The effects of COVID-19 and subsequent store closures are reflected in Kontoor Brands’ Q1 2020 earnings. Revenue for the parent company of Wrangler and Lee in the first quarter ended March 28 declined 22 percent year over year to $504 million from $648.34 million. During the quarter, U.S. revenue was down 16 percent to $379 million compared with the year-ago period.
Though Kontoor Brands has taken action to reduce expenses by implementing temporary furloughs and additional salary reductions for senior staff, during the earnings call Kontoor Brands president and CEO Scott Baxter shared how the company continues to invest in long-term high ROI areas, including enhancing its core business and driving new business development opportunities in DTC, digital and international markets.
With a portfolio that consists of “two of the largest, most iconic global denim brands that offer consumers an outstanding value proposition,” and with partnerships with “the best in class, winning retailers,” he said Kontoor Brands will be well positioned in a post-coronavirus market.
“We believe our model is more advantaged to not only weather the near-term storms, but positions us for success in a rapidly changing, economic and consumer landscape as we move into the new environment,” he said. The company, he added, has a “long track record of delivering strong financial performance and cash flow during challenged economic cycles,” and stands behind the restructuring and sales initiatives that it has implemented since the 2019 spin-off from VF Corp.
Here, Baxter outlines some of the strategies and actions the company has taken to enable Kontoor to emerge from this crisis.
In the U.S., Baxter reported that declines began to accelerate in the middle of March, as many key markets went under stay-at-home orders and largely remained so today. Kontoor Brands’ distribution network, however, remained operational for digital and wholesale orders. Many of the company’s largest wholesale customers remain open, he added, so Kontoor continued to receive and ship orders from its distribution centers in the U.S.
Wholesale orders, he said, “have accelerated meaningfully over the last few weeks.”
Baxter said Kontoor’s largest retailer partners—Walmart, Amazon, Target and Kohl’s—are “positioned as stable long-term winners in their respective channels of distribution.” Since the spin-off, he said the company has “aggressively invested in defending this core” and is gearing up for more collaboration in the future.
One partnership for the third quarter is a sizable program that will add Lee, which Baxter pointed out is under-distributed in the U.S., to more than 2,000 new doors in North America.
In addition, Wrangler is building on the success of its All Terrain Gear (ATG) platform, a line of men’s outdoor apparel made with quick-drying, water-repellent fabric, mesh venting, convertible wearing systems, UPF 30 protection and recycled materials. The program will launch in more than 400 doors with a “key European retailer” in the second half of 2020.
Kontoor Brands’ digital evolution continues, too. In Q1, Kontoor’s digital wholesale business increased 50 percent globally, and 41 percent within the U.S.
“We have solid proof points that our investments in this channel are highly productive,” Baxter said. “We have been and will continue to aggressively invest behind our digital business, and while still early days, the transformation of our own digital ecosystem is well underway.”
Supply chain advantages
A distinct competitive advantage during turbulent times, Baxter said, is owned manufacturing, which allows Kontoor to “tightly manage the inventory” and positions the company to effectively react as conditions normalize.
This, he added, is critical in supporting wholesale partners that need to serve consumers when market conditions improve.
“Vertically integrated manufacturing located in the Western Hemisphere allows us to scale production with shorter lead times as demand stabilizes,” Baxter said.
A “pre-coronavirus” normal is unlikely, Baxter noted. Kontoor Brands anticipates higher promotional levels and accelerated retailer foreclosures, though Baxter said the company has an opportunity to “lead our industry in shaping the new future.”
To support liquidity and greater financial flexibility, Baxter said the company renegotiated its credit facility, including “amending covenants for the future periods and drawing down $475 million on a revolver in the first quarter.” The company has also temporarily suspended payment of a dividend to free up cash.
“Key here is the word ‘temporarily,’” he said, adding that Kontoor will reevaluate the dividend in the fourth quarter.
“The decision to amend the credit facility and suspend the dividend was not taken lightly,” Baxter said, “as we understand how foundational the dividend is to our long-term story. The payment of a dividend has been and will be an essential element of the Kontoor investment thesis and total shareholder return model.”
The jeanswear giant believes “most in the investment community share this view, and believe that cash is king in the current unprecedented environment,” he added.
Connecting with consumers
During difficult times, heritage brands leverage their long-term connections with consumers and serve as a hopeful reminder that this too shall past. Wrangler and Lee, Baxter noted, “have 200-plus years of collective authenticity between them, from the Great Depression, to the World Wars, to cotton inflation, these brands have lived through challenging global crises.
“We believe these brands histories authenticity and connection to consumers bolstered more recently by investments in demand creation, and innovation positioned our brands to endure,” he said.
To stay connected with consumers, the company has rolled out a new digital Wrangler campaign called “Long Live Cowboys,” which Baxter said speaks to the brand’s perseverance and reaches consumers in an authentic way. And with stay-at-home orders in place, Wrangler introduced the “Can’t Stop Country Music” series posted every night on Wrangler’s network and Facebook pages, and on the artists’ Facebook pages as well. More than 4 million viewers have already tuned into this entertainment experience.
“We will not go quiet with our consumer, even during these times when it is important to stay apart,” Baxter said. “And we will continue to invest in the highest return areas that elevate our brands authenticity and connection to our customers and consumers.”