Kontoor Brands, Inc., the parent of Wrangler and Lee jeans, reported flat sales in the second quarter ended July 1 as gains in direct-to-consumer (DTC) and international offset decreases in U.S. wholesale. Kontoor said it sees shipments better aligned with POS in the U.S. and expects a return to healthy growth in the third quarter. Kontoor reiterated guidance for the year.

“We delivered second quarter results largely consistent with our expectations, with U.S. POS continuing to outpace shipments. Investments in our brands helped drive continued share gains in the core U.S. wholesale business. Solid performance in accretive areas such as DTC and International during the quarter further validates that our brands are resonating globally with consumers, despite the challenging landscape,” said Scott Baxter, President, chief executive officer and chair of Kontoor Brands.

“Further, we took restructuring actions in the quarter to reduce non-strategic spend and drive efficiencies in our operations, which will help fund strategic investments in key growth pillars such as talent, innovation, technology and demand creation. Consistent with our playbook, these critical enablers support increasingly diversified growth across channels, categories and geographies that generate more sustained, profitable growth over time.”

“While we continue to assume macroeconomic pressures will weigh on consumer demand in the second half of 2023, we are seeing shipments better align with POS in the U.S., which gives us confidence that third-quarter revenue should deliver outsized growth relative to our full-year guidance. Our FY23 outlook, now on an adjusted basis to exclude restructuring charges, is consistent with our prior outlook. Our aggressive measures to improve inventory in the second quarter, and expected further progress during the balance of 2023, will position us to exit the year with a healthy balance sheet and accelerating cash flow that affords significant capital allocation optionality as we head into FY24,” added Baxter.

Second Quarter 2023 Income Statement Review

  • Revenue was $616 million, which is flat compared to the prior year’s period. Revenue increases, primarily driven by strength in DTC and International, were somewhat tempered by decreases in U.S. wholesale.
  • U.S. revenue was $499 million, decreasing 2 percent over the same period in the prior year. U.S. wholesale decreased by 3 percent compared to the second quarter of 2022, with softness in seasonal products. These decreases were somewhat offset by continued strength in DTC, with U.S. own.com revenue increasing 13 percent compared to the same period last year.
  • International revenue was $117 million, a 13 percent increase (both reported and in constant currency) over the same period in the prior year, driven by strength in DTC and wholesale. International DTC increased 23 percent (25 percent increase in constant- currency) compared to the same period last year. China increased 82 percent (93 percent increase in constant currency) compared to the second quarter of 2022, driven by strength in wholesale and DTC. Europe decreased by 3 percent (5 percent decrease in constant currency) over the same period last year, with wholesale pressures more than offsetting gains in DTC. Europe DTC increased 12 percent (10 percent increase in constant currency) compared to the same period last year.
  • Wrangler brand global revenue was $425 million, a 2 percent increase from the same period in the prior year. Wrangler U.S. revenue increased 2 percent compared to the same period last year, driven by U.S. wholesale category diversification, including non-denim bottoms, outdoor and tops. Wrangler U.S. own.com increased 8 percent compared to the same period last year. Wrangler international revenue decreased 4 percent (5 percent decrease in constant currency) compared to the second quarter 2022, with gains in DTC more than offset by decreases in wholesale.
  • Lee brand’s global revenue was $188 million, a 3 percent decrease from the same period in the prior year. Lee U.S. revenue decreased 15 percent compared to the same period last year, with gains in own.com more than offset by decreases in wholesale, with seasonal products soft. Lee U.S. own.com increased 25 percent compared to the same period last year. Lee international revenue increased 27 percent compared to the second quarter 2022, driven primarily by increases in the APAC region, including strength in China wholesale and DTC.
  • Gross margin decreased 290 basis points to 40.6 percent of revenue on a reported basis and decreased 250 basis points to 41.0 percent of revenue on an adjusted basis compared to the same period last year. On an adjusted basis and as expected, higher inflationary pressures on input costs and impacts from proactive actions in managing internal production, including downtime, primarily drove the decline. The decline was partially offset by benefits from strategic pricing, geographic mix and moderating transitory costs such as air freight.
  • Selling, General & Administrative (SG&A) expenses were $187 million or 30.3 percent of revenue on a reported basis and $180 million or 29.3 percent of revenue on an adjusted basis in the second quarter, increasing 30 basis points on an adjusted basis compared to the same period in the prior year. Tight controls of discretionary expenses somewhat offset continued strategic investments in DTC and demand creation.
  • Operating income was $63 million on a reported basis and $72 million on an adjusted basis in the second quarter. Adjusted operating margin of 11.7 percent decreased 280 basis points compared to the same period in the prior year. Benefits from a geographic mix, moderating transitory costs such as air freight, tight expense controls and strategic pricing were more than offset by higher inflationary pressures on input costs and impacts from proactive actions in managing internal production, including downtime.
  • Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) was $69 million on a reported basis and $78 million on an adjusted basis in the second quarter. Adjusted EBITDA margin of 12.7 percent decreased by 280 basis points compared to the EBITDA margin during the same period in the prior year.
  • Earnings per share were $0.64 on a reported basis and $0.77 on an adjusted basis in the second quarter, compared to $1.09 in the same period last year. As expected, reported and adjusted Q2’23 results include a one-time discrete tax charge of $0.09.

