V.F. Corp. Q1 Earnings: A Little Early To Be Optimistic

seekingalpha08-07

V.F. Corporation stock surged 7% following the Q1 fiscal 2025 earnings announcement. VFC stock is now up 60% from its 52-week low.In this update, I will discuss VFC's latest quarterly results, ...

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VFC stock is now up 60% from its 52-week low.In this update, I will discuss VFC's latest quarterly results, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711302-vf-corp-q1-earnings-little-early-to-be-optimistic\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>V.F. Corp. 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Corp. Q1 Earnings: A Little Early To Be Optimistic\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-07 11:40 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4711302-vf-corp-q1-earnings-little-early-to-be-optimistic><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>V.F. Corporation stock surged 7% following the Q1 fiscal 2025 earnings announcement. VFC stock is now up 60% from its 52-week low.In this update, I will discuss VFC's latest quarterly results, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711302-vf-corp-q1-earnings-little-early-to-be-optimistic\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0786609619.USD","symbol_name":"高盛全球千禧一代股票组合Acc","start_time":0,"source_url":"https://seekingalpha.com/article/4711302-vf-corp-q1-earnings-little-early-to-be-optimistic","article_id":"2457992858","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/537268741/image_537268741.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2457992858","pubTimestamp":1723002051,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"V.F. Corporation stock surged 7% following the Q1 fiscal 2025 earnings announcement. 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VFC stock is now up 60% from its 52-week low.In this update, I will discuss VFC's latest quarterly results, focusing in particular on earnings adjustments and the performance of its core brands.I'll explain why I can't quite understand the market's positive reaction to what I believe was another rather weak earnings report.In light of the fact that VFC's management announced the sale of Supreme last month, I will also share my view on this transaction from a balance sheet and operational perspective. David Trood/DigitalVision via Getty Images Introduction I last looked at troubled apparel and footwear company V.F. Corporation (NYSE:VFC) in late May, following the release of - I'm inclined to say yet another - pretty disastrous earnings report. However, judging by the share price performance after the Q1 FY2025 earnings announcement on August 06, 2024, after the bell - VFC shares are up 7% at the time of writing - it looks like this time was very different. In addition, investors should note that VFC stock held up remarkably well during the stock market rout late last week and on Monday of this week. To at least some extent, VFC's robust performance (after all, the stock is up 60% from its 52-week low) is due to the sale of Supreme - the brand was only acquired in late 2020 under previous CEO Steve Rendle, who left V.F. Corp. - probably not entirely voluntarily - in December 2022. In this update, I will discuss V.F. Corp.'s latest quarterly results, with a particular focus on earnings adjustments and the performance of its core brands. I will also provide my views on the decision to sell Supreme and the impact of the transaction from a balance sheet and operational perspective. VFC's Q1 Fiscal 2025 Earnings - A Little Early To Be Optimistic For the recently completed first quarter of fiscal 2025, which ended June 2024, V.F. Corp. reported an adjusted loss per share of $0.33, which was slightly better than analysts had expected. Revenues came in at $1.91 billion, also slightly better than expected, but still 8.5% below the previous year's number (Figure 1). Currency effects had an almost insignificant negative impact, with revenues having declined by 8% at constant exchange rates. The Americas region remains VFC's weak point, with a 12% decline in revenues compared to the previous fiscal year's first quarter. The EMEA region also continues to show weakness, but the APAC region recorded modest (2%) year-over-year growth, at least on a constant currency basis. Although I can only hypothesize at this point, it is quite possible that VFC has benefited indirectly from the weak yen through tourists from mainland China. Figure 1: V.F. Corp. (VFC): Quarterly revenues and year-over-year change in percent (own work, based on company filings) GAAP earnings per share (EPS) for the quarter were negative $0.67, with the difference mainly due to an impairment charge ($0.30 per share) - more on this later. The difference of $0.04 stems from the company's \"Reinvent\" restructuring program. An almost negligible but still noteworthy adjustment of $0.5 million ($0.0013 per share) was made in relation to \"transaction and deal related activities\". The costs incurred are, of course, not significant, but indicate that management is apparently still looking to sell the backpacks business, consisting of the Kipling, Eastpak and JanSport brands. The expected sale of these brands has been dragging on for a very long time, and readers of my previous articles on VFC may recall that the first rumors in this regard surfaced more than a year ago. Despite these significant adjustments, earnings were still negative, mainly due to continued pressure on gross margin and in particular the - relatively speaking - once again increased selling, general, and administrative (SG&A) expenses. Gross margin declined by almost 80 basis points, but is still well above 50% (Figure 2) - one of the reasons why I think VFC's brand values are fundamentally strong. Figure 2: V.F. Corp. (VFC): Gross margin and year-over-year change in percent (own work, based on company filings) SG&A expenses as a percentage