Moody’s Investors Service changed VF Corporation’s outlook to negative from stable, reflecting VF’s lower-than-expected short-term operating performance expectations, an increasingly challenging operating environment as well as its higher-than-expected debt levels. .
Moody’s said the combination of these factors resulted in VF’s leverage profile not improving to the level expected upon its acquisition of Supreme in December 2020. For the twelve months ended July 2, 2022, the debt/EBITDA was 3.2 times, a level that is still above Moody’s level of 2.75 times corresponding to the Baa1 rating. Moody’s said VF faces near-term challenges related to the underperformance of its largest and most profitable brand, Vans, as well as significant destocking of customer inventory at Dickies. The company is also facing a slower-than-expected recovery in China, Moody’s noted, due to ongoing COVID-related disruptions and high inventory levels that should lead to a highly promotional sales environment. Moody’t said the issues are occurring in an increasingly challenging consumer spending environment and led the company to cut its revenue and earnings guidance for its fiscal year ending March 2023. When Associated At a currently high dividend payout, free cash flow will also deteriorate. in the short and medium term. Moody’s that in addition, VF will increase its debt by using a deferred draw term loan to fund an $857.5 million gross of tax and interest payment as part of its appeal of an adverse ruling related acquisition of Timberland in 2011. Adding additional debt, pro forma leverage exceeds 3.5 times as of July 2, 2022.
At the same time, Moody’s affirmed VF’s ratings, including senior unsecured rating Baa1, senior unsecured shelf rating (P)Baa1 and medium-term note program senior unsecured rating, preferred rating (P)Baa3, the (P)Baa2 subordinate rating and Prime-2 commercial paper rating.
VF’s Baa1 rating affirmation reflects VF’s strong position as one of the world’s largest apparel companies, its diverse portfolio of well-known brands and its track record of sustainable organic revenue and growth. improving long-term credit metrics through profitable growth and debt. reduction.
VF’s Prime-2 rating affirmation reflects Moody’s expectation that the company will maintain adequate liquidity to fund cash requirements over the next twelve months, including highly seasonal working capital requirements, capital expenditures and dividends. Moody’s expects the company to successfully refinance the 850 million euro bonds due September 20, 2023 ahead of maturity. As of July 2, 2022, VF had $528 million of cash on the balance sheet and ample excess availability under its $2.25 billion unsecured revolving credit facility due 2026. The credit facility supports its $2.25 billion commercial paper program, which had approximately $821 million outstanding as of July 2, 2022.
Moody’s wrote in its analysis: “VF’s Baa1 rating is underpinned by its significant scale as one of the world’s largest apparel companies, with broad industry diversification by product and distribution channel. VF owns several well-known brands with strong market positions in their segments such as Vans, The North Face, Timberland, Dickies and Supreme, with a successful long-term track record of sustainable organic revenue growth in its portfolio as well as strong EBIT coverage of interest which was currently approaching 9.5x. VF’s credit profile also reflects governance considerations, in particular its desire to pursue growth through acquisition and its tolerance for higher debt and leverage, as evidenced by the acquisition of Supreme in December. 2020 during the pandemic, as well as its currently high dividend payout which limits free cash flow available for investment or debt reduction. While the company has a longer-term track record of suspending share buybacks, reducing acquisition debt and leverage, and maintaining strong credit metrics, leverage has remained stubbornly high and will take probably 18-24 months to get back to rating-matching levels.
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