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Kontoor Brands Strategizes Tariff-Skirting Sourcing Plans for Wrangler, Lee

Coming off of a tough second quarter–its first as a public company after splitting from VF Corp.–Kontoor Brands has plans to turn things around.

It also has a strategy to deal with the U.S.-China trade war and general volatility in global sourcing. Not to mention troubles in the U.S. retail market.

“Despite some challenge in the U.S. retail landscape, we are well positioned to win with winning retailers in our key tiers of distribution and largest market,” Scott Baxter, president and CEO, told analysts on a conference call following a financial report released last week, indicating sales and earnings were down.

Brand plan

For one, he said digital wholesale continues to outperform for the owner of the Wrangler, Lee and Rock & Republic denim brands, with 30 percent  growth in the second quarter. Baxter said, excluding the Sears bankruptcy, Wrangler’s U.S. wholesale performance was up 2 percent in the first half of 2019 and “we expect global sales to accelerate in the second half of this year.”

Continuing, he said, “With our Lee brand, excluding the impact of the customer bankruptcy, we note that the U.S. wholesale increased 17 percent in the second quarter and was up 6 percent in the first half of 2019.”

Kontoor Brands is focused on several “high-level business strategies,” according to the CEO, starting with “scaling our advantage in our core denim business, including innovation.” The company also said it plans to accelerate its position in high value segments, like digital and international, while positioning itself for advantage in reaching new consumers and expanded channels.

In addition, the company is driving “an unwavering focus on margin expansion and improving capital efficiency,” and creating “a highly engaged and performance driven culture” that’s focused on and rewarded by achieving total shareholder return commitments, Baxter said.

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“In support of these strategies, we are focused on three key enablers, including enhancing its further scaling innovation, strengthening our best-in-class global supply chain and elevating our demand creation platform,” Baxter said.

As a standalone company, he said Kontoor Brands is better positioned to more effectively invest in and showcase new product technologies and advanced manufacturing capabilities. He cited the Body Optix line, an advanced anatomy shading technology that enhances shaping of denim products and generated “solid sell-through and brand heat for the Lee brand in China and its pioneer growth in our premium women’s lines.” It has recently paved the way for new women’s wear lines such as 101+ and Urban Riders in this key market. Body Optix has surpassed 500 million units mark at premium price points.

“Later this year we will be extending the Body Optix platform within the U.S. marketplace, scaling its meaningful features and benefits to more consumers at a compelling value,” Baxter noted.

The CEO also discussed the recent Indigood innovation platform that incorporates groundbreaking foam dyeing technology that uses no water, generates zero wastewater, uses 60 percent less energy and produces 60 percent less waste. Initially brought to global markets with the Wrangler Icons collection, the Lee brand will soon join the platform.

“Indigood allows us to more effectively address the needs of the younger millennial consumer base, clearly our focus for Kontoor now as an independent company,” Baxter said.

Boosting its core brands, the company has hired a new advertising agency for Wrangler and will do the same for Lee. It has collaborated with Lil Nas X in his global chart toping song, Old Town Road, launching the Wrangler collection with amplified product placement through digital channels. Recently introduced capsule collections for Wrangler and Lee have provided strong sell-through with key customers in higher tier channels.

When it comes to international, Rustin Welton, Kontoor chief financial officer, said China remains key for the company’s expansion strategy.

“Lee continues to maintain a strong leading position in China, with substantial expansion opportunities in both incremental, retail distribution, as well as further development of the digital platform. And we remain on track to launch the Wrangler brand in China in the first quarter of 2020, with our go-to-market strategy focused on digital,” he said.

Sourcing strategy

Kontoor’s supply chain affords distinct competitive advantages, Baxter noted, as the scaled, vertically integrated production capabilities developed over the years in its supply chain “are arguably among the best in the world in the denim category.” This includes specialized manufacturing innovations, including lasering technology and custom made production equipment.

The company has also streamlined and fine tuned its supply chain operations, including closing pre-owned manufacturing facilities in Mexico, exiting its internal trucking fleet and eliminating a shift at a domestic distribution center.

In sourcing, Baxter said “Speed, with more than a third of our current own production strategically placed in the Western Hemisphere, we can bring product to market for retailers in the U.S. within a matter of days, significantly faster than branded or private label producers that source in Asia.”

Welton said the company still has substantial Asian production, particularly in Bangladesh, though Kontoor has been looking at alternative sourcing options for some time.

“So the movement and the reduction of exposure in China is not a result of the tariffs,” he said. “It’s something that we have aggressively been looking at expanding sourcing opportunities in new markets…and we’ll continue do that as we move forward.”

Addressing the trade and tariff environment, Baxter said, “Today, we have very limited tariff exposure in China, with less than 1.5 percent of our global production for exports to the U.S. We do have some sizable production presence in Mexico, which as we stated, is a distinct competitive advantage given its scale and speed to market, and we’re optimistic that the pending USMCA trade agreement with Mexico and Canada will ultimately be approved.”

With that said, he told analysts the concerns around tariffs are not just based on our production in China, but also the potential negative impacts on global consumer spending.

“We recognize the most recent tariffs proposed act as an incremental tax on the U.S. consumer and many retailers will look to pass on higher costs in the form of higher prices,” Baxter said.