Moody’s Investors Service downgraded VF Corp.’s long-term debt ratings due to continued weakness at Vans, VF’s second largest brand, as the company embarks on a significant transformation initiative, project Reinvent, to revitalize VF’s business, most notably in North America.
Ratings lowered included VF’s senior unsecured notes ratings to Baa3 from Baa2, senior unsecured shelf and senior unsecured MTN program ratings to (P)Baa3 from (P)Baa2, subordinate shelf rating to (P)Ba1 from (P)Baa3, and preferred shelf rating to (P)Ba2 from (P)Ba1. The company’s short-term commercial paper rating was also downgraded to Prime-3 from Prime-2. The outlook remains negative.
Although Moody’s said it views the organizational and operational changes underway as positive steps to returning its portfolio to consistent growth, the actions present execution risk and are expected to take time to benefit financial performance. VF’s profitability has also become more reliant on its other leading brand, The North Face, which tempers the benefits of its portfolio diversification. Cost reductions are underway which will be used partially to reinvest in its brands, but design and product changes face relatively long lead times in apparel and footwear. Moody’s expects debt/EBITDA to improve from 4.8x at the end fiscal 2024 to 3.7x at the end of fiscal 2025 as VF prioritizes deleveraging. Moody’s also expects VF to remain focused on maintaining adequate liquidity including sufficient financial covenant cushion.
The negative outlook reflects the uncertainty of the timing and successful execution related to its business turnaround. Although VF’s financial strategy is clearly focused on debt reduction, evidenced by its dividend cut and commitment to repay $1.75 billion of upcoming maturities, the outlook also reflects risks related to completing any potential asset sales to supplement free cash flow and achieving its debt reduction objective.
Moody’s said in its analysis, “VF’s Baa3 senior unsecured rating is supported by its position as one of the largest global apparel, footwear, and accessory companies, with revenue of approximately $11.4 billion for the twelve months ended September 30, 2023. Although the company has multiple brands in its portfolio, its financial performance is weighted toward The North Face and Vans, the company’s two largest brands. VF’s ratings also reflect governance considerations, including the reduction of its dividend and its public commitment to repaying its $1.0 billion delayed draw term loan (unrated) due in December 2024 and its $750 million notes due April 2025.
“Debt/EBITDA, which is currently elevated is expected to decline to around 3.7x at the end of VF’s fiscal 2025, before any asset sales, as its new CEO, Bracken Darrell, embarks on a transformation plan to address underperformance in North America, particularly at Vans, reduces costs by approximately $300 million and reassess VF’s brand portfolio. Several organizational changes are underway to streamline processes, which resulted in the appointment of a chief commercial officer. An executive search for a new leader of Vans is also underway.
“Ratings could be upgraded if VF demonstrates sustained organic revenue growth across its key brands while maintaining conservative financial policies including good liquidity and lower debt and leverage levels. Specific metrics include lease-adjusted debt/EBITDA sustained below 3.0x, EBITA/Interest above 5.5x, and RCF/Net Debt above 25 percent.
“Ratings could be downgraded if VF’s debt levels are not reduced including the repayment of upcoming debt maturities and leverage remains elevated. Ratings could also be downgraded should operating performance fail to improve. Quantitatively, VF’s rating could be downgraded if lease-adjusted debt/EBITDA is sustained above 4.0x, EBITA/interest is below 4.5x, and RCF/net debt is below 20 percent.”
