VF’s Debt Load Suggests Asset Sales Ahead
VF Corp.’s crippling $1.7 billion debt has prompted a strategic portfolio review by its board and management. Now, the company is assessing its vision to reshape the business for near-term and long-term profitability.
The North Face, Vans and Timberland have long been considered VF’s core three brands and the crown jewels of its business. While Vans and Timberland have been struggling for some time, third-quarter results saw The North Face post its first decline in years. Performance workwear brand Dickie’s also posted declines in all regions during the quarter.
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On VF’s third-quarter earnings conference call on Tuesday, management said the firm has $1 billion in debt due Dec. 30, 2024, and $700 million due on April 23, 2025. Company leaders forecasted $600 million in free cash flow for Fiscal Year 2024, with expectations that VF can generate the same amount for Fiscal Year 2025.
Even if VF hits those targets, however, the combined amount is below what’s needed to pay down the debt if it wants to maintain a decent balance sheet. And while the company could refinance its debt, current rates mean VF will have to then account for higher interest expenses. The current plan is for the company to complete the two debt repayments without the need for any refinancing, according to president and CEO Bracken Darrell.
“With guidance for $600 million in free cash flow in Fiscal Year 2024, we model $454 million in Fiscal Year 2025 creating challenges for debt paydown,” TD Cowen analyst John Kernan noted in a research note.
During the earnings call, Darrell said the third quarter was “particularly disappointing,” with total revenue down 17 percent. “Results were challenged across our brands, including The North Face and the rest of the outdoor brands,” he said, adding that the company is “acting with urgency to improve performance so we do not report another quarter like this.”
Darrell also spoke about initiatives to right-size the company’s structure. “Reducing debt and strengthening the balance sheet remains a top priority,” he said. “We’re already reducing the net debt substantially this quarter versus last year, and that’s before we sell any assets. We’ve also identified non-core physical assets, which will be monetized in the coming quarters, and we’re activating a plan to pay down our next two rounds of debt without refinancing.” The company previously disclosed that it was selling its Packs business, including the JanSport, Eastpak and Kipling brands, as well as its corporate jet and certain real estate assets to generate cash and avoid any refinancing.
VF has a history of routinely reviewing brands and culling from its portfolio. Darrell said during the company’s second quarter conference call in October that “everything is on the table and there are no sacred cows.” Besides The North Face, Vans, Timberland and Dickies, VF also owns streetwear brand Supreme, merino performance apparel brand Icebreaker, performance-based merino wool line Smart Wool (best known for its socks), the run-improving footwear brand Altra, and premium outdoor apparel and footwear collection Napapijri.
The company is known for its focus on the great outdoors, and both The North Face and Vans—which could show signs of green shoots as early revamping efforts continue—fit that profile. That makes it hard to imagine either brand getting the boot, but its other holdings are candidates to be put up for sale.
For the third quarter ended Dec. 30, VF posted a net loss of $42.5 million, or 11 cents a diluted share, against net income of $507.9 million, or $1.31, a year ago. Net revenues were down 16.2 percent to $2.96 billion from $3.53 billion. Revenues for the Vans, The North Face, Timberland and Dickies brands were down 28 percent, 10 percent, 21 percent and 16 percent, respectively. Other brands in the portfolio were collectively down 6 percent.
During the call, CFO Matthew H. Puckett, who is stepping down, didn’t talk about the “other brands” in VF’s portfolio, but he did say that “Supreme saw its positive momentum from last quarter continued with broad-based growth across regions and benefited from entry into Korea.” The brand opened its new store in the market last August. “Overall, strong sell-through across product categories led to improving profitability,” he said of the brand.
VF acquired the streetwear sweetheart in December 2020 in a $2.1 billion deal. The transaction saw the brand become a wholly-owned subsidiary of the Denver-based apparel and footwear giant, with Supreme founder James Jebbia and his senior team remaining with the brand and operating the business from its New York City-based headquarters. The deal was viewed as one that accelerated VF’s transformation into a consumer-focused company. Former VF CEO Steve Rendle said at the time that streetwear represented a $50 billion global opportunity. But just because the streetwear brand is seeing positive momentum doesn’t mean it can’t get jettisoned out from under VF’s umbrella.
The company was impacted by a cyber incident in December and dealt with activist investors pushing for change at the company, including selling some of its real estate and installing some fresh faces on VF’s board. They are also pushing VF to consider selling Timberland and Supreme, as well as its other smaller brands.
According to BMO Retail and Services analyst Simeon Siegel, the company’s in-depth strategic review will see VF leaning in on brands that sit in growing markets, are leaders within their markets, and have the potential to add value to the business within those markets.
Chief investment office Dana Telsey of Telsey Advisory Group has an “outperform” rating on the company’s stock with a price target of $22 a share. “Encouragingly, Mr. Darrell appears confident that the changes being implemented across the company have been well-received, and can bear fruit in the coming quarters,” she said, noting that some volatility is expected in the near-term as early transformation efforts take hold. Some of the belt-tightening under VF’s Reinvent strategy disclosed in November saw the elimination of 500 jobs.
Darrell has a history of successful brand turnarounds at Logitech and Old Spice and plans to use a similar playbook, but Wells Fargo analyst Ike Boruchow said his track record remains “unproven in footwear and apparel.” In his view, the third quarter was “much worse than feared,” as VF’s CFO is leaving, and the company “needs to sell assets to manage their debt load.” With all three of VF’s hero brands trending negative, Boruchow concluded that the “turnaround plan just became that much harder.”
