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Kontoor CEO: ‘Our Strategies Are Working’

Led by a 14 percent hike in Lee brand global revenue, Kontoor Brands saw sales rise 3 percent to $681 million in the fourth quarter.

In a Nutshell: Kontoor Brands Inc., with a portfolio led by the Wrangler and Lee brands, provided 2022 guidance that included expected revenue of $2.7 billion, increasing at a high single digit percentage over 2021.

Kontoor said it expects first half revenues to increase in the low teens range compared to the prior year. Gross margin is expected to be consistent with adjusted gross margin of 44.6 percent achieved in 2021.

Expected increases from continued structural mix shifts to accretive channels such as digital and international, as well as benefits of strategic pricing, are anticipated to be offset by higher transitory expenses, including freight, in support of strong demand. Transitory impacts are expected to remain elevated in the first half to chase demand.

Selling, general and administrative (SG&A) investments will continue to be made in the company’s brands and capabilities. In addition to incremental volume-related items, SG&A investments are expected to be amplified in demand creation, digital and international expansion. Compared to adjusted SG&A in 2021, the company expects full year SG&A growth to be relatively consistent with full year revenue growth, with second half investments anticipated to be stronger than in the first half.

Earnings per share (EPS) is expected to be in the range of $4.65 to $4.75. Capital expenditures are expected to be in the range of $35 million to $40 million, primarily to support manufacturing, distribution and information technology projects.

The company ended the fourth quarter with $185 million in cash and cash equivalents, and approximately $800 million in long-term debt. As of Jan. 1, the company had no outstanding borrowings under its revolving credit facility and $487 million available for borrowing against this facility.

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Inventory at the end of fiscal 2021 was $363 million, up 7 percent compared to the prior year.

Sales: Revenue for the fourth quarter ended Jan. increased 3 percent to $681 million over the same period in the prior year. Excluding revenue from the 53rd week in the prior-year period, revenue increased 8 percent.

Revenue gains were primarily driven by strength in owned digital commerce, as well as continued positive trends in the U.S. wholesale business and solid performance in international markets, Kontoor said. These were somewhat offset by the combined impacts of the closure of VF Outlet stores, which Kontoor had inherited when it split off from VF Corp. in 2018, the discontinuation of the sale of third-party branded merchandise in all domestic stores and India business model changes. Excluding impacts from these strategic actions, fourth quarter revenue would have increased 7 percent compared to the same period in the prior year.

U.S. revenue was $523 million, up 1 percent over the year-earlier period. Gains were driven by growth in wholesale, including new business development wins, and strength owned digital commerce, which increased 39 percent. Excluding revenue from the 53rd week in the prior-year period, revenue increased 6 percent.

International revenue rose 12 percent to $158 million year over year. Compared to the same period in the prior year, China revenue increased 13 percent, while the European business rose 8 percent.

Wrangler brand global revenue was up 1 percent to $444 million over the same period in 2020. Wrangler U.S. revenue decreased 2 percent, with strength in digital, Western and outdoor offset by a 5-point headwind from the 53rd week in 2020. Wrangler international revenue rose 8 percent year over year.

Lee brand global revenue increased 14 percent to $233 million. Lee U.S. revenue rose 13 percent, driven by improving sell-through of new programs and increases in digital. Lee international revenue was up 14 percent.

For the year, revenue increased 18 percent to $2.48 billion, led by strength in digital and continued positive trends in the U.S. wholesale business and solid performance in international markets. Gains for the year were somewhat offset by the impacts of the VF Outlet store closures, the discontinuation of the sale of third-party branded merchandise in all domestic stores and India business model changes. Excluding impacts from these strategic actions, full year revenue would have increased 24 percent compared to the prior year.

U.S. revenue rose 14 percent to $1.87 billion, spurred by growth in wholesale, including new business development wins, and strength in digital, which increasing 43 percent. International revenue surged 33 percent to $607 million. China increased 37 percent and European business rose 33 percent. Excluding the strategic actions in India, international revenue was up 3 percent.

Wrangler brand global revenue increased 17 percent to $1.58 million. Wrangler U.S. revenue rose 15 percent and international revenue was up 27 percent. Excluding impacts from strategic actions, Wrangler brand global revenue increased 8 percent.

Lee brand global revenue increased 29 percent to $887 million. Lee U.S. revenue rose 24 percent, driven by improving sell through of new programs and increases in digital, while Lee international revenue jumped 36 percent. Excluding impacts from strategic actions, Lee brand global revenue increased 6 percent.

Earnings: Net income increased 2 percent in the quarter to $43.91 million.

Earnings before interest, tax, depreciation and amortization (EBITDA) was $78.68 million compared to $72.23 million in the prior-year period. EPS was 75 cents compared to 74 cents in the same period in the prior year.

Operating income came in at $69 million. Adjusted operating income was $72 million compared to $99 million in the same period in 2020. Adjusted operating margin decreased 430 basis points to 10.6 percent of revenue, driven by amplified investments in demand creation to drive future accelerating revenue growth and higher transitory impacts to chase demand. These investments, transitory impacts such as air freight and distribution expenses more than offset structural gross margin improvements and fixed cost leverage on improving revenue.

Gross margin increased 30 basis points to 42.8 percent of revenue, as adjusted gross margin declined 60 basis points to 42.6 percent of revenue. Structural margin improvements increased 80 basis points, driven by favorable customer and product mix, as well as business model changes, which more than offset the impacts of inflation, inventory adjustments and higher distressed sales. In addition, in support of strong demand, transitory expenses, which include air freight for expedited shipments, negatively impacted gross margin by 140 basis points in the quarter.

For the year, net income surged 188 percent to $195.42 million from $67.92 million. EBITDA was $319 million. Adjusted EBITDA was $387 million, compared to $258 million in the same period in 2020. Adjusted EBITDA margin increased 330 basis points to 15.6 percent of revenue.

EPS was $3.31 compared to $1.17 the prior year. Adjusted EPS was $4.28 compared to $2.61 in 2020.

Operating income was $283 million. Adjusted operating income was $352 million, compared to $229 million in prior year. Adjusted operating margin increased 330 basis points to 14.2 percent of revenue, driven by structural gross margin improvements and fixed cost leverage on higher revenue. These factors were somewhat tempered by amplified investments in demand creation to drive future accelerating growth, as well as higher transitory expenses and distribution expenses.

Gross margin increased 350 basis points to 44.7 percent of revenue. Adjusted gross margin increased 340 basis points to 44.6 percent of revenue. Favorable structural improvement from channel, customer and product mix more than offset higher transitory expenses, including air freight for expedited shipments, in support of strong demand, which negatively impacted gross margin by 130 basis points for the year.

CEO’s Take: Scott Baxter, president, CEO and chair of Kontoor Brands, said: “Kontoor’s solid fourth quarter and full year 2021 performance demonstrates how our strategies are working. In the quarter, we amplified strategic investments and delivered near-term results while continuing to set the foundation for greater long-term success…Based on the breadth and diversification of growth catalysts, supported by investments in key enablers, such as the evolution of our digital, ESG and demand creation platforms, we have confidence in our robust 2022 guidance, highlighting the continued momentum we expect in our business. As we look to the future, I’m optimistic that our growth-minded culture, as well as accelerating fundamentals and cash flow optionality, create a powerful combination.”