestitures.
  • Adjusted gross margin is still expected to be 54.1 percent, which represents an estimated increase of 80 basis points.
  • Adjusted operating margin is still expected to be 13.8 percent, which represents an estimated increase of approximately 90 basis points. Adjusted operating income is expected to increase approximately 12 percent (approximately 14 percent on a constant dollar basis excluding the impact of acquisitions and divestitures). Excluding the occupational Work business, adjusted operating income is expected to increase approximately 15 percent (approximately 18 percent on a constant dollar basis excluding the impact of acquisitions and divestitures).
  • Adjusted earnings per share is now expected to be approximately $3.30, reflecting growth of approximately 15 percent (approximately 18 percent on a constant dollar basis, excluding acquisitions and divestitures). This compares to the previous expectation of adjusted earnings per share in the range of $3.32 to $3.37, reflecting growth of 16 percent to 18 percent (19 percent to 21 percent on a constant dollar basis excluding the impact of acquisitions and divestitures).
  • Adjusted cash flow from operations is now expected to approximate $1.3 billion. This compares to the previous expectation of at least $1.3 billion.
  • Other full year assumptions include an effective tax rate of approximately 15.5 percent and capital expenditures of approximately $350 million. This compares to the previous expectation of an effective tax rate of approximately 15 percent to 15.5 percent and capital expenditures of approximately $400 million.

Photo courtesy The North Face