VF ended 2022 with a debt-to-EBITDA ratio – used as a way to gauge a company’s ability to pay down its debt – of 4.2x. The company’s goal is 2.5x. Moody’s cited several factors for the company’s high debt load in assessing the downgrade:
- Underperformance from Vans, which saw VF revise its full fiscal year guidance for the brand to a high-single digit percentage decrease, from a decline in the mid-single digits.
- Large retailers taking cautious inventory positions, which has led to order cuts for Dickies. The brand saw sales fall 13% in constant dollars to $177 million in the third fiscal quarter ended Dec. 31.
- The sluggish recovery in the China business.
- A more promotional environment in response to high inventory levels.
VF cut dividends by 41%, is looking to sell its Global Packs business – which includes Kipling, Eastpak, and JanSport – and is also working through inventory levels in an effort to reduce its debt load.
“While debt/EBITDA is currently elevated at 4.2x, VF is taking actions to bring leverage more in line with its 2.5x leverage target,” the ratings service said. “However, given the underperformance at Vans and the difficult economic environment, leverage is set to remain above this target for the next two years.”
Moody’s estimates the company’s debt ratio will hover above 2.75x for its next two fiscal years.
Despite the unsecured debt downgrade, the ratings agency’s overall outlook was changed from negative to stable due to the expected improvements to the business, driven by Vans and VF’s planned inventory rightsizing efforts over the next couple of years. More specifically, the ratings agency said it expects VF’s operating performance, cash flow, and credit metrics to see improvement as a result.
VF ended the December quarter with revenue up 3% in constant currency to $3.5 billion. Adjusted earnings per share fell 17% to $1.12.
The company counts Vans, The North Face, Timberland, and Dickies as its largest brands. Its portfolio also includes Supreme, Altra, icebreaker, Napapijri, Smartwool, and the packs business it said earlier this month was being put up for sale.