Moody’s Investors Service changed VF Corporation’s outlook to negative from stable, reflecting the effects of the unfavorable tax appeal ruling related to the company’s Timberland acquisition in 2011 and the continued risk associated with the turnaround of Vans.
Moody’s said the tax ruling and Vans’ struggles resulted in VF’s credit metrics remaining weak for its Baa2 unsecured rating.
At the same time, Moody’s affirmed VF’s ratings, including the Baa2 senior unsecured rating, the (P)Baa2 senior unsecured shelf rating and senior unsecured medium-term note program rating, the (P)Ba1 preferred shelf rating, the (P)Baa3 subordinate shelf rating and Prime-2 commercial paper rating.
Moody’s said in its analysis, “VF’s Baa2 senior unsecured rating is supported by its significant scale as one of the world’s largest apparel, footwear, and accessory companies, with broad industry diversification by product and distribution channel. VF owns several well-known brands with strong market positions including The North Face, Vans, Timberland, Dickies, and Supreme, with a successful long-term track record of driving sustainable organic revenue growth across its portfolio. VF’s credit profile also reflects governance considerations, including its recent dividend cut and long-term record of reducing acquisition debt and leverage.
“Debt/EBITDA is currently elevated above our downward trigger of 3.5x at 4.8x as the company contends with significant weakness at Vans, customer inventory destocking at Dickies and negative operating leverage from lower sales levels. The company borrowed incremental debt of $1 billion due in December 2024 to fund the gross tax and interest related to the Timberland tax appeal which will need to be addressed. Despite a 41 percent dividend cut to more closely align with its 50 percent dividend payout target (resulting in annual savings of approximately $326 million), leverage will remain high without significant improvement in its operating performance, most notably at Vans in coming quarters, and an even more conservative approach to capital allocation. VF appointed its new CEO, Bracken Darrell, in July 2023, and he is assessing the company’s strategic plans.
“VF’s Prime-2 commercial paper rating reflects Moody’s expectation that the company will maintain adequate liquidity to fund cash flow needs over the next twelve months, including highly seasonal working capital needs, capital expenditures and its reduced dividend. As of July 1, 2023, VF had over $800 million of balance sheet cash and ample excess availability under its unrated $2.25 billion unsecured revolving credit facility due 2026. The credit facility supports its commercial paper programs totaling $USD 3.25 billion. The company had around $50 million outstanding as of July 1, 2023, under its $USD 2.25 billion commercial paper program. Moody’s expects that borrowings under its commercial paper programs will never be in excess of the availability on its revolver.
“The negative outlook reflects the risk that higher leverage will be sustained without a significant improvement in operating performance, particularly at Vans, its second largest brand. Prioritization of debt reduction will also be integral to improved credit metrics in light of the adverse tax ruling.”
Photo courtesy Timberland