Wrangler and Lee parent Kontoor Brands reported significant business impacts from COVID-19 on first quarter revenue and profit.
In a Nutshell: Kontoor Brands Inc., with a portfolio led by Wrangler and Lee, said February year-to-date revenue declined by mid-single digits compared to adjusted results in the prior year, with approximately one-third of the drop-off due to China, as impacts from COVID-19 weighed heavily in the region.
March revenue declined significantly, particularly in the U.S. and Europe, as retail and owned-door closures and governmental stay-at-home orders spread. Given that the wholesale channel represented approximately 85 percent of the company’s global revenue in 2019, continued customer door closures resulted in a material decline for April revenue, but digital trends have been improving in recent weeks, Kontoor noted Thursday.
In the U.S., the company’s largest online and brick-and-mortar retail partners are leaders in their respective channels of distribution, Kontoor noted, and while volumes have been reduced, sales to most of the company’s largest customers are continuing.
So far, Kontoor has not experienced significant service disruptions to customers given its global, diversified supply chain network. As order volumes decelerated late in the first quarter, production in the company’s owned manufacturing facilities was adjusted to align with demand and tightly manage inventory.
As governmental conditions permit, the company’s owned manufacturing allows for flexing of production across diversified facilities and positions Kontoor to respond with scale and speed as demand warrants. In addition, a significant portion of sourced finished products originate from various countries that are currently under governmental stay-at-home orders. Given long-standing relationships with vendors, the company continues to diligently monitor developments and work with partners to prioritize production to best sync with demand.
Kontoor finished the first quarter with $479 million in cash and cash equivalents, and approximately $1.4 billion in total long-term debt. Over the past 60 days, the company has taken several proactive actions to enhance liquidity, including drawing down $475 million from its revolving credit facility and amending the terms of its credit facility to provide future period covenant relief and increased flexibility, but requiring netted cash not to exceed $250 million.
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The company also set temporary salary reductions for senior management and other key leaders, as well as a reduction in fees for the board of directors, while implementing temporary furloughs for certain personnel in stores, distribution centers, and corporate and regional offices. It also suspended merit increases for its global workforce and executed operating expense savings initiatives and select capital expenditure reductions.
The first quarter was impacted by increased inventory provisions, increased allowances for credit losses and the cost of downtime in owned manufacturing facilities.
Kontoor’s distribution centers around the world continue to operate and fulfill wholesale and direct-to-consumer (DTC) orders. All owned and partnership brick-and-mortar stores in China have reopened, while owned-retail stores in North America and Europe remain closed.
Sales: Revenue in the first quarter ended March 28 decreased 22 percent year over year to $504 million from $648.34 million. The decline was primarily the result of COVID-19 retail and owned-door closures and stay-at-home orders.
During the quarter, U.S. revenue was down 16 percent to $379 million compared with the year-ago period. The decline was partially offset by growth in digital, with U.S. digital wholesale increasing 41 percent. International revenue fell 37 percent to $126 million, as the pandemic had widespread impact, particularly in China.
Wrangler brand global revenue decreased 18 percent to $303 million. Impacts from COVID-19, planned lower distressed sales and the planned exit or reduction of select non-core programs were the primary drivers of the U.S. decline.
Lee brand global revenue fell 24 percent to $183 million, while U.S. revenue declined 9 percent, driven primarily by coronavirus business shutdowns. Other global revenue declined 50 percent to $18 million, driven by store closures related to COVID-19, as well as planned reductions in the sale of goods manufactured for third parties, and Rock & Republic.
Digital sales increased 10 percent, including a 41 percent increase in U.S. digital wholesale.
Earnings: Kontoor reported a net loss of $2.71 million compared to positive income of $15.41 million in the 2019 quarter, a 118 percent reversal.
Gross margin decreased 30 basis points to 37.8 percent of revenue, with decreases primarily due to increased inventory provisions that contributed approximately 340 basis points of the decline. Geographic mix also contributed 210 basis points to the decrease, which was adversely impacted by lower revenues generated in international markets, particularly in China.
The operating loss was $200,000. On an adjusted basis, operating income was $22 million, down from $68 million in the same period in 2019. Adjusted operating margin decreased to 4.4 percent of revenue, driven by increased inventory provisions, increased allowances for credit losses and fixed cost de-leverage of lower sales, more than offsetting restructuring benefits, cost savings and quality-of-sales initiatives.
CEO’s Take: Scott Baxter, president and CEO, said: “The COVID-19 global pandemic has had an unprecedented impact on the world, including Kontoor’s operations and results. During the first quarter, we took decisive actions to support the health and welfare of our most important asset, our colleagues around the world, as well as to strengthen our financial flexibility…We’ve implemented several strategic actions to help navigate the near-term challenges, while positioning the company for future success. These measures, which include the amendment of our credit facility and the related temporary dividend suspension, will provide strengthened liquidity that is paramount in these uncertain times and enable Kontoor to emerge from this crisis well positioned to best serve the future needs of our stakeholders.
“We believe Kontoor’s key retail partners remain well positioned to navigate this environment,” Baxter added. “With more than 200 years of authentic heritage, our two iconic brands offer consumers a distinct value proposition. In addition, we are highly encouraged by significant new programs and distribution gains that are expected for the second half of 2020. Our iconic brands, coupled with our cost savings efforts and scaled, agile supply chain, position Kontoor well in the marketplace.”