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Wrangler, Lee Parent Raises Outlook on ‘Cost Savings, Strategic Pricing’

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Kontoor Brands’ net income increased 25 percent to $80.81 million in the first quarter.

In a Nutshell: The Wrangler and Lee owner raised its 2022 outlook on Thursday, with revenue now expected to exceed $2.7 billion, increasing approximately 10 percent compared to 2021, and compared to prior guidance of a high-single-digit percentage gain.

The company now expects first-half revenues to increase in the mid-teens range compared to the prior year versus a low-teens range in previous guidance. Second quarter revenue, consistent with prior guidance, is forecast to be in the range of $640 million to $650 million, increasing 30 percent to 32 percent compared to last year.

Gross margin is projected to be consistent with the adjusted gross margin of 44.6 percent achieved in 2021. Kontoor expects higher inflationary pressures on input costs, transitory expenses, including freight, and adverse mix due to Covid lockdowns in China to weigh on gross margin. However, the benefits from continued structural mix shifts to accretive channels such as digital, ongoing cost saving initiatives and strategic pricing are anticipated to offset these higher costs. The company expects the impacts of Covid lockdowns in China to weigh most heavily on second-quarter gross margin.

The company said selling, general and administrative (SG&A) investments will continue to be made in brands and capabilities. In addition to incremental volume-related items, SG&A investments in demand creation, digital and international expansion will increase.

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Earnings per share (EPS) are now expected to be in the range of $4.75 to $4.85, increasing 11 percent to 13 percent over 2021 adjusted EPS, and up from the prior guidance of $4.65 to $4.75. Second quarter EPS is now expected to be in the range of $1.05 to $1.15, compared to prior guidance of $1.25 to $1.35, due to Covid lockdowns in China and higher transitory freight expenses negatively impacting gross margin and profitability.

Capital expenditures are expected to be in the range of $35 million to $40 million, primarily to support manufacturing, distribution and information technology projects.

In the first quarter, SG&A expenses were $196 million, or 28.9 percent of revenue, down 290 basis points compared to the same period in the prior year. Higher demand creation, digital and IT investments, product development and distribution expenses more than offset better fixed cost leverage on improving revenue and lower compensation related expenses.

The company ended the first quarter with $194 million in cash and cash equivalents, and approximately $800 million in long-term debt. As of April 2, the company had no outstanding borrowings under its revolving credit facility and $487 million available for borrowing against it.

Inventory at the end of the first quarter was $433 million, up 24 percent compared to the prior-year period. Second quarter revenue growth is expected to be up 30 percent to 32 percent.

Sales: Revenue for the first quarter ended April 2 increased 4 percent over the same period in the prior year to $680 million.

Revenue increases were primarily driven by strength in digital, as well as continued positive trends in the U.S. wholesale business and solid performance in international markets, the company said. Compared to first quarter 2021, global owned e-commerce revenue rose 38 percent and digital wholesale was up 24 percent.

U.S. revenue also increased 4 percent over last year to $507 million, driven by growth in wholesale, including new business development wins, and strength in digital, with U.S. owned e-commerce revenue increasing 43 percent and digital wholesale up 37 percent compared to the first quarter 2021. International revenue grew 6 percent in the period to $173 million. China increased 3 percent, while the European business rose 11 percent.

Wrangler brand global revenue gained 3 percent to $412 million, with U.S. revenue increasing 2 percent on strength in digital, Western and workwear. Wrangler international revenue rose 14 percent over the prior-year quarter.

Lee brand global revenue grew 6 percent in the period to $264 million, with U.S. revenue up 9 percent, driven by continued strength in demand and increases in digital. Lee international revenue increased 2 percent.

Earnings: Net income increased 25 percent to $80.81 million from $64.46 million in the prior-year period.

EPS was $1.40 compared to reported EPS of $1.09 in the same period in the prior year.

Earnings before interest, taxes, depreciation and amortization was $118 million from $102 million in last’s year quarter. EBITDA margin increased 170 basis points to 17.3 percent of revenue.

Operating income rose 16 percent to $108 million, with operating margin increasing 160 basis points to 15.9 percent of revenue, driven by strategic investments to drive 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 decreased 130 basis points to 44.8 percent of revenue compared to the first quarter 2021. Based on strong demand during the quarter, transitory expenses, which include air freight for expedited shipments, were elevated. Structural margins improved as impacts of pricing and favorable channel and product mix more than offset the impacts of inflationary costs, including cotton, ocean freight and labor, Kontoor noted.

CEO’s Take: Scott Baxter, president, CEO and chair, said: “Our strategies continue to yield accelerating performance, with first quarter results coming in above our expectations. We expect macroeconomic challenges will persist, with inflationary pressures, supply chain disruptions and Covid lockdowns weighing on the operating environment. However, based on Kontoor-specific drivers, momentum across the business and continued execution of our strategic playbook, we have confidence in raising our fiscal year revenue and EPS guidance.”

“The continued emphasis on our digital ecosystem, demand creation platforms and talent will increasingly support Kontoor in becoming a consumer-centric, growth-oriented company,” Baxter added. “These investments, when combined with our significant cash flow optionality, should afford compelling returns for all KTB stakeholders.”