S&P Global Ratings has downgraded VF Corp.’s credit rating and released a grim assessment of the state of the company’s business after VF reported third quarter earnings last week.
In addition to a deteriorating revenue picture, the rating agency also believes that VF will have to execute a sizeable asset sale to meaningfully reduce its $6 billion debt burden.
VF Problems Not Limited to Vans
S&P said VF’s operating performance continues to worsen for many reasons, even beyond the stalled turnaround at Vans.
“We revised downward our base-case forecast to account for recent declines that we expect to continue in VF’s four major brands – The North Face, Vans, Timberland and Dickies,” S&P wrote in its announcement.
While wholesale is tough for many companies at the moment, VF’s 26% wholesale decline in the third quarter was worse than what competitor brands experienced recently, as was the 8% fall in DTC sales. All of the above “further highlights brand issues beyond Vans,” S&P said.
The rating agency also does not see a turnaround coming anytime soon for Vans, despite the brand’s efforts to increase product innovation and leverage a new VF global commercial model and Americas region platform.
“We believe (Vans) waning resonance with consumers will continue to hamper efforts in fiscal 2025 (which starts in April),” S&P said. “…Weak demand in the North America wholesale channel and an increasingly competitive landscape means progress against these actions will be slow in the near term.”
S&P lowered its forecast for VF’s fiscal year, which ends next month. S&P now expects VF’s revenue to decline 10% versus the 6% decline previously forecast. EBITDA margin is expected to fall 200 basis points compared to last year.
S&P: VF Asset Sale Likely, Maybe a Big Brand
The weakness across much of the VF portfolio means it will be harder for VF to reduce debt without an asset sale, something VF is currently considering, according to VF CEO Bracken Darrell.
According to S&P, VF will need to reduce its $6 billion debt by almost $4 billion to reach VF’s stated debt to EBITDA ratio goal of 2.5x.
S&P estimates that VF will end its current fiscal year with a debt to EBITDA ratio of 5x.
“This implies sizeable asset sales, with potential for one or two of VF’s big four brands to be sold,” S&P said. “While this will allow the company to reduce its high debt burden faster, it also reduces its brand diversity and puts more pressure on the remaining underperforming brands to turn around.”
