Kontoor Brands Q4 Revenues Slide 8 Percent on Weak Wholesale Shipments

Kontoor Brands, Inc. saw fourth quarter revenue decrease 8 percent, or a 9 percent decrease in constant-currency terms (CC) to $670 million, compared to the prior-year quarter. Revenue decreases were said to be primarily driven by retailer inventory management actions in the U.S., partially offset by gains in digital wholesale, China and direct-to-consumer (DTC).

• U.S. revenue was $538 million, decreasing 11 percent compared to the prior year.
  • U.S. wholesale decreased 12 percent.
  • Growth in digital wholesale and owned brick-and-mortar was more than offset by reduced wholesale shipments as retailers tightly managed inventory levels.
• International revenue was $132 million, a 4 percent increase (flat in CC terms) compared to the prior- year quarter with growth in both DTC and wholesale.
  • International DTC increased 8 percent (+6 percent CC).
  • China increased 23 percent (+25 percent CC), reportedly driven by gains in DTC and wholesale.
  • Europe decreased 3 percent (-9 percent CC), with growth in digital and owned retail more than offset by a decline in wholesale.

Wrangler brand global revenue was $461 million for the fourth quarter, a 9 percent decrease (-10 percent CC) compared to the prior-year quarter.

• Wrangler U.S. revenue decreased 10 percent, driven by reduced wholesale shipments as retailers tightly managed inventory levels partially offset by growth in DTC and digital wholesale. Wrangler U.S. own.com increased 7 percent.
• Wrangler international revenue decreased 2 percent (-7 percent CC), with increases in DTC more than offset by declines in wholesale.

Lee Brand’s global revenue was $206 million, a 6 percent decrease (-7 percent CC) compared to the prior-year comparable period.

• Lee U.S. revenue decreased 14 percent, said to be driven primarily by reduced shipments to the wholesale channel as retailers tightly managed inventory levels, partially offset by growth in digital wholesale.
• Lee international revenue increased 8 percent (+4 percent CC) reportedly driven by DTC and wholesale growth in China.

Income Statement
Consolidated gross margin increased 90 basis points to 41.7 percent of sales on a reported basis and increased 140 basis points to 42.2 percent on an adjusted basis compared to the prior-year period.

Gross margin included an unanticipated 90 basis point negative impact from duty expense related to prior periods, as well as the impact from proactive inventory management actions.

• Excluding the duty charge, adjusted gross margin increased 230 basis points driven by the benefits from pricing, channel mix and lower product costs.

Selling, General & Administrative (SG&A) expenses were $204 million, or 30.5 percent of revenue on a reported basis in the fourth quarter.

• On an adjusted basis, SG&A declined 5 percent to $202 million, or 30.1 percent of revenue, compared to the prior-year period. Investments in DTC and technology were offset by prudent management of discretionary expenses.

Operating income was $75 million on a reported basis. On an adjusted basis, operating income was $81 million.

• Operating income included $6 million of duty expense related to prior periods. Excluding the duty charge, adjusted operating income was $87 million and increased 1 percent compared to adjusted operating income in the prior-year quarter.
• Adjusted operating margin of 12.1 percent increased 40 basis points compared to the adjusted operating margin for the prior year Q4. Excluding the duty charge, the adjusted operating margin increased 120 basis points to 12.9 percent.

Earnings per share (EPS) was $1.21 on a reported basis in Q4, and $1.28 on an adjusted basis, compared to reported EPS of 91 cents and adjusted EPS of 88 cents in the prior-year period.

• EPS included an unanticipated 7 cents charge for duty expenses related to prior periods.
• Excluding the duty charge, adjusted earnings per share was $1.35, increasing 54 percent compared to the prior-year Q4 period.
• EPS in the quarter was said to be positively impacted by discrete tax items that are expected to lower the company’s cash tax payments in future years.

Full Year 2023

Revenue was $2.61 billion for full year 2023, decreasing 1 percent compared to the prior year.

• U.S. revenue was $2.06 billion, decreasing 1 percent compared to the prior year.
  • U.S. wholesale decreased 1 percent.
  • U.S. direct-to-consumer increased 6 percent, reportedly driven by 7 percent growth in owned digital and 4 percent growth in owned retail.
• International revenue was $547 million, a 2 percent decrease (-3 percent CC) year-over-year.
  • China decreased 7 percent (-2 percent CC), with growth in DTC more than offset by a decline in wholesale.
  • Europe decreased 2 percent (-4 percent CC), with double-digit growth in owned retail and digital reportedly more than offset by a decline in wholesale.

