VF Downgraded by S&P
VF Corp, the parent corporation of brands as iconic as Vans, The North Face, Supreme, and Dickies, has been downgraded by S&P to “BBB-”, just one downgrade above junk status. Should VF Corp’s financial standing get any worse, it would make access to a credit line, not just more expensive, but also more difficult.
The debt downgrade followed terrible sales numbers in Q3, leading to losses of USD 42.5 million in said period. Likewise, VF Corp’s debt to earnings ratio is 5 to 1, more than twice their target, and which indicates a potential asset sale. Vans, Timberland, The North Face, and even Dickies could all potentially be on the chopping block. Whilst offloading debt could be a positive strategic decision, it would also narrow down its brand portfolio, putting even more pressure on the surviving brands.
Last summer, Bracken Darrell became the newest CEO for VF Corp, and was tasked to turn business around as soon as possible. However, activist investors, Legion Partners Asset Management, was too impatient to wait and see and acquired a stake in VF, pushing the company to sell off underperforming brands like Timberland. This comes on the heels of Engaged Capital, a second activist investor, calling VF to offload non-core businesses, chiefly, every brand under the VF umbrella but Vans and The North Face. Since its acquisition in 2020 for USD 2 billion, hype brand Supreme has failed to live up to its hype (pun fully intended), posting negative sales growth for the last three years.
Keeping Vans and The North Face only, however, is not risk free and might even accelerate VF’s demise.
Vans, who was once hailed as a hip and savvy, is VF’s worst performing brand at the moment, experiencing a 28% drop in sales in the third quarter amid a shift in shoe trends. Clearing Vans inventory in the wholesale channel is of utmost importance for VF, which will inevitably put even more fiscal pressure on the company this year. WWD further notes that “VF Corp’s margins have taken a hit from excessive discounts and promotions it has offered to attract shoppers as well as clear surplus inventory." Compounded to this is Van’s declining resonance and relevance amongst consumers, who see the brand as old-fashioned and lacking in design innovation.
Nevertheless, it was not all bad news in Q3 for VF. Sales for The North Face were up by 19%, and whilst sales in the Americas were down by 11%, they rose by 8% in Greater China.
S&P also expects V&F to use USD 800 million of its discretionary cash flow to lighten up its debt obligations in 2024 and 2025. S&P further goes on to say that ““At this time, we believe VF remains committed to a conservative financial policy and will abstain from mergers and acquisitions and share repurchases with a goal of restoring gross leverage to its target.”
