Kontoor Brands, Inc., the global lifestyle apparel company with a portfolio led by former VF Corp. denim brands Wrangler and Lee, reported third quarter revenue increased 2 percent year-over-year to $670 million for the period ended September 28. The increase was said to be driven by growth in global direct-to-consumer (DTC) and U.S. wholesale, partially offset by a decline in international wholesale revenue.

“Our third quarter results exceeded expectations driven by strong execution and business fundamentals,” said Scott Baxter, president, CEO and chair, Kontoor Brands. “The investments in our brands continue to drive market share gains, expanded distribution, category growth and new innovation platforms. Fueled by our Jeanius transformation program, momentum for the business is building, supported by increased investment capacity and capital allocation optionality that position us to deliver strong returns for stakeholders in the years ahead.”

U.S. revenue amounted to $530 million for the quarter, increasing 5 percent compared to the prior-year Q3 period. Wholesale revenue increased 5 percent year-over-year, reportedly driven by expanded distribution, market share gains and strength in point-of-sale, partially offset by retailer inventory management actions. Direct-to-consumer increased 5 percent year-over-year, driven by 9 percent growth in e-commerce, partially offset by a 2 percent decline in brick & mortar retail.

International revenue was $141 million in the quarter, a 5 percent decrease compared to the prior-year period. International wholesale decreased 7 percent and DTC was said to be flat, with 11 percent growth in e-commerce partially offset by a 6 percent decrease in owned brick & mortar retail.

Europe decreased 6 percent (-8 percent constant currency), with 9 percent growth in DTC (+7 percent constant currency) more than offset by a 9 percent decline in wholesale (-11 percent constant currency). Asia increased 2 percent, with 5 percent growth in wholesale partially offset by a 7 percent decrease in DTC. Non-U.S. Americas revenue decreased 12 percent (-6 percent constant currency).

Wrangler brand global revenue was $464 million in Q3, a 4 percent increase compared to the prior-year Q3 period. Wrangler U.S. revenue increased 5 percent, reportedly driven by 10 percent growth in DTC and 5 percent growth in wholesale. Wrangler international revenue decreased 3 percent year-over-year, said to be driven by a decline in wholesale partially offset by growth in direct-to-consumer.

Lee brand global revenue was $202 million for the quarter, a 3 percent decrease year-over-year. Lee U.S. revenue increased 1 percent for the period, reportedly driven by growth in the wholesale channel partially offset by a decline in direct-to-consumer. Lee international revenue decreased 7 percent year-over-year, said to be driven by a decline in wholesale and brick & mortar retail, partially offset by growth in e-commerce.

Income Statement Summary
Consolidated gross margin increased 320 basis points year-over-year to 44.7 percent of revenue on a reported basis and increased 150 basis points to 45.0 percent on an adjusted basis compared to prior-year reported results, excluding the out-of-period duty charge in that period. Adjusted gross margin expansion was reportedly driven by the benefits from lower product costs and supply chain efficiencies, partially offset by lower pricing.

Selling, General & Administrative (SG&A) expenses were $201 million for the quarter, or 30.0 percent of revenue, on a reported basis. On an adjusted basis, SG&A expenses were $195 million, or 29.1 percent of revenue, representing an increase of 5 percent compared to the prior year on a reported basis, driven by an increase in demand creation investments, product development and distribution expenses.

Third quarter operating income was $98 million on a reported basis. On an adjusted basis, operating income was $107 million and increased 8 percent compared to the prior year on a reported basis, excluding the out-of-period duty charge in that period. Adjusted operating margin of 15.9 percent increased 80 basis points compared to the prior year on a reported basis, excluding the out-of-period duty charge in that period.

Earnings per share (EPS) was $1.26 on a reported basis. On an adjusted basis, EPS was $1.37 compared to reported EPS of $1.22 in the prior year, excluding the out-of-period duty charge in that period, representing an increase of 12 percent.

Balance Sheet and Liquidity Summary
The company ended the third quarter with $269 million in cash and cash equivalents, and $745 million in long-term debt.

Inventory at the end of the third quarter was $462 million, down 24 percent compared to the prior year end of quarter.

As of the end of the third quarter, the company had no outstanding borrowings under the Revolving Credit Facility and $494 million available for borrowing against this facility.

The company’s Board of Directors declared a regular quarterly cash dividend of 52 cents per share, a 4 percent increase compared to the second quarter of 2024, payable on December 19, 2024, to shareholders of record at the close of business on December 9, 2024.

Consistent with its commitment to return cash to shareholders, the company reported that it repurchased $40 million of common stock during the third quarter. When combined with the dividend, the company returned a total of $68 million to shareholders during the third quarter and $168 million year-to-date. KTB has $215 million remaining under its authorized share repurchase program.

