VF Corp.’s Debt Ratings Downgraded By S&P

S&P Global Ratings lowered its debt ratings on VF Corp. due to its below-plan results for the fiscal year ended April 1.

S&P said VF’s earnings were below its base-case forecast, notably with free operating cash flow (FOCF) of negative $917 million and leverage near 4x. The rating agency said it believes elevated inventory from realignment in the wholesale channel and weakened consumer demand will continue to pressure its credit metrics in fiscal 2024 and delay the recovery of its largest brand, Vans.

VF’s issuer credit rating were lowered to ‘BBB’ from ‘BBB+’. The outlook is stable. At the same time, all issue-level ratings on the company were lowered to ‘BBB’ from ‘BBB+’. The short-term and commercial paper ratings remain ‘A-2′

S&P’s stable outlook on VF indicates improved credit metrics over the next 18 to 24 months and an expectation that VF’s financial policy to support leverage reduction back into the 2x-3x range.

S&P said in its analysis, “We forecast leverage to remain above 3x in fiscal 2024, but for capital allocation decisions to support leverage reduction over the next 12 to 24 months.

“The current weakening of consumer demand for discretionary products, retailer inventory realignment, and foreign exchange and inflationary headwinds continue to pressure VF’s performance. The company ended fiscal 2023 with sales down 2 percent and EBITDA margin weakening by 370 basis points, reflecting a heavily promotional environment from lower demand and an attempt to clear excess inventory. We now project leverage to remain above 3x through the end of fiscal 2024 before declining below 3x in fiscal 2025.

“VF illustrated its commitment to a conservative financial policy by taking several actions aimed at restoring gross leverage to its target of 2.5x. The company cut its $800 million annual dividend by about 40 percent, saving $300 million to $350 million in cash flow it can use to reduce debt and invest in its brands. We believe the company could reduce its dividend again if needed to hit its leverage goals. Additionally, the company is pursuing strategic alternatives for its Kipling, Eastpak and JanSport brands and made smaller asset sales of about $100 million in fiscal 2023. We expect the company to limit M&A activity until credit metrics are restored. The Timberland IP tax case could also result in further debt repayment. If VF wins the appeal, it will get a refund of the assessed tax, plus interest accrued on the overpayment (about $876 million), and credit metrics will improve faster than our current base case.

“Underperformance of its brands weighs negatively on VF’s competitive position.

“VF is one of the world’s largest apparel and footwear companies, but its revenues are largely concentrated in its core four brands with Vans and the North Face representing 31 percent of sales each. North Face performed well for the year with 11 percent growth, while Dickies declined negative 13 percent and Timberland negative 2 percent. Vans, the company’s largest brand at $4 billion in annual revenues, faced declines of 12 percent in fiscal 2023 (14 percent in the fourth quarter) amid a weak consumer demand environment and heavy discounting. We expect Vans revenues to decline until the second half of fiscal 2024. The competitive landscape for Vans has broadened, with new entrants and legacy brands expanding into additional footwear occasions and innovating into new silhouettes such as slip-on sneakers. New brand management at Vans will focus on its classic shoe product, re-think brand collaborations, and become more regional in product assortment and distribution channels. The company will also seek to diversify its customers in China outside of Tmall (China’s largest online seller). Although the execution and success of this plan remain to be seen, we believe new management at Vans and this restored focus, combined with innovation, could return the brand to mid-single-digit growth. Additionally, the company recorded a total of $735 million in impairment charges on its 2020 acquired streetwear brand Supreme. The pandemic-induced supply chain challenges have weighed on VF’s ability to execute on its acquisition forecast and strategy to grow the brand.

“FOCF turning positive in fiscal 2024 is dependent on inventory reductions.

“Inventories were up 62 percent at the end of fiscal 2023, with on-hand inventories up 46 percent, excluding in-transit inventory and 15 percent comprised of prior season discontinued product. The excess inventory is primarily related to the North Face and Dickies brands and is related to the arrival of shipments coinciding with the wholesale channels’ realignment and a decline in demand. The company is retaining core inventory that can be sold at full price when selling conditions improve and plans to sell dated inventory through its outlet channels, which management believes is achievable. Inventory reduction is the main driver of FOCF turning positive and making progress toward more normalized levels of inventory in fiscal 2024.

“The stable outlook reflects our expectation that credit metrics will be restored over the next 18 to 24 months supported by capital allocation decisions to support debt reduction and better profitability from a better cost environment.”

Photo courtesy VF Corp.