of revenues increased by almost four percentage points year-over-year. To be fair, however, it should be mentioned that absolute SG&A expenses fell by $167 million or 13% compared to the previous quarter. Compared to the first quarter of fiscal 2024, SG&A expenses decreased by $23 million or 2.1%. In my view, the company is making good progress in reducing costs, and one should also keep in mind that the current quarter's figure includes about $18 million in restructuring-related costs. Figure 3: V.F. Corp. (VFC): Selling, general, and administrative expenses in percent of revenues and year-over-year change in percent (own work, based on company filings) Let's now take a look at the performance of VFC's core brands - Vans, The North Face, Timberland, and Dickies. Starting with Vans, the iconic skateboard brand, I think it would be an exaggeration to say that things are slowly stabilizing (Figure 4). Of course, the difficult macroeconomic environment is impacting sales performance, but to a large extent, and compared to other companies like Nike, Inc. (NKE) and adidas AG (OTCQX:ADDYY, OTCQX:ADDDF), it is definitely ongoing internal issues that are plaguing Vans. In the recently completed quarter, sales fell by 21%, both on a reported and currency-adjusted basis. Figure 4: V.F. Corp. (VFC): Vans segment quarterly revenues and year-over-year change in percent (own work, based on company filings) The North Face (TNF) recorded its weakest quarterly revenues in three years, although this is largely due to the seasonal nature of the business (Figure 5). Comparing the Q1 figures over the last four years, TNF still managed to grow at a CAGR of 12.7%. Considering that TNF's quarterly revenues only declined by 3% year-over-year (again, an insignificant currency-related headwind), I think it is fair to conclude that the brand continues to perform well in a difficult macroeconomic environment. Figure 5: V.F. Corp. (VFC): The North Face segment quarterly revenues and year-over-year change in percent (own work, based on company filings) Timberland and Dickies recorded a decline in revenues of 14% and 10% respectively in the first quarter. The downward trend is still intact and indicates a brand weakness that has not yet been remedied. Personally, I think it is best to sell Dickies now that the rate of decline is decelerating (up six percentage points versus last year, Figure 6). On a trailing twelve-month basis, the brand contributed less than $600 million in revenues, or about 7% of the combined revenues of Vans, TNF, Timberland, and Dickies. Figure 6: V.F. Corp. (VFC): Dickies segment quarterly revenues and year-over-year change in percent (own work, based on company filings) Sales related to Supreme are still included in \"Other Brands\", and I think it's reasonable to expect that most of the segment's 10% currency-neutral growth came from that brand. As an aside, I've always disliked that the performance of this - apparently important - brand was buried alongside the performance of the non-core brands. In fact, the FY2023 10-K report was one of the few occasions where management gave an actual revenue figure for Supreme - $523 million (p. F-20). I had to turn to this report from Moody's to find out that Supreme generated revenues of $538 million in fiscal 2024 (Figure 7). Figure 7: V.F. Corp. (VFC): Supreme segment revenues and year-over-year change in percent (own work, based on company filings and a recent report from Moody's) Now that Supreme has been de facto sold, there is of course no longer any reason to assess the brand's performance. However, management expects Supreme to be reported under \"discontinued operations\" starting Q2 of fiscal 2025, so interested investors will then finally have an idea of the brand's actual performance on a quarterly basis. As the transaction is expected to close by the end of this calendar year (i.e. end of Q3 FY2025), VFC's total revenues are expected to decline by approximately 5% to 6% in FY2026, barring any significant negative or positive surprises or other asset sales (Figure 8). Against this backdrop, I consider the sale of the brand - especially at what I believe to be a good valuation (approximately 2.8 times fiscal 2024 revenues) - to be the right move, but also a necessary one. Let's now take a look at the potential impact of the sale of Supreme on VFC's balance sheet. Figure 8: V.F. Corp. (VFC): Trailing-twelve months revenue distribution, including and excluding the estimated contribution from Supreme (own work, based on company filings) What To Make Of The Sale Of Supreme For $1.5 Billion? Last month, VFC made headlines for selling Supreme to Italian-French company EssilorLuxottica S.A. (OTCPK:ESLOF, OTCPK:ESLOY) for $1.5 billion in cash. ESLOF shares barely reacted to the news, suggesting that shareholders of the eyewear-focused company were not surprised by the announcement. Personally, I can't quite understand what the rationale for the takeover might have been. VFC management's rationale, on the other hand, was pretty clear: it was to generate cash to pay off debt that will come due soon. This was also acknowledged by CEO Bracken Darrell, who also pointed out the limited synergies between the brand, which was only acquired in 2020, and VFC's other major brands. This is, of course, in stark contrast to the comments made by former CEO Steve Rendle when the acquisition was announced. Personally, I always viewed Supreme as a good fit for VFC in principle, but of course, the valuation (implied price-to-sales ratio of 3.7) was far too expensive. As we now know, Supreme fell well short of original expectations and only achieved revenues of $523 million in fiscal 2023 - a decline of 7% compared to the previous year - and growth in fiscal 2024 was also rather meager at just 3%. VFC stock investors responded positively, as evidenced by the approximately 20% jump in share price following the announcement. However, I still think the