Moody’s changes VF Corp’s debt rating outlook. to negative
Moody’s Investors Service has changed the outlook for VF Corp. from stable to negative, reflecting lower than expected near-term operating performance expectations, an increasingly challenging operating environment and 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 when it acquired the Supreme brand in December 2020.
For the twelve months ended July 2, 2022, Debt/EBITDA was 3.2x, a level that is still above Moody’s Baa1 rating level of 2.75x.
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 said, due to ongoing COVID-related disruptions and high inventory levels that should lead to a highly promotional sales environment.
Moody’s 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.
Coupled with a currently high dividend payout and free cash flow, Moody’s forecast VF Corp. would also deteriorate in the short to medium term. Moody’s said that in addition, VF would 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 a ruling. unfavorable loss related to the acquisition of Timberland in 2011.
Adding the additional debt, the pro forma leverage exceeds 3.5 times as of July 2, 2022.
Moody’s also affirmed VF’s ratings, including senior unsecured rating Baa1, senior unsecured rating (P)Baa1 and senior unsecured medium-term note program rating, preferred rating (P)Baa3, subordinated rating (P)Baa2, and commercial paper rating Prime-2.
VF’s Baa1 rating affirmation reflects VF’s position as one of the world’s largest apparel companies, its diverse portfolio of well-known brands and its track record of revenue growth and improving credit metrics long-term through profitable growth and debt reduction.
Its confirmation of VF’s Prime-2 rating reflects Moody’s expectation that the company will maintain adequate liquidity to fund cash flows over the next twelve months, including seasonal working capital, capital expenditures and the dividends.
Moody’s expects VF Corp. successfully refinances the 850 million euro bonds maturing on September 20, 2023, before their 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 a strong EBIT hedge of interest which is currently approaching 9.5 times. 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. Although 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.”
Photo courtesy of VF Corp.