VF Corp (VFC; Baa3 Neg/BBB- Neg) 1Q (to June) Results

Management and bulls will point to an easing in the pace of falls (from -11% last qtr to -8%). We wouldn't define that as a turnaround - particularly when it's still loss making. We'd also point out mgmt sees even bigger margin deleveraging on a SG&A expense increase next quarter. This leaves Q2 (3m to Sept) lacking any significant positive catalyst on the bottom line. Heading in now for purely carry leaves you exposed to weak macro between now and a actual turnaround (Q3?). We saw VF get hit hard on recent risk-off sessions and that makes sense to us too; costs are sticky so it needs headline to stop falling - weak macro is not what it needs here. On RV we continue to prefer Coty 27s on short-end and keep caution further out.

2Q (to June) numbers:

• Sales at $1.9b (-8% constant currency, -9% gross). Gross margin was 52% (-80bps) as it continued some inventory clean up (-24%yoy). EBIT was a -$240m loss at a adj. -4% margin and reported -12.6%. The loss is up from last years -$9m which is as expected on continuing margin deleveraging (headline sales fall, SG&A stays sticky) which contributed -280bps to the contraction. It's continuing quarterly dividend at 9c/share or $35m.
• North Face still holding firm (-3%) while all other brands faced double digit falls. Reminder only North Face was rolling "tougher" comps (+12% last year) so impressive performance from it to edge only a LSD fall.
• US where it is nearly half exposed continued to lead falls (-12%) while EMEA (-5%) and APAC (-3%) were more mute. DTC (-10%) and Wholesale (-8%) similar at group level but differences by region. For full breakdown see below image.
• Numbers above are slight beat (c-11%) on headline growth and are in-line to slight misses further down the income statement/on margins. As we said late yesterday consensus set a low bar - somewhat in line with mgmt guidance for it to stay rough.

Guidance:

• Q2 revenue falls to continue moderating but not into growth. Vans to see modest improvement in falls, North Face to be down relative to Q1. Gross margin to be up slightly yoy (last yr: 51.3%). It says it is reinvesting its targeted 25-30% of cost savings in front-loaded manner and this will appear in Q2 dragging SG&A expenses UP and deleveraging margins further down.
• FY (to March) FCF guidance including non-core physical asset sales is kept unch at $600m and is the only explicit guidance. Supreme sale expected to close by CY24 as expected.

Earnings call:

• It says targeting $300m in cost savings this half - this is nothing to get excited about. Co makes $2-3b/qtr in sales and is facing HSD falls; so $200-300m/yr. To keep margins flat you don't need $ for $ cuts in costs but again as we can see this qtr the $50m in savings were not close to holding margins/earnings up. Obviously this qtr wasn't helped by the seasonal weakness in headline revenues.
• It was asked if any other brands are set to be sold; said none for now but always reviewing portfolio and is relying on cash generation to pay down debt further out that is not covered by supreme sale - i.e. '26 and onward maturities.
  It's closing unprofitable Vans stores dampening its growth in that segment even further. It' saying retail sector more broadly facing falling footfall.