Reef Avoids Impairment Charge

Reef Avoids Impairment Charge

VF Corp. said in its 10K filing that it performed an impairment analysis of Reef in the fourth quarter due to its recent weak performance but concluded that the flip flop brand’s goodwill and trademark were not impaired.

“Recent performance by the brand has been negatively impacted by isolated events such as an unseasonably cold spring in 2014, supplier issues in 2015 and bankruptcies of wholesale customers and an inconsistent retail environment in the U.S. in 2016,” VF wrote in its annual report. “However, VF is optimistic about the brand because of the nature of past challenges and the expected success of new product offerings.

Key assumptions developed by VF management and used in its quantitative analyses of Reef and its trademark include minimal revenue growth in the wholesale channel driven by door expansion with existing and new customers, modest growth in e-commerce, modest gross margin expansion based on updated strategies, increased leverage of SG&A expenses on higher revenues, market-based discount rates and royalty rate based on active license agreements of the brand.

VF’s internal analysis determined that for goodwill, the estimated fair value of the reporting unit exceeded the carrying value by 18 percent. The estimated fair value of the trademark exceeded its carrying value by a significant amount.

“Management performed sensitivity analyses on the impairment model and concluded that the goodwill was not impaired, even with negative changes made to key assumptions,” VF wrote. “For goodwill, a 15 percent decrease in projected cash flows did not cause the estimated fair value of the reporting unit to decline below its carrying value. Separately, a 100 basis point increase in the discount rate did not cause the estimated fair value of the reporting unit to decline below its carrying value.”

VF acquired Reef in 2005. As part of a 2009 annual impairment analyses, VF recorded impairment charges of $31.1 million and $5.6 million related to the goodwill and trademark, respectively. The remaining carrying values of the goodwill and trademark at the 2016 testing date were $48.3 million and $74.4 million, respectively.

Reef is part of the Outdoor & Action Sports coalition.

VF’s annual report can be viewed here.