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Diversifying Products and Prices Pay Off for Kontoor Brands

Better gross margins and a tighter control on expenses powered Kontoor Brands to a 319 percent spike in net income in the third quarter, but the Greensboro, N.C.-based company’s home turf is also proving to be source of momentum.

In the Q3 earnings call last week, Kontoor Brands president and CEO Scott Baxter said the jeanswear firm’s U.S. business saw accelerating trends during the quarter with the Wrangler and Lee brands delivering positive growth.

In the U.S., Lee increased 10 percent, while Wrangler was up 2 percent, he said. “And we are taking share broadly,” he added. “According to NPD, both Lee and Wrangler brands saw accelerating U.S. share trends during Q3, ending the quarter with solid increases across both men’s and women’s denim.”

Baxter credited these broad-based improvements to the strategic initiatives that Kontoor has been executing since the spinoff from VF Corp. last year. Lee and Wrangler, he said, have lacked investment for a long time. “They’re great brands, incredible history and that, with a little bit of investment, with a little bit of strategy, with a lot of marketing, we can really make something special out of [them],” Baxter said.

To put it simply, Kontoor Brands’ TLC is paying off.

Since branching out as its own publicly traded company, Kontoor has focused on expanding into new price tiers and markets, Baxter said. Having a footprint in multiple channels gives the company a “distinct advantage” and allows Kontoor to be a bigger player in the denim category, he added.

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Both brands in Q3 have benefited from the buzz generated by special collections such as Lee’s ongoing partnership with Alife and its recent partnership with AppHarvest, an agriculture sustainability organization. The Wrangler by Fred Segal collection available at Nordstrom shows that the brand can support a higher price point. Meanwhile, Wrangler is also settling into the outdoor specialty segment with the All Terrain Gear line, which grew its reach in Europe.

But beyond owning two legacy brands, Rustin Welton, Kontoor Brands executive vice president and CFO, said the company’s strong manufacturing backbone has allowed the company to quickly respond to market demands and produce products for various tiers and customers.

“We have a diversified, world-class supply chain,” he said. “We’re sourcing or operating from over 275 factories in 20 countries that has enabled us to continue to supply the market and really believe we offer a quality product at compelling value in all of the channels of distribution that we have.”

Fostering established partnerships, however, has proven to be a good place to start. In September, Lee men’s and women’s products launched in over 2,000 Walmart doors, and Baxter said the company is “encouraged” by the early reads it’s seeing in the marketplace. “The initial assortments are now largely set, and in-store point-of-sale is well under way and will be finalized over the next few weeks, which should help further catalyze sell-through,” he said.

Importantly, Kontoor views the launch as a foundation from which it can scale upwards. The initial sell-in focused on jeans and select casual products, but Baxter said the company is “excited about the incremental SKU and category opportunities as well as the potential for door expansion over time.” Shorts and seasonal items, he suggested, could be next.

Like Levi’s, which recently expanded its partnership with Target, Kontoor’s distribution at retailers that consumers have relied on throughout the pandemic, like Amazon, Walmart and Target, has placed the company in a better position than competitors that have historically relied on mall foot traffic. But Baxter said a second area of strategic focus—accelerating digital—is a primary catalyst of Kontoor’s “evolving distribution strategy.”

The strategy is especially paying off close to home. Kontoor’s investments in its U.S. digital platforms continue to yield solid returns, he said. The company’s digital wholesale business increased 68 percent in Q3; its e-commerce business increased 43 percent.

“And while we remain in the early stages of transforming our own branded sites, the third quarter showed continued momentum for both brands, with global up 27 percent and up 38 percent,” Baxter added. “We will continue to our investments in developing our digital ecosystem as the consumer will be at the center of everything we do.”