Wrangler brand global revenue was $1.75 billion for the year, flat compared to 2022, supported by growth in categories such as outdoor, non-denim bottoms and female.

• Wrangler U.S. revenue was flat with growth in DTC and digital wholesale offset by retailer inventory management actions.
• Wrangler U.S. own.com increased 9 percent driven by growth in Tops and Western.
• Wrangler international revenue increased 1 percent (1 percent decrease in constant currency).

Lee Brand’s global revenue was $843 million, a 4 percent decrease compared to 2022.

• Lee’s U.S. revenue decreased 4 percent due to retailer inventory management actions.
• Lee’s international revenue decreased 3 percent (4 percent decrease in constant currency).

Gross margin decreased 140 basis points to 41.7 percent of revenue on a reported basis and decreased 120 basis points to 41.9 percent on an adjusted basis compared to the prior year.

• Gross margin included a 60 basis point negative impact from the previously discussed duty expense related to prior years.
• Excluding the duty charge, adjusted gross margin decreased 60 basis points as benefits from pricing, channel mix and lower transitory costs such as air freight were offset by increased product costs and proactive inventory management actions.

SG&A expenses were $769 million, or 29.5 percent of revenue, on a reported basis.

• On an adjusted basis, SG&A of $760 million was approximately flat compared to adjusted SG&A in the prior year. As a percent of revenue, adjusted SG&A increased 10 basis points to 29.1 percent.
• Investments in DTC and technology, as well as increased distribution costs, were said to be offset by tight control of discretionary expenses.

Operating income was $319 million on a reported basis and $334 million on an adjusted basis for the full year.

• Operating income included $14 million of previously discussed duty expense related to prior years.
• Excluding the duty charge, adjusted operating income was $348 million, or 13.3 percent of revenue compared to adjusted operating income of $372 million, or 14.1 percent in the prior year.

Full-year EPS was $4.06 a share on a reported basis and $4.26 on an adjusted basis compared to reported EPS of $4.31 and adjusted EPS of $4.49 in the prior year.

• EPS included a 19-cent charge for duty expense related to prior years.
• Excluding the duty charge, adjusted earnings per share was $4.45.
• Full-year EPS was said to be positively impacted by discrete tax items that are expected to lower the Company’s cash tax payments in future years.

Balance Sheet and Liquidity Review
Kontoor Brands ended fiscal 2023 with $215 million in cash and cash equivalents and approximately $0.8 billion in long-term debt.

Inventory at the end of fiscal 2023 was $500 million, down 16 percent compared to the prior year-end and in line with expectations.

As of December 30, 2023, the company had no outstanding borrowings under the Revolving Credit Facility and $493 million available for borrowing against this facility.

As previously announced, the company’s Board of Directors declared a regular quarterly cash dividend of 50 cents per share, payable on March 18, 2024, to shareholders of record at the close of business on March 8, 2024.

Consistent with a commitment to return cash to shareholders, the company repurchased $30 million of common stock during the fourth quarter. When combined with the strong dividend, the company returned a total of $139 million to shareholders during 2023. The company has $300 million remaining under its authorized share repurchase program.

Project Jeanius
The investments made over the past five years have enabled Kontoor Brands to become a standalone public company, strengthen its brands, reduce financial leverage, implement a global ERP solution and navigate an uneven operating environment. To meet the company’s accelerated growth objectives while maintaining a strong financial profile, the company has commenced Project Jeanius to unlock sources of capital to support increased investment in accretive growth opportunities, improve profitability and drive higher returns on capital.

Project Jeanius will simplify and transform processes, systems and the company’s global operating model, focusing on enhancing and optimizing the supply chain, reducing operating complexity and integrating the business across global shared services. The initiative will improve speed to market and agility, and leverage advanced data analytics to enhance business insights and decision making.

“This is one of the most important steps we have taken as a public company and will transform our organization from the legacy structure required at the spin to a best-in-class global multi-brand platform while unlocking significant sources of capital. With our strong leadership team in place, we are able to take this step from a position of strength, and I am confident this will deliver the next chapter of Kontoor’s value-creation journey,” said Scott Baxter, president, CEO and chair of Kontoor Brands.

