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Kontoor Brands Upbeat for H2 Despite 43% Revenue Plunge

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Denim powerhouse Kontoor Brands said it sees a pickup for the second half, after reporting a second-quarter loss and revenue decline.

In a Nutshell: Kontoor Brands Inc., with a portfolio led by the Wrangler and Lee brands, said it has strengthened liquidity and improved its financial position in the second quarter, even as the economic crisis that resulted from the global pandemic brought down sales and earnings.

The company said it ended the quarter with $256 million in cash and equivalents, and approximately $1.1 billion in long-term debt. It repaid $175 million against the revolver in conjunction with the closing of the amendment to the credit facility in May.

Due to the company’s strong cash generation, in June it made an additional discretionary repayment on its revolver of $75 million. As of June, Kontoor had $225 million of outstanding borrowings under the revolving credit facility and $273 million available for borrowing against it.

Inventory at the end of the second quarter of 2020 was $433 million, down $105 million or 20 percent compared to the prior-year period.

Kontoor previously withdrew its 2020 guidance and has not provided an updated outlook given the continued dynamic nature of the environment. However, the company said it continues to take the necessary, proactive steps to accommodate a prolonged COVID-19 operating climate.

Revenue in the second half of 2020 should experience sequential year-over-year improvement and is expected to benefit from new programs and distribution gains, as well as the timing shift of shipments.

Sales: Revenue for the second quarter ended June 27 decreased 43 percent to $349 million. Kontoor said the revenue declines were primarily the result of COVID-19-related wholesale and owned-door closures, and stay-at-home orders, as well as an approximate $33 million timing shift of shipments from the second quarter to the third. Revenue on a year-over-year basis sequentially improved each month as the quarter progressed.

During the second quarter, U.S. revenue was down 41 percent to $288 million, driven primarily by the COVID-19 impacts and the timing shift. These declines were partially offset by growth in digital, with U.S.-owned online sales increasing 48 percent and U.S. digital wholesale rising 36 percent.

International revenue fell 51 percent to $61 million, primarily from COVID-19 impacts. Europe revenue was the most impacted, while the recovery in China continued to improve.

Wrangler brand global revenue decreased 31 percent to $252 million, while its U.S. revenue declined 27 percent.

Lee brand global revenue declined 58 percent to $86 million, mainly due to the pandemic’s economic fallout. Lee U.S. revenue fell 66 percent, driven by more prolonged retailer door closures.

Other global revenue declined 70 percent to $12 million, driven by the temporary company-owned VF Outlet store closures related to COVID-19, as well as planned reductions in the sale of goods manufactured for third parties and Rock & Republic.

Earnings: The company reported a net loss of $33.26 million compared to net income of $37.99 million in the second quarter of 2019.

The operating loss was $22 million compared to income in the year-ago period of $53.52 million. On an adjusted basis, operating income was $6 million, down from $74 million in the same period in 2019.

The adjusted operating margin decreased to 1.6 percent of revenue, driven by fixed cost de-leverage of lower sales and increased credit losses, more than offsetting restructuring benefits, cost savings and quality-of-sales initiatives.

The loss per share was negative 58 cents, while the adjusted loss per share was negative 22 cents.

Earnings before interest, tax, depreciation and amortization (EBITDA) was a loss of $14 million. Adjusted EBITDA was $13 million, down from $82 million in the prior year.

Gross margin decreased 10 basis points to 38.5 percent of revenue. COVID-19 impacts associated with downtime in owned manufacturing and inventory reserves drove a 450-basis point net decline. Geographic mix contributed another 60 basis points of headwind. These factors more than offset approximately 350 basis points of improvement from restructuring, quality-of-sales initiatives, pricing, product cost enhancements and improving channel mix.

CEO’s Take: Scott Baxter, president and CEO of Kontoor Brands, said: “In a rapidly changing operating environment, we remain focused on navigating near-term impacts associated with the COVID-19 pandemic, while also positioning Kontoor for future success. During the second quarter, we successfully balanced managing through short-term challenges while taking proactive measures to drive competitive separation in the global marketplace. We strengthened our liquidity position, improved our financial flexibility and paid down debt, all while investing in growth and new business development opportunities.”

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