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Kontoor Sales Jump 29% in Q1

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Kontoor Brands turned in a 29 percent sales gain in the first quarter and transformed last year’s loss in the period into an income win.

In a Nutshell: Kontoor Brands Inc., owner of jeans giants Wrangler and Lee, raised its 2021 fiscal outlook Thursday as it reported first quarter financial results.

Revenue is now expected to increase in the low-teens range over 2020, as compared to a low-double digit range in the prior guidance, including a mid-single-digit impact from VF Outlet store closures and the transition to a new licensed business model in India.

Gross margin is now expected to increase by 230 to 270 basis points, as compared to 150 to 200 basis points in the prior guidance, above the adjusted gross margin of 41.2 percent achieved in 2020. The increase reflects continued benefits from ongoing restructuring and quality-of-sales initiatives, as well as higher anticipated growth in more accretive channels such as digital and international.

Sales, general and administrative (SG&A) investments will continue to be made in brands and capabilities. Due to the strengthening revenue and gross margin outlook, the company expects to amplify SG&A investments in demand creation, digital and international expansion. These increases will be partially mitigated by ongoing tight expense controls and sustained, structural post-pandemic cost containment initiatives.

Adjusted earnings per share (EPS) is now expected to be in the range of $3.70 to $3.80 as compared to $3.50 to $3.60 in the prior guidance. Capital expenditures are expected to be in the range of $40 million to $50 million, including $25 million to $30 million associated with the implementation of a new global ERP system.

The company ended the first quarter of 2021 with $230 million in cash and equivalents, and approximately $800 million in long-term debt. Due to strong cash generation during the quarter, Kontoor Brands made additional discretionary debt payments totaling $100 million. As of April 3, the company had no outstanding borrowings under the revolving credit facility and $493 million available for borrowing against it.

Inventory at the end of the quarter was $350 million, down $139 million or 28 percent compared to the prior-year period.

Sales: Revenue for the first quarter ended April 3 increased 29 percent to $652 million over the same period in the prior year. Compared to adjusted revenue in the first quarter of 2019, reported revenue increased 3 percent.

Revenue increases compared to the prior year were primarily driven by strength in digital, including the company’s own e-commerce business and digital wholesale, as well as improved performance across the U.S. wholesale business and accelerating trends in international markets. First quarter revenue also benefited from a shift in the timing of shipments from the second quarter to the first quarter ahead of the company’s North American ERP implementation.

Gains in the quarter were somewhat offset by strategic actions related to the VF Outlet store closures and the new business model in India. Additionally, COVID-19 continued to negatively impact the company’s first quarter results in select markets and channels.

U.S. revenue grew 29 percent year over year to $488 million, driven by growth in U.S. wholesale, new business development wins and strength in digital. Compared to adjusted revenue in the first quarter of 2019, reported revenue increased 11 percent, with owned e-commerce increasing 70 percent and digital wholesale jumping 132 percent.

International revenue rose 30 percent to $163 million in the period thanks to the China business increasing 109 percent over the same period in the prior year in constant currency and increased 20 percent in constant currency over the same period in 2019. Despite ongoing headwinds from COVID-19, the Europe business, led by digital, increased 4 percent over the same period in the prior year and was down 5 percent in constant currency. Compared to adjusted revenue in the first quarter of 2019, international revenue decreased 14 percent, driven primarily from impacts associated with the business model change in India.

Wrangler brand global revenue increased 31 percent year over year to $399 million. Compared to adjusted revenue in the first quarter of 2019, Wrangler brand global revenue rose 10 percent. Wrangler U.S. revenue increased 38 percent compared to the same period last year, driven by increases in digital and strength in the core U.S. wholesale and Western businesses. Compared to revenue in the first quarter of 2019, Wrangler U.S. revenue was up 18 percent.

Lee brand global revenue was up 37 percent in the quarter to $250 million. Compared to adjusted revenue in the first quarter of 2019, Lee brand global reported revenue increased 4 percent. Lee U.S. revenue rose 28 percent compared to the same quarter last year with strength from improving sell through of new programs and increases in digital. Compared to revenue in the first quarter of 2019, Lee U.S. revenue was up 16 percent.

Earnings: Net income in the quarter was $64.46 million compared to a net loss of $2.71 million in the year-ago period.

Adjusted operating income was $119 million, increasing 437 percent compared to the same period in the prior year. Adjusted operating margin increased 1,390 basis points to 18.3 percent of revenue, reflecting the benefits of gross margin improvements, fixed cost leverage on better revenue and tight expense control. Adjusted operating margin increased 750 basis points compared to the first quarter of 2019.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $127 million, up 325 percent compared to the year-ago period. Adjusted EBITDA margin increased 1,360 basis points to 19.5 percent of revenue. Adjusted EBITDA margin increased 750 basis points compared to the first quarter of 2019.

EPS was $1.09 compared to a loss per share of 5 cents in the same period in the prior year and compared to earnings per share of 27 cents in the same period in 2019.

Gross margin increased 830 basis points to 46.1 percent of revenue, compared to gross margin during the same period in the prior year, or 820 basis points on an adjusted basis. Favorable channel, customer and product mix, as well as quality-of-sales initiatives, were the primary drivers of gross margin gains in the quarter. In addition, the current period benefited from product cost enhancements, as well as lower inventory provisions and higher production volumes than the prior year. Compared to the first quarter of 2019, gross margin increased 800 basis points or 500 basis points on an adjusted basis.

CEO’s Take: Scott Baxter, president and CEO, said: “We started 2021 with solid momentum, as our first quarter results came in above our expectations. The strong performance in the quarter was broad-based, as evidenced by improving growth across regions, channels and categories. We continue to execute the strategic playbook we’ve communicated, as structural margin gains support focused investments in demand creation, infrastructure and technologies.”

“As we transition into our next horizon, the stage is set for us to pivot to growth,” Baxter added. “We are in the very early days of our journey and remain determined to deliver on the tremendous opportunities ahead.”

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