Standard & Poors Corp. revised its debt rating outlook on VF Corp. to negative. The rating agency said it expects VF’s operating results to be “significantly weaker” than it expected due to the economic fallout from the spread of the coronavirus.
S&P affirmed all its debt ratings on VF, including ‘A’ issuer credit rating on the company.
S&P said in its statement, “The outlook revision reflects our view that VF Corp.’s operating results will be severely pressured in upcoming quarters and result in a significant deterioration of its credit metrics. In response to the coronavirus outbreak, VF Corp. and its wholesale partners’ stores in the U.S. and Europe have been closed for the past few weeks. We believe closures will likely be extended given the increasingly drastic actions governments are taking to quell the rapid rise in new COVID-19 cases. Stores in China have re-opened following closure in February; however, we expect consumers will be slow to return to normal retail activity as fears of a resurgence of infection remain. Depressed demand for the company’s products will significantly reduce sales in upcoming quarters. While the company is implementing strict measures to control costs, its margins will be hurt by a lack of operating leverage and increasingly promotional environment given our expectation for high unemployment through 2022. As a result, we forecast VF Corp.’s leverage will temporarily increase above 2x in fiscal 2021 from below 2x at Dec.2019.
“The negative outlook reflects the risk that extended economic stress on operating performance could result in a downgrade due to prolonged credit measure deterioration.
“We could lower our ratings on VF Corp. within the next 24 months if store closures or a recession hurt the company’s operating performance for a prolonged period and we no longer expect it will manage credit measures appropriate for the rating by the end of fiscal 2022, including debt to EBITDA of below 2x. We believe VF has many levers to manage its credit measures including its shareholder remunerations; however, consumers may curtail apparel and footwear purchases for a prolonged period given expectations for high unemployment over the next few years.
“We could revise the outlook to stable if VF Corp. weathers the pandemic and restores its profitability such that debt leverage declines below 2x in 2022.”
Photo courtesy VF Corp.