VF Corp.’s Fourth Quarter Boosted by The North Face

VF Corp. reported sales rose 12 percent on a currency-neutral basis in the fiscal fourth quarter ended April 2, with sales ahead 24 percent for The North Face and 2 percent for Vans. Earnings per share were ahead 67 percent, with both earnings and sales in line with Wall Street targets. 

The company’s revenue is expected to climb at least 7 percent in constant dollars for the current fiscal year, with low double-digit growth at The North Face and mid-single-digit growth at Vans.

Q4 FY22 Financial Highlights

• Revenue $2.8 billion, up 9 percent (up 12 percent in constant dollars). The North Face revenue is $0.8 billion, up 24 percent (up 26 percent in constant dollars); Vans revenue is $1.0 billion, flat (up 2 percent in constant dollars).
• Gross margin 51.9 percent, down 20 basis points. Adjusted gross margin 52.2 percent, down 50 basis points.
• Operating margin 6.8 percent, up 210 basis points. Adjusted operating margin 7.9 percent, up 120 basis points.
• Earnings per share (EPS) $0.21, up 32 percent. Adjusted EPS $0.45, up 67 percent.
• Return of $244 million to shareholders through $194 million in cash dividends, $50 million of shares repurchased.

FY22 Financial Highlights

• Revenue of $11.8 billion, up 28 percent (up 27 percent in constant dollars) excluding acquisitions, up 23 percent.
• Gross margin of 54.5 percent, up 180 basis points. Adjusted gross margin 54.8 percent, up 150 basis points, including a 20 basis point positive impact from acquisitions.
• Operating margin of 13.8 percent, up 720 basis points. Adjusted operating margin 13.1 percent, up 510 basis points, including a 30 basis point positive impact from acquisitions.
• EPS $3.10, up 242 percent. Adjusted EPS, up 143 percent to $3.18, including a $0.19 per share contribution from acquisitions.
• Return of $1.1 billion to shareholders through $773 million in cash dividends, $350 million of shares repurchased.

FY23 Financial Outlook
VF provided the following outlook for full-year fiscal 2023 based on these assumptions:

• No significant COVID-19-related lockdowns in key commercial or production regions, with the current restrictions in China expected to ease from the beginning of June 2022;
• No significant worsening in global inflation rates and consumer sentiment;
• Total VF revenue is up at least 7 percent in constant dollars. The North Face revenue is up a low double-digit percentage. Vans’ revenue is up mid-single-digit percent;
• Gross margin up approximately 50 basis points;
• Operating margin is approximately 13.6 percent;
• Tax rate is approximately 16 percent, returning to a more normalized rate;
• EPS $3.30 to $3.40;
• Adjusted cash flow from operations was approximately $1.2 billion. Capital expenditures of about $250 million;
• Excludes the impact of a payment VF anticipates making to the IRS in fiscal 2023 of approximately $845 million, plus accrued interest relating to the dispute regarding the timing of income inclusion associated with VF’s acquisition of Timberland in 2011.

Steve Rendle, VF Corp. chairman, president and CEO said:
“I am pleased with the progress we have made advancing our strategic priorities while successfully navigating another eventful year. We largely delivered on the commitments we made at the outset of Fiscal 2022 by achieving broad-based growth across our family of brands. A portion of our active segment did not achieve its potential. We understand the issues, we have the right people in place, and we know we will do better.

“Our performance is a testament to the incredible breadth and depth of talent across our organization and our teams continue to be highly resourceful, committed and passionate. We will continue to thoughtfully invest in our brands and value-enhancing strategic growth opportunities, and I am confident VF has a long runway for sustained, profitable and broad-based growth ahead.”

Fourth Quarter Fiscal 2022 Income Statement Review

• Revenue increased 9 percent (up 12 percent in constant dollars) to $2.8 billion, driven by increases in the EMEA and North America regions partially offset by a decline in the APAC region primarily due to COVID lockdowns. The fourth quarter of fiscal 2021 also included an extra week compared to the fiscal 2022 period due to VF’s 53-week fiscal 2021.
• Gross margin decreased 20 basis points to 51.9 percent, primarily driven by incremental freight costs. On an adjusted basis, gross margin decreased 50 basis points to 52.2 percent.
• Operating income on a reported basis was $192 million. Operating income increased 30 percent (36 percent in constant dollars) to $224 million on an adjusted basis. Operating margin on a reported basis was 6.8 percent. Adjusted operating margin increased 120 basis points to 7.9 percent.
• Earnings per share were $0.21 on a reported basis. On an adjusted basis, earnings per share increased 67 percent (up 76 percent in constant dollars) to $0.45.