July 1, 2023, Balance Sheet and Liquidity Review

  • The company ended the second quarter 2023 with $82 million in cash and cash equivalents and approximately $0.8 billion in long-term debt.
  • As of July 1, 2023, the company had no outstanding borrowings under the Revolving Credit Facility and $488 million available for borrowing against this facility.
  • As previously announced, the company’s Board declared a regular quarterly cash dividend of $0.48 per share, payable on September 18, 2023, to shareholders of record at the close of business on September 8, 2023.
  • Inventory at the end of Q2’23 was $627 million, up 17 percent compared to the prior-year period, sequentially improving from a 52 percent year-over-year increase in Q123 and also up 16 percent compared to pre-pandemic 2019 levels. The company continues to take proactive actions and now expects Q3’23 inventory to be lower than Q3’22 inventory, with additional reductions planned in Q4’23.

2023 Outlook
Excluding restructuring charges associated with the strategic actions taken in Q2’23, the company is reaffirming its prior outlook for FY’23 provided on May 4, 2023, with select updates to quarterly cadence. Although the impacts from near-term macroeconomic factors are uncertain, the company remains focused on execution to deliver continued strong share gains in the U.S. and to drive gross margin improvement. The company remains confident in its strategy and expects to continue investing in its brands and capabilities in support of longer-term profitable revenue growth and anticipates accelerating cash generation as inventory continues to normalize in 2023.

Accordingly, the company’s 2023 outlook is as follows:

  • Revenue is expected to increase at a low-single-digit percentage over 2022, consistent with the prior outlook, with second-half performance now anticipated to be above first-half growth. During the fourth quarter of 2023, the company assumes macro consumer demand conditions will be more challenged in the U.S., with the China market fully reopening. Based on continued U.S. share gains, improving shipments and POS and strong quarter-to-date trends, the company anticipates Q3’23 revenue to increase at a mid-single-digit rate, above expected full-year growth.
  • Adjusted gross margin is expected to be in the range of 43.5 percent to 44.0 percent, increasing 40 to 90 basis points compared to gross margin of 43.1 percent in 2022, consistent with prior outlook excluding restructuring charges in Q2’23. The company expected gross margin expansion in the second half, driven by geographic and DTC mix, normalizing production and reduced input cost pressures. The company continues to anticipate the most pronounced gross margin gains in Q4’23.
  • Adjusted SG&A is expected to increase at a mid-single-digit percentage compared to adjusted SG&A in 2022, consistent with the prior outlook, excluding restructuring charges in Q223. Investments will continue to be made in the company’s brands and capabilities supporting longer-term profitable revenue growth, including demand creation, DTC and International expansion. During 2H23, the company anticipates amplified investments in DTC and demand creation will be most pronounced in Q3’23.
  • Adjusted EPS is expected to be in the range of $4.55 to $4.75, consistent with the prior outlook excluding $0.13 associated with restructuring charges in Q223. Due primarily to amplified SG&A investments in Q3’23 and the most significant gross margin expansion anticipated in Q423, the company expects year-over-year EPS growth to be most pronounced in Q4’23.
  • Capital Expenditures are expected to be in the range of $35 million to $40 million, primarily to support IT projects, growth in owned retail stores, and manufacturing and distribution investments.
  • The company expects an effective tax rate of 20 percent to 21 percent. Interest expense is expected to be in the range of $33 million to $38 million. Other Expense is expected to be in the range of $5 million to $10 million. Average shares outstanding are expected to be approximately 57 million, excluding the impact of any additional share repurchases.

Photo courtesy Lee