“Our Fortress Balance Sheet:” VF’s June 30 Quarter

That’s how CEO Steve Rendle describes it in the quarter’s conference call.  We’ll quickly review the numbers, but in this maximum pandemic quarter, it’s not so much about the income statement as the strategy and management response.  We’ll let VF’s management explain to us what they did and how they were prepared.

Yeah, I agree.  You’re not mostly VFs and can’t do everything they did.  But you can do some.  Even now.  If VF is well positioned for the pandemic it’s because of the management practices they evolved before anybody had even heard of covid 19.  Funny thing- their actions helped them prepare for the pandemic but were good management before it reared its ugly head.

The Numbers

Let’s start with a word about “fortress” balance sheets.  These days that means liquidity- cash and access to cash.  The issue is a company’s ability to meet its obligations until things start to “normalize,” whenever that is and whatever that means.  Initially VF, like other industry companies, drew down its credit line.  Then, on April 23, “…VF closed its sale of senior unsecured notes which provided net proceeds to the company of approximately $2.98 billion.”  Part of the proceeds were used to pay down that credit line.

The impact was to raise VF’s current ratio to 3.65 times from 2.05 times at the end of last year’s June 30 quarter.  That’s a good thing, indicative of improved liquidity.  But at the same time long term debt to equity rose from 51.2% at the end of June 2019 to 192.6% because of the increased debt and a 30% decline in stockholders’ equity year over year.

It wasn’t long ago that VF was talking about reducing  leverage.  Their ability to borrow under the terms they got is indicative of financial strength.  For the times, they have a fortress balance sheet.  By some measures, you can argue it’s weaker than a year ago.  In the conference call, CFO Scott Roe says they expect to end fiscal 2021 with their revolving line of credit undrawn and with $3 billion in cash.  He also reminds us they will get additional cash when the work wear business is sold.

Revenues fell 48% to $1.1 billion compared to last year’s June 30 quarter.  The active segment was down 54% to $571 million and outdoor revenues fell 44% to $341 million.  Direct to consumer revenues declined 37% even with ecommerce rising 78%.  International revenues fell 37% even with greater China revenue being flat.  International was 51% of total revenue.

Gross margin fell 3.4% to 52.9% “…negatively impacted by elevated promotional activity to clear excess inventory, partially offset by favorable mix shift toward higher margin businesses and channels.”  Shifting towards higher margin businesses has been a focus of VF for some years.  The spin off of the jeans business is an example.  The shift is one of those strategies that makes particular sense during the pandemic but was solid business before we ever heard of Covid 19.

Income during the quarter was a loss of $285.6 million compared to a profit of $49.2 million in last year’s quarter.  The company benefited from $50.4 million during the quarter “…as a result of relief from the CARES act and other governmental packages, which were recorded as a reduction in selling, general and administrative expense.”

 

Vans’ revenue fell 52% during the quarter compared to last year’s quarter.  The North Face was down 45% and Timberland, 47%.

Tactics and Strategies

The tactics VF has pursued during the pandemic are recognizable to most industry companies.  Close stores, reopen them when you can with protection, focus on ecommerce, reduce expenses including capital spending, raise cash, manage your supply channels, protect your employees and customers, negotiate with landlords, work from home.

Strategically, CEO Rendle summarized it this way.  “VF is built for this. Our strong brands, coupled with our purpose-led people-first approach, and our financial and supply chain disciplines, and our fortress balance sheet, allow us to weather any storm.”  With, he could have added, the opportunity created by our competitors who don’t make it because they weren’t as well prepared.

“Participation in outdoor activities,” he continues, “and consumer interest in outdoor exploration is increasing. Health and wellness and the pursuit of a more active lifestyle is accelerating. Casualization is a trend likely to be a mainstay in post- COVID world. There’s an elevated focus on environmental sustainability that will lead to a greater commitment to combating global climate change. And there are growing expectations for purpose-driven actions from brands to care for their local communities and address issues relevant to their consumers.”

These trends weren’t, he explains, new but were accelerated by the virus.  VF had already identified them.  Companies that hadn’t had to hit the brakes and turn left, right, or around.  VF just had to hit the accelerator while trying to keep the car on the road.  It wasn’t easy to do, but it was opportunity and they felt prepared.

“Within digital, our consumer-centric strategy recognizes that transactional activity is only one measure of success.  We are increasingly focused on engagement metrics, consumer capture and consumer lifetime value. Highlights from our digital for the quarter include buy online, pickup in store and ship-from-store capabilities have fully launched in the vast majority of our stores in the US.”  The absolute necessity of integrating inventory management with information gathered from algorithmic driven data systems was already well under way at VF.

“We are increasingly leveraging product and consumer data as a differentiator, using our analytics engine to create more individualized experiences, engaging consumers, while providing product development insights.  Demand chain analytics investment across our platform will allow our brands to understand what is trending in what channels, with the goal of making our digital marketing more timely, relevant and contextual.”

90% of VF’s strategic investments in this year’s plan were focused on digital transformation.  Again, no change of direction required.  Just hit the accelerator.

There’s also a comment about their brands having a relatively high percentage of core products.  What I think and hope they mean is that marginal SKUs are gone.  I wish they had discussed product quality as it relates to sustainability.

I’m sure there have been bumps in the road.  The faster you go, even straight, the more trouble even a small pothole can be.  They expect second quarter revenue to be down less than 25%- a comparative big improvement but hardly out of the woods kind of results.

But there’s all that liquidity which means they haven’t, they tell us, cut back on strategic investments.

It’s not just about being a survivor- it’s about being prepared and able to do the right things as you survive.