The 45 cents on an adjusted basis was in line with Wall Street estimates. The $2.8 billion in sales was basically in line with the consensus target of 2.84 billion.

Full Year Fiscal 2022 Income Statement Review

• Revenue increased 28 percent (up 27 percent in constant dollars) to $11.8 billion. Excluding the impact of acquisitions, revenue increased 23 percent, driven by increases in its largest brands and regions. Fiscal 2021 also included an extra week compared to the fiscal 2022 period due to VF’s 53-week fiscal 2021.
• Gross margin increased 180 basis points to 54.5 percent, primarily driven by a higher proportion of full-price sales more than offsetting incremental freight costs. On an adjusted basis, gross margin increased 150 basis points, including a 20 basis point positive impact from acquisitions, to 54.8 percent.
• Operating income on a reported basis was $1.6 billion. On an adjusted basis, operating income increased 109 percent (up 107 percent in constant dollars) to $1.5 billion, including a $94 million contribution from acquisitions. Operating margin on a reported basis was 13.8 percent. Adjusted operating margin increased 510 basis points, including a 30 basis point positive impact from acquisitions, to 13.1 percent.
• Earnings per share were $3.10 on a reported basis. On an adjusted basis, earnings per share increased 143 percent (up 142 percent in constant dollars) to $3.18, including a $0.19 contribution from acquisitions.

COVID-19 Update
To help mitigate the spread of COVID-19 and in response to public health advisories and governmental actions and regulations, VF has modified its business practices, including the temporary closing of offices and retail stores, instituting travel bans and restrictions and implementing health and safety measures, including social distancing and quarantines.

The zero-tolerance policy in China in response to COVID-19 is impacting some raw material suppliers in the country. The majority of VF’s supply chain is operational, and suppliers are complying with local public health advisories and governmental restrictions. Most final product manufacturing and assembly suppliers are back to normal operating levels. Continued port congestion, equipment availability and other logistics challenges have contributed to product delays. VF is working with its suppliers to minimize disruption and is using expedited freight strategically, 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 fourth quarter. Currently, all stores are open.

In the EMEA region, 6 percent of stores were closed at the beginning of the fourth quarter and the end of the fourth quarter and, currently, no stores are closed due to COVID-19.

In the APAC region, including Mainland China, no stores were closed at the beginning of the fourth quarter. Twelve percent of stores were closed at the end of the fourth quarter. Currently, 19 percent of stores are closed.

VF is continuing to monitor the outbreak globally and will comply with guidance from government entities and public health authorities to prioritize the health and well-being of its employees, customers, trade partners and consumers. As COVID-19 uncertainty continues, VF expects ongoing disruption to its business operations.

Balance Sheet Highlights
Inventories were up 34 percent compared with the same period last year. VF returned approximately $194 million of cash to shareholders through dividends during the quarter. The company also repurchased about $50 million of shares during the quarter and has $2.5 billion remaining under its current share repurchase authorization.

Tax Dispute Update In Connection With Timberland Acquisition
As previously reported, VF petitioned the U.S. Tax Court to resolve an IRS dispute regarding the timing of income inclusion associated with VF’s acquisition of The Timberland Company in September 2011. While the IRS argues that all such income should have been immediately included in 2011, VF has reported periodic income inclusions in subsequent tax years. Both parties moved for summary judgment on the issue and, on January 31, 2022, the Court issued its opinion in favor of the IRS. 

VF believes the opinion of the Court was in error based on the technical merits and intends to appeal; however, VF is required to pay the 2011 taxes and interest in the dispute or post a surety bond. It is anticipated that during fiscal 2023, the IRS will assess, and VF will pay, the 2011 taxes and interest, which would be recorded as a tax receivable based on VF’s expected probability of a successful appeal. The gross amount of taxes and interest as of April 2, 2022 was estimated at approximately $845 million and will continue to accrue interest until paid. VF continues to remain confident in its timing and treatment of income inclusion and is defending its position. However, should the Court’s opinion be upheld on appeal, VF may not collect this tax receivable. If the Court’s opinion is upheld, VF should be entitled to a refund of taxes paid on the periodic inclusions that VF has reported. However, any such refund could be substantially reduced by potential indirect tax effects resulting from the application of the Court’s opinion. Deferred tax liabilities, representing VF’s future tax on annual inclusions, would also be released. The net impact to tax expense estimated as of April 2, 2022 could be up to $700 million.

Photo courtesy The North Face