Supreme saga is a prime example of value destruction, considering the brand was acquired for $2.1 billion and one can assume significant brand development costs went into Supreme. Those who follow V.F. Corp. closely may recall that the company recognized an impairment charge of $735 million in FY2023 - $394 million related to goodwill and $341 million related to brand intangibles. Considering that Supreme was sold at a lower price than the related goodwill and indefinite-lived trademark intangible asset were still recognized on VFC's balance sheet, it was no wonder that the remaining difference of $145 million had to be written off in Q1 of fiscal 2025. Of course, VFC's previous management clearly overpaid for the brand, but I think $1.5 billion in cash is a good deal for VFC - especially considering the difficult market environment (high-interest rates) and the weak negotiating position (high debt, continued revenue contraction). If we look at VFC's most recent maturity ladder (Figure 9, the profile at the end of Q1 of fiscal 2025 is not yet available, but most likely has not changed given essentially flat net debt of $5.3 billion), we can quickly see the need to pay down the delayed draw Term Loan Agreement (see p. F-26, fiscal 2024 10-K). A longer-term refinancing of $1 billion would likely come with a rather expensive coupon, especially in light of VFC's rather weak credit rating (Baa3, negative outlook). Management had previously announced that it expects not refinance the 2.400% notes maturing in April 2025 either, likely to signal its willingness to deleverage significantly. Considering that management has reiterated free cash flow guidance of $600 million for FY2025 in the Q1 earnings update (or about $460 million after payment of the dividend), I think it is realistic to expect a full repayment of the 2.400% notes as well. Figure 9: V.F. Corp. (VFC): Maturity ladder at the end of Q4 of fiscal 2024 (own work, based on company filings) So, barring any significant negative surprises, VFC should end fiscal 2025 with net debt about $1.75 billion lower. However, the sale of Supreme and the expected repayment of the two maturities mentioned above have not prompted Moody's to change its current negative outlook on the long-term Baa3 rating. The agency estimates that VFC's pro forma debt to EBITDA ratio will decline from approximately 5.9x to 5.4x, provided all the proceeds from the sale of Supreme are used for debt paydown. I, personally, believe that VFC's maturity profile will be manageable again after the term loan and 2025 notes are paid down, also considering that the company will likely be able to generate at least $500 million in free cash flow. But even if operations stabilize fairly quickly (which I consider unlikely), I think it will be a long time before the company is in a position to return an increasingly large portion of free cash flow to shareholders via a growing dividend and/or share buybacks. Conclusion VFC released its Q1 FY2025 results on August 06, 2024, after the bell, and judging by the share price action, investors were quite pleased with the report. The fact that the overall rate of revenue decline moderated sequentially was one of the few positives in the report, but not one that I would have emphasized. Generally speaking, I don't think there's any point in getting prematurely optimistic with VFC at this point. The performance of Vans is still abysmal, and Timberland and Dickies did not surprise positively either. The North Face did comparatively well, but it remains to be seen how the important second quarter will go for the cyclical brand. VFC's management still has a lot of work to do and, frankly, I can't quite understand the market's optimism. In my view, the market is still celebrating the fact that management was able to get a pretty solid deal for Supreme and is now able to derisk the balance sheet. Of course, the transaction as a whole is a prime example of value destruction, but I think it would be unfair to simply conclude that VFC lost a lot of money in the process. Achieving $1.5 billion in this market environment and considering Supreme's sobering performance so far and VFC's rather weak negotiating position is definitely something I think the new management deserves credit for. However, I maintain that VFC should not only sell its backpacks business, but also Dickies, which only contributes about 7% to trailing twelve months core brands sales and therefore likely offers a good opportunity to cut overhead costs. I do not think it is unrealistic for the brand to fetch more than $500 million in a sale, so that together with the backpack business, VFC's net debt could fall to around $2.6 billion. This would further improve the already significantly de-risked maturity profile and potentially prompt rating agencies to at least revise the rating outlook to stable. All in all, I think that the sale of Supreme and the hopefully successful further asset sales will give management enough leeway to successfully execute the turnaround. I remain cautiously optimistic, but cannot really understand the market's upbeat reaction to another rather weak quarterly report. I continue to hold on to my VFC shares because of the soon at least somewhat de-risked balance sheet and because I think it is unreasonable to expect tangible signs of an operational turnaround so soon and given the difficult macroeconomic environment. I view it as appropriate to give management the time needed and appreciate the focus on improving financial stability.   Thank you very much for reading my latest article. Whether you agree or disagree with my conclusions, I always welcome your opinion and feedback in the comments below. And if there's anything I should improve on or expand on in future articles, drop me a line as well. As always, please consider this article only as a first step in your own due diligence.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457992858"}