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This Is What Boosted Kontoor’s Net Income 50 Percent

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Led by strength in Wrangler and digital, Kontoor Brands eked out a 1 percent revenue gain in the fourth quarter.

In a Nutshell: Kontoor Brands Inc., with a portfolio led Wrangler and Lee, said Tuesday that at the end of the fourth quarter it achieved its lowest net debt level and strongest liquidity position since becoming a standalone public company in May 2019.

As the company released financial results for its fourth quarter and fiscal year, it reported ending 2020 with $248 million in cash and equivalents, and approximately $900 million in long-term debt.

Due to the company’s strong cash generation, during the fourth quarter it made additional discretionary repayments on its revolver totaling $125 million. As of December, Kontoor Brands, which split off from VF Corp., had no outstanding borrowings under the revolving credit facility and $493 million available for borrowing against this facility. Based on improving fundamentals, the company announced the early termination of the covenant relief period in its amended credit facility.

Selling, general and administrative (SG&A) expenses were $218 million in the quarter. On an adjusted basis, SG&A was $187 million, or 28.3 percent of revenue, up 40 basis points compared to the same period in the prior year. Adjustments were due to costs associated with a global ERP implementation and information technology infrastructure build-out, VF Outlet door closures and a business model change in India. Tight expense control and restructuring benefits helped offset increases in demand creation spending in support of fourth quarter and 2021 revenue.

Inventory at the end of the fourth quarter was $341 million, down $117 million or 26 percent compared to the prior-year period.

While the impacts from the pandemic and macroeconomic factors remain uncertain, Kontoor Brands provided fiscal 2021 guidance. Revenue is expected to increase in the low-double digit range over 2020 levels, including a mid-single digit impact from the VF Outlet actions and India business model changes.

Adjusted gross margin is expected to increase 150 to 200 basis points above the 41.2 percent achieved in 2020, reflecting 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.

Adjusted EPS is expected to be in the range of $3.50 to $3.60, including the accretive impacts of actions taken with the VF Outlet and India businesses. Capital expenditures are expected to be in the range of $40 million to $50 million, including $25 million to $30 million related to the ERP rollout.

Sales: Revenue for the fourth quarter ended Jan. 2 increased 1 percent compared to the prior year to $661 million.

Kontoor Brands said revenue increases were primarily driven by strength in digital, including its owned e-commerce and digital wholesale, as well as improved performance across the Wrangler U.S. wholesale business and accelerating trends in international markets. These gains were somewhat offset by Covid-19 impacts on select wholesale distribution.

In addition, the company made the strategic decision to exit 38 VF Outlet stores and discontinue the sale of third-party branded merchandise in all stores, and to transition to a new licensed business model in India. These decisions are consistent with the company’s ongoing commitment to optimize its distribution strategy. The impact of these actions was offset by the benefit of sales during the 53rd week in the period.

U.S. revenue ticked up 1 percent to $520 million, driven by growth in Wrangler wholesale, new business development wins and strength in digital, with its owned e-commerce increasing 50 percent and digital wholesale increasing 75 percent.

International revenue was $141 million, increasing 4 percent over the same period in the prior year, with Wrangler international up 5 percent and Lee international up 3 percent. The Europe and China businesses experienced continued sequential revenue improvements, with China increasing 11 percent and Europe increasing 7 percent.

Wrangler brand global revenue rose 7 percent year over year to $448 million. Wrangler U.S. revenue increased 8 percent, driven by increases in digital and strength in the core U.S. wholesale and Western businesses. Lee brand global revenue increased 1 percent in the period to $204 million. Lee U.S. revenue was flat in the quarter with strength from improving sell through of new programs and increases in digital, largely offset by the ongoing impacts of Covid-19 on select distribution and quality-of-sales actions during the quarter.

For the year, revenue decreased 18 percent to $2.10 billion. Revenue declines were primarily the result of temporary wholesale and owned door closures and stay-at-home orders due to Covid-19. The 53rd week contributed approximately 1 point to full-year revenue.

U.S. revenue was $1.64 billion, a 14 percent decline year-over-year driven by Covid-19 impacts. Full year declines were partially offset by new business development wins and growth in digital, with U.S. own.com increasing 38 percent and U.S. digital wholesale increasing 59 percent year-over-year.

International revenue fell 29 percent year over year to $456 million, with declines driven primarily due to Covid-19, partially offset by growth in owned digital, which grew 12 percent.

Wrangler brand global revenue decreased 11 percent for the year to $1.35 billion. U.S. revenue declined 7 percent, with 2020 second half Wrangler U.S. revenues increasing 5 percent compared to the same period in 2019.

Lee brand global revenue decreased to $688 million, a 22 percent decline year-over-year. U.S. revenue fell 18 percent, with second half Lee U.S. revenues increasing 5 percent compared to the same period in the prior year, reflecting new business development wins and strength in digital.

Earnings: Net income grew 50 percent in the quarter to $43.11 million from $28.75 million a year earlier.

Earnings before interest, tax, depreciation and amortization (EBITDA) was $72 million. Adjusted EBITDA was $106 million, increasing 14 percent compared to the same period in the prior year. Adjusted EBITDA margin increased 190 basis points to 16.1 percent of revenue.

Fourth quarter earnings per share (EPS) of 74 cents increased 48 percent compared to the prior year; Adjusted EPS of $1.23 increased 27 percent year over year.

Operating income improved 7 percent to $63 million. On an adjusted basis, operating income was $99 million, increasing 16 percent compared to the same period in the prior year. Adjusted operating margin increased 180 basis points to 14.9 percent of revenue, reflecting the benefits of gross margin improvements and tight expense control.

Gross margin in the period rose 180 basis points to 42.5 percent compared to the prior year, while adjusted gross margin increased 230 basis points to 43.2 percent year over year. Benefits of channel mix, as well as lower distressed sales and favorability in product costs, were the primary drivers of the increase in adjusted gross margin, more than offsetting headwinds from higher input costs.

For the year, net income fell 30 percent to $67.92 million from $96.65 million in 2019.

EBITDA was $156 million. Adjusted EBITDA was $258 million, down 24 percent compared to the prior year. EBITDA margin on a reported basis declined to 7.4 percent of revenue. Adjusted EBITDA margin decreased 120 basis points to 12.3 percent.

Operating income was $124 million. On an adjusted basis, operating income was $229 million. Operating margin on a reported basis declined to 5.9 percent of revenue. Adjusted operating margin decreased 140 basis points year-over-year to 10.9 percent of revenue.

CEO’s Take: Scott Baxter, president and CEO, said: “We finished 2020 with great momentum, a testament to our teams’ unwavering focus on execution throughout this unprecedented year…We are winning in the marketplace by expanding existing leadership positions and extending our reach to new consumers. Our strong fourth quarter performance is also a result of the strategic measures we’ve taken over the last two years, allowing us to not only navigate near-term challenges, but also position the company for success in 2021 and beyond. Focused investments in brand-enhancing initiatives, technology and talent are setting the stage for an exciting next phase of our journey in which we expect accelerating long-term sustainable growth.”

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