Wrangler clocked more than $500 million in revenue for the first time in a single quarter, owner Kontoor Brands reported Tuesday.
In a Nutshell: “We still haven’t taken our eye off the ball from a core category standpoint,” Scott Baxter, chairman, president and CEO of the The Greensboro, N.C.-based jeanswear, told analysts in a fourth-quarter earnings call Tuesday, despite considerable opportunity to expand in categories beyond denim. “We still focus a lot of our demand creation in our consumer platforms around our denim categories, and we will stay laser focused on that going forward.”
Kontoor’s U.S. denim business grew 11 percent last year, while the non-denim rose 13 percent and “now stands at 38 percent of our global mix,” Baxter said. The company reported a 7 percent uptick in the international business outside of Covid-restricted China.
The denim giant is confident that “the Wrangler and Lee brands are healthy and well-positioned in the marketplace in 2023,” he said, pointing to strong point-of-sale and direct-to-consumer trends, with U.S. comps up 20 percent year-to-date.
“Despite the significant macro pressures during 2022, we were able to deliver another year of healthy growth with revenue increasing high single digits. And we returned a total of $166 million to shareholders through a combination of dividend payouts,” Baxter said. Gross margin improved by 230 basis points compared to adjusted 2019 gross margin “even with the impacts of inflation, supply chain challenges, retailer inventory rebalancing, and COVID lockdowns in China,” he added.
Inventory ended Fiscal 2022 at $597 million, up 64 percent from the prior-year period and up 30 percent versus 2019. Year-end inventory was $81 million better than where it was in the third quarter last year. But most, or 90 percent, is core product, and Kontoor expects inventory to get back on track by the middle of the year.
Tom Waldron, executive vice president, co-chief operating officer and global brand present for Wrangler, blamed cost inflation and less challenged product lead times for “higher inventory dollars.”
Wrangler, which celebrated its 75th anniversary last year, scored its $500-million-plus quarter thanks to 16 percent global growth in the fourth quarter and a 19 percent improvement in the U.S.
“In our core, we continue to drive share gains in the quarter with Wrangler men’s bottoms, outpacing the U.S. market by 160 basis points,” Waldron said. Outdoor workwear and T-shirt sales rose 20 percent, with quarterly digital revenue up 18 percent.
“[D]iversified strategies within categories, tops and non-denim bottoms, now account for over 40 percent of Wrangler’s business driven by a 12 percent CAGR since 2019, “he said.
“The evolution of our product innovations within outdoor including our performance ATG (All Terrain Gear) line, as well as workwear female tees and Western specialty, combined to give us a greater permission to play in different categories and channels of distribution and reach new consumers like never before,” Waldron said.
Lee, Kontoor’s other household name brand, continues attracting new customers, according to Chris Waldeck, executive vice president, co-chief operating officer and global brand president for the lifestyle label.
“Our strategies are beginning to unlock the brand’s true potential as we continue to build [our] premium international positioning,” he said.
Globally revenue fell 3 percent, though U.S. strength offset international challenges. Excluding China, global revenue rose 2 percent. In the U.S., Lee grew 5 percent, with lee.com sales up 11 percent. Internationally, China fueled a 13 percent revenue decline in the quarter.
“We are seeing sequential improvement come through in the NPD market share data highlighted by Lee women’s, which grew significant share in Q4,” Waldeck said.
International is a key growth catalyst for Kontoor, Waldeck said. “In the near term you will see us continue to navigate through challenging conditions, but with an eye to the future, focusing on the health of our brands and positioning each for long term profitable growth,” he said, referring to Russia’s war in Ukraine and China’s bounceback after the pandemic.
Weldeck said retail inventories continue to trend high in China as people return to the workplace, though Kontoor’s own stock is in a better position. He believe Lee’s China business will work through some early challenges by the middle to end of the year as “consumers get back to normal course of daily life and pent up demand is released.”
“[The] China market, and more broadly, Asia and Europe, represents substantial white space for Kontoor,” he said. “There is no reason why our brands shouldn’t operate at a similar level to our peers, which suggests an opportunity to double our international business over time.”
Kontoor opened three new Lee-Wrangler premium retail stores in Europe in the quarter, with the first co-branded door in Berlin. There are plans to expand the footprint this year. “These brand enhancing retail destinations offer consumers a unique immersive experience with a full lifestyle assortment for both brands,” Waldeck said.
Net Sales: Net revenues for the fourth quarter ended Dec. 31 grew 7 percent to $731.6 million from $681.1 million.
U.S. revenue rose 16 percent to $605 million, with gains from both the Wrangler and Lee brands. U.S. wholesale sales rose 17 percent from the same 2021 quarter. International sales were down 20 percent to $127 million, with China contributing a 33 percent decline due to COVID impacts and Europe down 15 percent.
By brand, Wrangler global revenue was up 15 percent to $509 million, while Lee global revenue decreased 6 percent to $219 million.
For the year, net revenues rose 6 percent to $2.63 billion from $2.48 billion.
Earnings: Net income rose 18 percent to $51.6 million, or 91 cents a diluted share, from $43.9 million, or 75 cents, in the prior year. On an adjusted basis, earnings per share (EPS) were 88 cents for the quarter.
Wall Street was looking for adjusted diluted EPS of 67 cents on revenue of $668.8 million.
For Fiscal 2023, Kontoor expects revenue to increase at a low single digit percentage over last year, with growth fairly balance between the first and second half. Growth is expected to be driven by U.S operations, with continued momentum in point-of-sale, share gains and digital.
Earnings per share was guided to the range of $4.55 to $4.75. The company also expects gross margin in the range of 43.5 percent to 44.0 percent, up 40 to 90 basis points versus gross margin of 43.1 percent in 2022.
For the full year, net income was up 26 percent to $245.5 million, or $4.31 a diluted share, from $195.4 million, or $3.31, a year ago.
CEO’s Take: “While we expect macro economic challenges to persist, our results afford us great proof points that when we execute on our playbook, all of our key stakeholders win,” Baxter said.