Excess retail inventory, the new China Covid lockdowns and inflation ate into the revenues of Kontoor Brands, the parent company of Lee and Wrangler, in the third quarter forcing it to slightly adjust its 2022 financial outlook in the report it released Thursday morning.
Kontoor’s third quarter ended Oct. 1, 2022.
Overall company revenue for the three-month period was $607 million, a 7 percent decrease (5 percent decrease in constant currency) from $652 million over the same period in the prior year. Kontoor said this was mostly due to “significant U.S. retailer inventory rebalancing efforts in the quarter and the impacts of lockdowns in China” but noted that gains in the EMEA region and its own online sales helped offset the losses somewhat.
China was the hardest hit region when it came to revenue. It decreased 24 percent (20 percent decrease in constant currency) there compared to the third quarter 2021 but this was a major improvement from decreases of 50 percent in Q2 2022.
The U.S. was next where revenue was $452 million, a decrease of 8 percent over last year, with reductions in both Wrangler and Lee. The U.S. wholesale business dropped 9 percent compared to the third quarter of 2021 mostly due to inventory rebalancing in retail. However, the company’s own digital sales revenue rose by 14 compared to Q3 2021.
Kontoor’s international revenue was $154 million, a 3 percent decrease (7 percent increase in constant currency) over the same period in the prior year. While the drop in China contributed to the lower numbers, European revenue increased 7 percent (27 percent increase in constant currency), driven by growing digital sales and a newly adjusted product shipment schedule.
Both Wrangler and Lee saw profit fall in the U.S. especially. Wrangler U.S. revenue decreased 5 percent compared to last year but on the brighter side, the categories of Western, workwear, T-shirt and women’s were strong and revenue from U.S. wrangler.com was up 16 percent. The U.S. decline caused Wrangler brand global revenue to drop to $406 million, a 4 percent decrease (2 percent decrease in constant currency) from the same period in the prior year but all told, Wrangler international revenue increased 3 percent (15 percent increase in constant currency) compared to the third quarter 2021.
Lee U.S. revenue decreased 19 percent compared to last year, primarily driven by the reduction of shipments but U.S. Lee.com grew by 10 percent. Lee’s global revenue was $198 million, a 13 percent decrease (9 percent decrease in constant currency) from Q3 2021. Lee international revenue decreased 6 percent (3 percent increase in constant currency) from the year before because gains in Europe were negated by the reductions in China. Kontoor also said that non-denim categories such as T-shirts “experienced significant gains in the quarter” across the globe.
Other global revenue, presumably from its third brand, Rock & Republic, was $2 million, a 33 percent decrease compared to the Q3 2021.
Excess inventory continues to be a problem at Kontoor. Inventory at the end of the quarter was $678 million, up 66 percent compared to the prior-year period and 24 percent with pre-pandemic 2019 levels. Approximately 90 percent of inventory at the end of the third quarter was core product. The company said it is taking “proactive actions” to reduce inventory levels by mid-2023.
In addition, Kontoor ended the third quarter 2022 with $58 million in cash and cash equivalents, and approximately $0.8 billion in long-term debt. As of October 1, 2022, it had $40 million in outstanding borrowings under the revolving credit facility and $448 million available for borrowing against this facility.
As a result of these numbers, the Greensboro, N.C.-based corporation adjusted its annual forecast.
The year’s total revenue is now expected to increase approximately 4 percent (6 percent in constant currency) compared to 2021 and prior guidance of increasing approximately 6 percent. Meanwhile, gross margin is now expected to approximate 43.0 percent compared to adjusted gross margin of 44.6 percent achieved in 2021 and compared with prior guidance of 43.5 percent.
“Despite the difficult environment, we are encouraged by the sell-through of our brands including continued POS share gains in the third quarter in our largest market. However, as expected, sell-in was adversely impacted and global revenue tempered as U.S. retailer inventory rebalancing efforts and Covid-related lockdowns in China continued. Mix benefits, strategic pricing, and tight expense controls helped offset inflationary pressures and allowed us to deliver upside to our profit expectations,” said Scott Baxter, president, CEO and chair of Kontoor Brands.
“We expect challenging global macroeconomic conditions, particularly inflation, should continue to weigh on consumer discretionary spend, and ongoing inventory reduction actions will pressure near-term margins. However, we anticipate revenue to sequentially accelerate in the fourth quarter due to improved U.S. retail inventory levels, continued POS momentum, share gains and new business development activities. Further, our cash generation is expected to remain strong over time, giving us confidence in our capital allocation flexibility, as evidenced by our recently announced dividend increase,” Baxter added.