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Q2 Revenue Up 25% for Wrangler, Lee Owner

Jeans giant Kontoor Brands saw net income in the second quarter jump 162 percent to $62 million, as revenue rose 25 percent to $613.57 million

In a Nutshell: Kontoor Brands Inc., with a portfolio led by the Wrangler and Lee brands, said Thursday while reporting second quarter financial results, that it was taking a more conservative approach to its assumptions for the balance of the year and updating its 2022 outlook.

In consideration of impacts from retailer inventory rebalancing, the ongoing Covid-19 pandemic, inflation and other macroeconomic factors, the company projected revenue to now increase approximately 6 percent compared to 2021, compared to prior guidance of an estimated 10 percent gain.

Revenue in the second half is expected to be relatively flat compared to 2021, with the third quarter experiencing greater pressure relative to the fourth quarter due to Covid lockdowns in China and retailer inventory rebalancing.

Gross margin is now forecast at around 43.5 percent compared to adjusted gross margin of 44.6 percent achieved in 2021 and compared with prior guidance that was anticipated to be consistent with 2021. The company expects higher incremental inflationary pressures on input costs 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 help offset these higher costs. Kontoor said it expects gross margin year-over-year headwinds to moderate in the second half, with the third quarter experiencing greater pressure relative to the fourth quarter.

Adjusted selling, general and administrative (SG&A) is now projected to increase at a mid-single digit rate compared to adjusted SG&A in 2021, relatively consistent with revenue growth. Investments will continue to be made in the company’s brands and capabilities, including demand creation, digital and International expansion.

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Given the uncertainty of macroeconomic conditions, Kontoor expects tighter expense control on non-strategic and discretionary items, which will help drive strategic investments. Adjusted SG&A excludes one-time restructuring charges related to the globalization of the company’s operating model and relocation of the European headquarters, which are anticipated to be approximately $18 million for the year.

Adjusted earnings per share (EPS) is expected to be in the range of $4.40 to $4.50, compared to prior guidance of $4.75 to $4.85. Adjusted EPS excludes one-time restructuring charges related to the globalization of the company’s operating model and relocation of the European headquarters, which are anticipated to be approximately 25 cents per share for the year.

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

In the second quarter, SG&A expenses were $178 million, or 29 percent of revenue, down 990 basis points compared to the same period in the prior year. Tight control of non-strategic expenses, lower compensation costs and better fixed cost leverage on improving revenue more than offset product development and distribution expenses, while continuing to make strategic investments in higher demand creation, digital and IT investments, according to Kontoor.

Inventory at the end of the quarter was $538 million, up 33 percent compared to the prior-year period. The company said inventory is “healthy and well positioned, with increases primarily in core product to support future replenishment business.”

Kontoor ended the second quarter with $145 million in cash and cash equivalents, and approximately $800 million in long-term debt. As of July 2, Kontoor had no outstanding borrowings under its revolving credit facility and $488 million available for borrowing against it.

The company noted that the cutover and transition of its North American enterprise resource planning (ERP) system caused timing of shipments to benefit first quarter 2021 revenue and profitability, while negatively impacting second quarter 2021 revenue and profitability. In addition, second quarter 2021 revenue in the EMEA region benefited from a shift in the timing of shipments from the third quarter to the second quarter ahead of the European ERP implementation.

Kontoor said upon completion of the ERP foundation, management approved plans last month to accelerate its transformation to a global operating model and relocate the EMEA headquarters to Geneva. This is expected to provide greater capital efficiency, improved go-to-market capabilities and access to best-in-class talent.

Sales: Revenue for the second quarter ended July 2 increased 25 percent to $613.57 million compared to guidance of $640 million to $650 million.

Kontoor said revenue increases were primarily driven by strength in U.S. digital and wholesale channels. Strength domestically was somewhat offset by the international business, as Covid lockdowns negatively impacted the China region, while expected Europe declines were primarily due to timing shifts of shipments associated with the ERP implementation in the region last year.

Despite international headwinds, reported global revenue increased 8 percent and digital wholesale increased 43 percent compared to second quarter 2021.

U.S. revenue was $510 million, increasing 40 percent over last year, driven by strength in both the Wrangler and Lee brands. Gains were driven by growth in wholesale, including new business development wins, and strength in digital, with U.S. revenue increasing 24 percent and digital wholesale increasing 64 percent compared to the second quarter of 2021.

International revenue was $103 million, an 18 percent decrease over the same period in the prior year. Due to Covid lockdowns in the region, China decreased 50 percent year over year.

Wrangler brand global revenue increased 34 percent in the period to $418 million. Wrangler U.S. revenue was up 40 percent, with broad-based strength across channels and categories, including Western, workwear, outdoor and female. Wrangler international revenue was flat compared to the second quarter 2021.

Lee brand global revenue rose 10 percent to $193 million. Lee U.S. revenue increased 40 percent, driven by strength in U.S. wholesale demand and increases in digital. Lee international revenue decreased 27 percent over the second quarter 2021, mainly attributable to the Covid lockdowns in China and ERP timing shifts in Europe.

Earnings: Net income in the quarter jumped 162 percent to $62 million from $23.64 million in the 2021 period.

Earnings before interest, taxes, depreciation and amortization (EBITDA) was $94.96 million compared to $43.98 million in the year-earlier period. EBITDA margin increased 650 basis points to 15.5 percent of revenue.

Earnings per share was $1.09 on a reported basis compared to reported EPS of $0.40 and adjusted EPS of $0.70, in the same period in the prior year.

Second quarter EPS was $1.09 compared to EPS of 40 cents in the year-earlier period and versus guidance of $1.05 to $1.15.

Gross margin decreased 260 basis points to 43.5 percent of revenue, compared to the second quarter 2021. Near-term transitory expenses, which include air freight for expedited shipments to meet demand, contributed 170 basis points of decline.

CEO’s Take: Scott Baxter, president, CEO and chair of Kontoor Brands, said: “In a highly dynamic macroeconomic environment, supply chain challenges and inflationary pressures accelerated during the quarter. While these factors tempered our top line a bit sooner than expected, we were still able to deliver strong 27 percent revenue growth and 57 percent adjusted earnings growth, on a constant currency basis, in line with our EPS guidance. I am proud of our teams’ agility to navigate rapid changes, outperform on a relative basis in our largest market and deliver on our second quarter profitability goals.”

“Looking forward, we anticipate that macro conditions will remain challenging, particularly as retailer inventories are rebalanced and inflation weighs on overall consumer demand,” Baxter added. “However, we are confident that our strategies, continued brand momentum and efficient operating model will fuel further competitive separation over time. Kontoor-specific drivers in accelerating diversified growth, when coupled with our proven strong cash generation, should allow us to continue to deliver industry-leading TSR (total shareholder value.”