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Ready to Break Out, Kontoor Brands Lays Out Its Plans for Investors

Ahead of its spin off from VF Corp. in late May, Kontoor Brands Inc., has outlined its plan for the future.

The new entity, which will be an independent, publicly traded company consisting of the Wrangler, Lee and Rock & Republic brands, and the VF Outlet business, is expected to maintain revenue of around $2.5 billion in 2019, and then see low single digit growth in 2020 and 2021, according to a presentation and financial outlook released Friday.

The initial outlook for Kontoor Brands’ first fiscal year that ends Dec. 28 has adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ranging between $340 million and $360 million, reflecting a mid-single-digit to low double-digit decline compared with full year 2018 adjusted EBITDA.

Most of the anticipated decline in full year adjusted EBITDA is the result of an expected falloff in the first quarter from inventory management and other operational actions taken prior to the planned separation, “which is intended to successfully position Kontoor Brands for the future.” In addition, retail bankruptcies are also expected to negatively impact full year 2019 adjusted EBITDA.

Capital Expenditures are expected to range between $55 million and $65 million, including approximately $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 about $80 million to $90 million of capital investment over a two- to three-year period and result in significant efficiencies and cost savings once fully implemented.

Kontoor Brands’ initial 2020 to 2021 outlook forecasts revenue to increase at a low single-digit compound annual growth rate (CAGR) over the period. Adjusted EBITDA is projected to rise at a mid-single-digit CAGR. Capital expenditures are expected to range between $105 million and $110 million overall during the period, including approximately $80 million to $90 million to support the design and implementation of the global ERP system.

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Scott Baxter, who has been named president and CEO of Kontoor Brands, said in a presentation to investors that the new company will have “compelling, durable and consistent cash flow” in excess of $300 million annually and “healthy margin expansion” thanks to $50 million in identified cost reductions.

Kontoor Brands comes into the market with a vertically integrated supply chain producing or sourcing more than 170 million units in 2018, executives said Friday, noting that it has “deep retail relationships across leading brick and mortar and e-commerce players” and a global footprint across 65 countries.

It also has two iconic brands, Wrangler and Lee, to build off of.

Wrangler saw $1.6 billion in net sales in 2018 and was the No. 2 men’s denim brand in the U.S. and the top denim brand in the mass channel. Net sales at Lee reached $1 billion last year, and it was the leading denim brand in China and India.

Executives said Kontoor Brands has a “focused management team instilling an energized culture and a unified global brand and product approach” that is on course to optimizing its supply chain, leveraging benefits of scale, realizing cost efficiencies and identifying and sharing best practices globally.

Kontoor also has plans to scale its advantage in the core men’s denim business to “drive industry-leading innovation, elevate demand creation, leverage [its] leading supply chain [and] continue to grow in high-margin channels.”

Restructuring and cost savings programs are under way at Kontoor, including exiting unprofitable channels and markets like Argentina; streamlining and simplifying supply chain operations, including establishing an internal trucking fleet; consolidating facilities, like moving Lee’s headquarters to Greensboro, N.C., from Kansas City, and redesigning its commercial organization in the U.S. and Asia.

The company will also establish and streamline global brand management across regions and functions, and leverage its supply chain to enhance inventory management and working capital efficiency. Kontoor said it will invest in higher growth, accretive digital and direct-to-consumer channels; elevate design, and “deliver innovation and enhance segmented offerings.”