Updated 2024 Outlook
“We are raising our full year outlook driven by better-than-expected third quarter results, stronger profitability and cash generation,” said Baxter. “Our business is positioned to strengthen in the fourth quarter, as evidenced by accelerating revenue growth, gross margin expansion, stronger operating earnings growth and further reductions in inventory. We will continue to manage the business conservatively in light of the uncertain environment, but remain confident in our ability to drive strong returns for the balance of the year and into 2025.”

The company’s updated 2024 outlook includes the following:

  • Revenue is now expected to be $2.60 billion ($2.57 to $2.63 billion prior outlook), including fourth quarter revenue of approximately $695 million, reflecting growth of approximately 4 percent. The company said it continues to expect market share gains, growth from channel and category expansion, and expanded distribution to be offset by conservative retailer inventory management and macroeconomic pressures on consumer spending around the globe.
  • Adjusted gross margin is now expected to be 45.1 percent of revenue (44.8 percent prior outlook), representing an increase of 260 basis points compared to adjusted gross margin in the prior year, excluding the out-of-period duty expense in that period. Adjusted gross margin includes a 20 basis-point impact from supply chain and inventory management actions compared to the prior outlook. In the fourth quarter, the company said it expects adjusted gross margin to be 44.6 percent of revenue (44.3 percent prior outlook), representing an increase of 150 basis points compared to prior-year adjusted gross margin, excluding the out-of-period duty expense in that period. Gross margin expansion is driven by the benefits of lower product costs, direct-to-consumer mix, and supply chain efficiencies.
  • Adjusted SG&A is expected to increase 4 percent compared to adjusted SG&A in the prior year, consistent with the prior outlook. The company said it will continue to invest in its brands and capabilities in support of long-term profitable growth, including demand creation, direct-to-consumer and international expansion.
  • Adjusted operating income is expected to be $385 million (higher end of $377 to $387 million prior outlook), reflecting an increase of 11 percent (10 to 11 percent prior outlook) compared to adjusted operating income in the prior year, excluding the out-of-period duty expense in that period. Adjusted operating income includes a $6 million impact from supply chain and inventory management actions compared to the prior outlook. The supply chain actions, mainly expedited freight, are expected to secure inventory positions this year in support of fourth quarter and first half 2025 growth expectations. The inventory management actions are a result of the company’s continued focus on improving the composition of its inventory and driving further reductions in inventory and increased cash flow while establishing an even stronger foundation for the business for 2025. Fourth quarter adjusted operating income is expected to be $105 million, reflecting growth of more than 20 percent.
  • Adjusted EPS is now expected to be $4.83 peer share (approximately $4.80 prior outlook), including an incremental 8 cents impact from supply chain and inventory management actions compared to the prior outlook. Excluding the out-of-period duty expense in the prior year, adjusted EPS is expected to increase 9 percent (8 percent prior outlook). In the fourth quarter, the company said it expects adjusted EPS of $1.31 per share. Full year 2024 adjusted EPS includes an approximate 5-percentage point headwind from a higher tax rate, including an approximate 25-percentage point headwind in the fourth quarter.
  • Capital Expenditures are now expected to be $25 million ($35 million prior outlook).
  • For the full year, the company expects an effective tax rate of approximately 20 percent. Interest expense is expected to approximate $32 million. Other Expense is expected to be in the range of $12 million to $14 million. Average shares outstanding are expected to be approximately 56 million, excluding the impact of any future share repurchases.
  • The company now expects cash flow from operations to exceed $360 million ($350 million prior outlook) driven by the combination of accelerated earnings growth and further reductions in inventory.
  • The company said its 2024 outlook does not reflect any material impacts from Project Jeanius.

Preliminary 2025 Outlook and Project Jeanius

  • Kontoor Brands expects its growth momentum to continue into 2025, driven by continued market share gains, category expansion and new distribution. Based on current visibility, the company expects revenue growth of approximately 4 percent in the first half of 2025.
  • Adjusted gross margin expansion is expected to be driven by the benefits of structural mix, supply chain initiatives, and Project Jeanius, partially offset by modest product cost inflation and the impact of ongoing supply chain volatility.
  • Adjusted operating income growth is expected to outpace revenue growth driven by gross margin expansion, SG&A leverage and the benefits of Project Jeanius. The company expects to continue to increase the rate of investment behind its growth priorities such as demand creation, category expansion, international expansion and direct-to-consumer.
  • The benefits from Project Jeanius are expected to be weighted to the second half of 2025 as supply chain initiatives begin to scale. Project Jeanius is expected to provide modest SG&A benefits in the first half of 2025, with accelerating benefits in the second half driven by combined gross margin and SG&A initiatives.
    The Company expects another year of robust cash generation driven by earnings growth and improved net working capital management, providing significant capital allocation optionality.

Image courtesy Wrangler/Kontoor Brands