VF Corporation reported financial results for its second quarter ended 26th September, 2020.
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“Our year to date results have surpassed our internal expectations across all brands, driven by Digital and China, two of our key growth pillars. We are beginning to see signs of stabilization and strength across all aspects of our business, supporting our decision to raise the dividend and provide a financial outlook for the balance of the year. Although uncertainties remain, investments in our digital transformation are resulting in near-term momentum and improved capabilities to emerge in an even stronger position,” said Steve Rendle, VF’s Chairman, President and CEO.
On 21st January, 2020, VF announced its decision to explore the divestiture of its Occupational Workwear business. The Occupational Workwear business is comprised primarily of the following brands and businesses: Red Kap®, VF Solutions®, Bulwark®, Workrite®, Walls®, Terra®, Kodiak®, Work Authority® and Horace Small®. The business also includes certain Dickies® occupational workwear products that have historically been sold through the business-to-business channel.
During the three months ended March 2020, the company determined that the Occupational Workwear business met the held-for-sale and discontinued operations accounting criteria. Accordingly, the company has reported the related held-for-sale assets and liabilities as assets and liabilities of discontinued operations and included the operating results and cash flows of the business in discontinued operations for all periods presented.
The adjusted amounts in this release exclude certain cost optimization activities and other charges indirectly related to the strategic review of the Occupational Workwear business. The adjusted amounts also exclude costs related to strategic business decisions in South America and the operating results of jeanswear wind down activities in South America following the spin-off of Kontoor Brands. Total costs were approximately $21 million in the second quarter of fiscal 2021 and $37 million in the first six months of fiscal 2021. In addition, the first six months of fiscal 2021 excludes approximately $42 million of noncash non-operating expenses related to the release of certain currency translation amounts associated with the wind down activities in South America.
Combined, the above items negatively impacted earnings per share by $0.04 during the second quarter of fiscal 2021 and $0.19 during the first six months of fiscal 2021. All adjusted amounts referenced herein exclude the effects of these amounts.
Reconciliations of measures calculated in accordance with GAAP to adjusted amounts are presented in the supplemental financial information included with this release, which identifies and quantifies all excluded items, and provides management’s view of why this information is useful to investors.
As the global impact of COVID-19 continues, VF remains first and foremost focused on a people-first approach that prioritizes the health and well-being of its employees, customers, trade partners and consumers around the world. To help mitigate the spread of COVID-19 and in response to public health advisories and governmental actions and regulations, VF has modified its business practices, including the temporary closing of offices and retail stores, instituting travel bans and restrictions, implementing health and safety measures including social distancing and quarantines.
Nearly all of VF’s retail stores in the EMEA and APAC regions, including Mainland China, remained open during the second quarter. In North America, 75 percent of all retail locations were open at the end of the first quarter and over 95 percent of all retail stores were open at the end of the second quarter. Additional retail locations have re-opened since the end of the quarter, and currently all of VF’s North American retail stores are open. VF’s wholesale customers in APAC, North America and EMEA have re-opened almost all of their locations.
The majority of VF’s supply chain is currently operational. Suppliers are complying with local public health advisories and governmental restrictions which has resulted in isolated product delays. VF is working with its suppliers to minimize disruption. VF’s distribution centers are operational in accordance with local government guidelines while maintaining enhanced health and safety protocols.
VF is continuing to monitor the COVID-19 outbreak globally and will comply with guidance from government entities and public health authorities to prioritize the health and well-being of its employees, customers, trade partners and consumers. As COVID-19 uncertainty continues, VF expects ongoing disruption to its business operations.
Revenue decreased 18 percent (down 19 percent in constant dollars) to $2.6 billion driven by store closures and lower consumer demand as a result of the COVID-19 outbreak and related government actions and regulations.
Gross margin decreased 340 basis points to 50.8 percent, primarily driven by elevated promotional activity to clear excess inventory and the timing of net foreign currency transaction activity. On an adjusted basis, gross margin decreased 350 basis points to 50.9 percent.
Operating income on a reported basis was $320 million. On an adjusted basis, operating income was $342 million. Operating margin was 12.3 percent. Adjusted operating margin was 13.1 percent.
Earnings per share was $0.62 on a reported basis. On an adjusted basis, earnings per share was $0.67.
Inventories were down 10 percent compared with the same period last year. During the quarter, VF returned approximately $186 million of cash to shareholders through dividends. As part of the company’s liquidity preservation actions during the ongoing COVID-19 outbreak, the company has suspended its share repurchase program. VF has $2.8 billion remaining under its current share repurchase authorization.
VF’s full year outlook assumes no material deterioration to the company’s current business operations as a result of COVID-19, governmental actions and regulations. For VF’s full year fiscal 2021 outlook, revenue is expected to be at least $9.0 billion, reflecting a decrease of approximately 14 percent on an adjusted basis, including low single-digit growth in the second half driven by a return to growth in the fourth quarter.
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Adjusted earnings per share is expected to be at least $1.20, reflecting a decrease of approximately 55 percent (down approximately 56 percent in constant dollars). Adjusted free cash flow is still expected to exceed $600 million.