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Kontoor Brands Off to Rough Start, But Denim Maven Predicts Uptick

Stumbling out of the gate after splitting off from VF Corp., Kontoor Brands said changes are afoot for a turnaround.

In a Nutshell: Kontoor Brands Inc., which became an independent, publicly traded company on May 23 with a portfolio led by Wrangler and Lee, saw drops in both revenue and income in the second quarter, but the company reaffirmed its outlook for the fiscal year ended Dec. 28.

Revenue is expected to exceed $2.5 billion, reflecting a mid-single digit decline compared with full year 2018 adjusted revenue, which excludes the impact of restructuring and separation costs, and changes in the company’s business model.

Kontoor expects second half revenue to improve, with the fourth quarter benefiting the most from strategic actions and the customer bankruptcy comparison. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) is expected to range between $340 million and $360 million, reflecting a mid-single digit to low double-digit decline compared with full year 2018 adjusted EBITDA.

Capital Expenditures are expected to range between $55 million and $65 million, including roughly $30 million to $40 million to support the design and implementation of a global enterprise resource planning (ERP) system. The global ERP system implementation is expected to require approximately $80 million to $90 million of capital investment during a two-to-three year period and is expected to result in significant efficiencies and cost savings once fully implemented.

Looking ahead to 2020 and 2021, the company forecast revenue to increase at a low-single digit compound annual growth rate, and adjusted EBITDA to rise at a mid-single digit rates.

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“As anticipated, the impacts of strategic actions and the prior year U.S. retailer bankruptcy weighed on our second quarter performance,” Kontoor Brands said. “We expect to see improved second half performance, as benefits from restructuring and cost savings initiatives begin to more fully manifest. As planned, inventory levels are expected to remain elevated during the third quarter of the year due to the inventory built during the second quarter in anticipation of plants closed. The company expects second half adjusted EBITDA to be more weighted to the fourth quarter.”

Sales: Net revenue for the second quarter ended June 29 fell 8 percent to $609.7 million on a reported basis and was down 7 percent in constant currency.

On an adjusted basis, revenue was down 6 percent to $602 million. Kontoor brands said adjusted revenue declines were mainly due to impacts of a major U.S. retailer bankruptcy in the fourth quarter of 2018 that represented about 2 points of the decline, actions to exit an underperforming country in Europe and to change business models in select markets, which contributed an additional 2 points to the decline, and foreign currency headwinds.

During the second quarter, U.S. revenue declined 3 percent $487 million, international revenue fell 25 percent to $123 million on a reported basis and fell 19 percent in constant currency.

Wrangler brand global revenue decreased 8 percent to $364 million on a reported basis and 7 percent in constant currency. U.S. revenue for the brand declined 3 percent due to timing shifts of shipments and the customer bankruptcy.

The company noted that excluding the bankruptcy, Wrangler’s U.S wholesale performance was up 2 percent in the first half of 2019 and it anticipates global sales will accelerate in the second half of this year.

Lee brand global revenue decreased 5 percent to $206.9 million on a reported basis and 3 percent in constant currency. Excluding currency and the impact of the customer bankruptcy, adjusted revenue for Lee would have increased 1 percent in the quarter.

Earnings: Net income in the quarter dropped 37 percent to $38 million compared to the prior-year period, when Kontoor Brands was still part of VF Corp.

EBITDA fell 26 percent in the quarter on a reported basis to $60 million. Adjusted EBITDA was down 10 percent to $82 million. EBITDA margin on a reported basis declined 250 basis points to 9.9 percent.

Gross margin decreased 160 basis points to 38.6 percent on a reported basis. On an adjusted basis, gross margin was down 110 basis points to 40.0 percent. The company predicted the comparative performance in gross margin will improve in the second half.

CEO’s Take: Scott Baxter, president and CEO, said: “The restructuring and cost savings actions we’ve taken to simplify and stabilize the organization are paying off and are setting the foundation for improved profitability in the second half of 2019 and beyond. We will remain disciplined in our approach and focused on our total shareholder return goal of 8 to 10 percent supported by an industry leading dividend.”

Adding to that, he said, “We have the pieces in place and see a clear path to achieving our long-term revenue growth, margin improvement and cash generation goals. These improvements start to gain traction in the second half of 2019 as our business model changes and cost improvement initiatives begin to take hold.”