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Kontoor Wrestles With Coronavirus Amid Year-Two Turnaround Effort

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In its first year as a public company, Kontoor Brands faced expected and surprising headwinds, leading to declines in sales and earnings.

In a Nutshell: Kontoor Brands Inc., parent of Wrangler and Lee, said during the fourth quarter and throughout 2019, the company has undergone transformational change to improve operational performance, address internal and external factors, and set the stage for long-term profitable growth.

While this change has negatively impacted near-term revenue, quality-of-sales initiatives that focus on higher margin and faster growing lines of business, as well as the exit of select non-strategic lines of business and points of distribution, position the company for future success, Kontoor said.

President and CEO Scott Baxter also said as a new publicly traded company, it was important to understand the underlying fundamentals of the business, so the company’s outlook for 2020 excludes the impact of the COVID-19 outbreak.

“We believe this most accurately reflects our business model, but we also think it is important to provide investors context with respect to potential coronavirus impacts,” Baxter said. “Prior to the emergence of the coronavirus, we saw improved trends from holiday, both within the U.S. and international markets. Based on information we have quarter-to-date, we anticipate a potential negative global impact of approximately 4 points to our first quarter revenue, due mostly to our operations in China.”

China operations represent approximately 7 percent of annual global revenue for Kontoor. Operations in China consist of wholesale channels including digital and partnership stores, as well as owned and operated full price and outlet stores.

In February, a majority of owned and partner retail doors were closed for the month, while most of the remaining doors saw substantial reductions in traffic and comps, the company noted. Over the past few weeks, the number of doors open is increasing, with approximately 75 percent now open. Although this trend is anticipated to continue in March, reductions in traffic and comps are expected to continue.

“In terms of supply chain impacts, the situation continues to be actively monitored, but currently there are no material disruptions in either manufacturing or sourcing of materials,” Kontoor said, adding that approximately one-third of Kontoor production is owned manufacturing in the Western Hemisphere.

Kontoor Brands’ outlook for the fiscal year ended Jan. 2, 2021 has revenue consistent with full year 2019 adjusted revenue, with branded Wrangler and Lee revenue anticipated to increase by low-single digits, while other non-strategic revenues are expected to decline by double-digits.

“Due to these reasons, first half revenue is expected to decline,” Kontoor said. “Revenue is expected to grow in the second half based on the moderating headwinds from restructuring and quality-of-sales actions, benefits of expanding programs and points of distribution, as well as the timing of shipments, with the strongest revenue growth expected during the fourth quarter.”

Gross margin is expected to be in the range of 41 percent to 41.5 percent compared with full year 2019 adjusted gross margin of 40.8 percent.

Sales: Revenue in the fourth quarter ended Dec. 28 decreased 10 percent to $653 million. Kontoor said the decline was significantly impacted by proactive strategic quality-of-sales initiatives, reduced sales of certain lower-margin lines of business and lower distressed sales, which represented approximately 1 point of the decline and the impact of a major U.S. retailer (Sears Holdings) bankruptcy in the fourth quarter of 2018.

During the fourth quarter, U.S. revenue was $517 million, down 8 percent on a reported basis. Compared with 2018 adjusted revenue, U.S. revenue declined 6 percent, partially due to softness in broader retailer traffic during the holiday period and partially offset by growth in digital, which increased 52 percent.

International revenue fell 17 percent to $136 million in the period. Compared to fourth quarter 2018 adjusted revenue, international revenue declined 14 percent.

Wrangler brand global revenue fell 6 percent to $417 million. Compared to fourth quarter 2018 adjusted revenue, Wrangler global revenue declined 5 percent and U.S. revenue was off 3 percent.

Lee brand global revenue moderated in the fourth quarter, decreasing 12 percent to $202 million.

For the full year, revenue decreased 8 percent to $2.55 billion. Compared with 2018 adjusted revenue, 2019 revenue declined 6 percent to $2.52 billion, in line with company full year 2019 guidance.

U.S. revenue was down 5 percent to $1.91 billion. U.S. revenue declined 3 percent compared with 2018 adjusted revenue. U.S. digital wholesale revenue increased 43 percent.

International revenue declined 15 percent to $639 million. Compared with 2018 adjusted revenue, international revenue declined 13 percent, with second half revenue rate comparisons improving relative to first half results. International declines were partially offset by growth in digital wholesale, owned digital and China, which grew 14 percent, 6 percent and 2 percent in constant currency, respectively.

Wrangler brand global revenue decreased 5 percent for the year to $1.52 billion. Compared with 2018 adjusted revenue, global revenue declined 4 percent and U.S. revenue declined 2 percent.

Lee brand global revenue decreased 8 percent to $882 million. Compared with 2018 adjusted revenue, global revenue declined 8 percent and U.S. revenue declined 6 percent. On a constant currency basis, Lee brand revenue increased 2 percent in China during 2019, with broad-based strength across all channels of distribution, including a 2 percent comparable store increase and 2 percent increase in the digital business.

Earnings: Net income in the quarter fell 45 percent to $28.75 million from $51.9 million in the year-ago period. For the year, net income declined 63 percent to $96.65 million from $263.07 million.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was up 1 percent to $93 million. Gross margin increased 210 basis points to 40.7 percent of revenue on a reported basis.

For the year, gross margin decreased 90 basis points to 39.4 percent on a reported basis, primarily due to higher distressed sales and manufacturing inefficiencies.

For the year adjusted EBITDA was $341 million, down 12 percent. EBITDA margin on a reported basis declined to 7.6 percent of revenue. Adjusted EBITDA margin decreased 90 basis points to 13.5 percent.

CEO’s Take: Scott Baxter, president and CEO, said: “2019 has been a year of transformational change for our organization, our leadership teams and our employees around the globe. Since our spinoff in May of 2019, we have been successfully executing on our Horizon 1 strategic initiatives, making excellent strides in setting the foundation for more profitable and sustainable long-term growth. As we look to 2020, we remain sharply focused on the continued optimization and globalization of our operating model.”

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