Project Jeanius is a multi-year initiative and the company expects to realize between $50 million and $100 million of gross profit improvement and SG&A savings on a run-rate basis throughout the program, a portion of which will be reinvested into strategic priorities to accelerate growth. The company anticipates the impact of Project Jeanius to begin in the fourth quarter of 2024, with more significant benefits expected in 2025 and 2026. The company’s 2024 outlook does not yet reflect the anticipated impact of Project Jeanius.

2024 Outlook
“Our outlook for this year reflects strong gross margin expansion and operating earnings growth, strong cash generation, best-in-class returns on capital and significant capital allocation optionality. Although we anticipate the operating environment will remain challenging over the near term, we enter 2024 from a position of strength,” offered Baxter.

“And, to build on our momentum, we initiated Project Jeanius to further enhance our operating efficiency while simultaneously creating significant capacity to invest behind our brands and strategic priorities to accelerate growth. The future is bright for Kontoor Brands and we are committed to driving superior returns and value creation for all stakeholders,” added Baxter.

The company’s 2024 outlook includes the following:

• Revenue is expected to be in the range of $2.57 billion to $2.63 billion, reflecting a decrease of 1 percent to an increase of 1 percent compared to 2023. The company expects growth from strategic initiatives, expanded distribution and ongoing market share gains to be offset by conservative retailer inventory management and continued challenging macroeconomic conditions.
  • The company anticipates these challenges to be most pronounced in the first half of 2024, with first-half revenue declining at a mid-single-digit rate compared to the 2023 first half.
  • In the first quarter, the company expects a revenue decline of approximately 9 percent compared to Q1 2023, reflecting tight retailer inventory management and a conservative approach to seasonal product.
• Adjusted gross margin is expected in the range of 44.2 percent to 44.4 percent, increasing 170 to 190 basis points compared to adjusted gross margin in the prior year, excluding the out-of-period duty expense. Gross margin expansion is expected to be driven by the benefits of mix as well as lower input costs.
  • The company anticipates stronger gross margin expansion in the first half of 2024, with first-half gross margin expanding more than 250 basis points compared to the 2023 first half.
  • In the first quarter, the company expects gross margin in the range of 44.0 percent to 44.2 percent.
• Adjusted SG&A is expected to increase at a low- to mid-single-digit percentage rate compared to adjusted SG&A in the prior-year period. The company said it will continue to invest in its brands and capabilities in support of long-term profitable growth, including demand creation, DTC, and international expansion while remaining disciplined with discretionary expenses.
• Adjusted operating income is expected to be in the range of $372 million to $382 million in 2024, reflecting an increase of between 7 percent and 10 percent compared to adjusted operating income in the prior year excluding the out-of-period duty expense, including double-digit growth beginning in the second quarter.
• Adjusted EPS is expected to be in the range of $4.65 to $4.75 a share, reflecting an increase of 9 percent to 12 percent compared to adjusted EPS in the prior year.
  • Excluding the out-of-period duty expense in 2023, adjusted EPS is expected to increase between 4 percent and 7 percent, including an approximate 5 percentage point headwind from a higher tax rate.
  • The company said it anticipates first-half 2024 adjusted EPS to be relatively consistent with the 2023 first half on a dollar basis.
  • In the first quarter, the company expects adjusted EPS of approximately 90 cents

Capital Expenditures are expected to be approximately $40 million for the year.

Kontoor expects an effective tax rate of approximately 20 percent for 2024. Interest expense is expected to approximate $35 million. Other Expense is expected to be in the range of $12 million to $14 million. Average shares outstanding are expected to be approximately 57 million, excluding the impact of share repurchases.

The company expects cash flow from operations to exceed $325 million, driven by the combination of accelerated earnings growth and a continued normalization of inventory.

All per-share amounts are presented on a diluted basis. Unless otherwise noted, “reported” and “constant-currency” amounts are the same. Amounts as presented herein may not be recalculated due to the use of unrounded numbers.

As previously disclosed and detailed above by line item, management reported that it identified and corrected inaccuracies in processing certain transactions with U.S. Customs and Border Protection arising from the implementation of the company’s ERP system. These inaccuracies resulted in underpayment of duties owed to U.S. Customs for the 2021 to 2023 periods. Full-year 2023 results include a $14 million charge related to prior years, and fourth-quarter 2023 results include a $6 million charge related to prior annual and interim periods.

Image courtesy Kontoor Brands