Kontoor Brands reported sales dipped 1 percent in the second quarter, but adjusted earnings grew 27 percent to top expectations, prompting the parent of Wrangler and Lee to lift its EPS outlook for the year.

“We delivered second-quarter results that exceeded our expectations driven by higher revenue, stronger gross margin expansion and cash flow generation,” said Scott Baxter, president, chief executive officer and chair of Kontoor Brands. “Our fundamentals continue to improve, providing us with significant optionality to drive long-term value while returning more than $100 million to shareholders year-to-date.

“We are carrying great momentum into the second half of the year and are raising our outlook, including the impact of additional demand creation investments that will support profitable growth for the balance of the year and beyond,” continued Baxter.

Second Quarter 2024 Income Statement Review
Revenue was $607 million, down 1 percent from the prior year. The revenue decline was driven by retailer inventory management actions in the U.S., the anticipated decrease in revenue from seasonal products, and lower international revenue, partially offset by growth in direct-to-consumer. There was also an approximate two-point benefit from the earlier timing of wholesale shipments in the U.S. from the third quarter into the second quarter.

U.S. revenue was $496 million, decreasing 1 percent compared to the prior year. Growth in direct-to-consumer was more than offset by a 1 percent decline in wholesale revenue due to reduced shipments as retailers tightly managed inventory levels.

  • International revenue was $111 million, a 6 percent decrease (5 percent decrease in constant currency) compared to the prior year.
  • Europe decreased 5 percent, with a 3 percent growth in direct-to-consumer (4 percent growth in constant currency) more than offset by an 8 percent decline in wholesale.
  • Asia decreased 13 percent (10 percent decrease in constant currency), with a 26 percent decrease in wholesale (24 percent decrease in constant currency) partially offset by a 4 percent increase in direct-to-consumer (8 percent increase in constant currency).
  • Non-U.S. Americas increased 2 percent (3 percent increase in constant currency), driven by growth in wholesale.
  • International direct-to-consumer increased 3 percent (5 percent increase in constant currency), with 25 percent growth in digital (28 percent growth in constant currency) partially offset by an 11 percent decrease in owned brick-and-mortar stores (9 percent decrease in constant currency).

Wrangler brand global revenue was $429 million, a 1 percent increase compared to the prior year. Wrangler U.S. revenue was flat, with 10 percent growth in direct-to-consumer offset by a 1 percent decline in wholesale. Wrangler international revenue increased 7 percent, driven by 13 percent growth in direct-to-consumer (14 percent growth in constant currency) and 6 percent growth in wholesale.

Lee brand global revenue was $175 million, a 7 percent decrease (6 percent decrease in constant currency) compared to the prior year. Lee U.S. revenue decreased 3 percent, driven by reduced shipments to the wholesale channel and a decline in direct-to-consumer. Lee international revenue decreased 13 percent (11 percent decrease in constant currency) driven by a decline in wholesale, partially offset by growth in direct-to-consumer.

Gross margin increased 410 basis points to 44.7 percent on a reported basis and increased 420 basis points to 45.2 percent on an adjusted basis compared to the prior year. Lower product costs drove adjusted gross margin expansion, improved product mix and proactive supply chain efficiencies, partially offset by lower pricing.

Selling, General & Administrative (SG&A) expenses were $196 million or 32.3 percent of revenue on a reported basis. On an adjusted basis, SG&A expenses were $195 million, or 32.1 percent of revenue, representing an increase of 8 percent compared to the prior year. Investments in direct-to-consumer and technology were partially offset by lower distribution and freight expense.

Operating income was $75 million on a reported basis. On an adjusted basis, operating income was $80 million and increased 10 percent compared to the prior year. Adjusted operating margin of 13.1 percent increased 140 basis points compared to the prior year.

Earnings per share (EPS) were 92 cents a share on a reported basis. On an adjusted basis, EPS was 98 cents a share, compared to adjusted EPS of $0.77 in the prior year, representing a 27 percent increase.

Balance Sheet and Liquidity Review
The company ended the second quarter with $224 million in cash and cash equivalents and $750 million in long-term debt.

Inventory at the end of the second quarter was $488 million, down 22 percent compared to the prior year.

As of the end of the second quarter, the company had no outstanding borrowings under the Revolving Credit Facility and $494 million available for borrowing against this facility. During the second quarter, the company made a $25 million voluntary payment against its outstanding term loan.

As previously announced, the company’s Board of Directors declared a regular quarterly cash dividend of $0.50 per share, payable on September 20, 2024, to shareholders of record at the close of business on September 10, 2024.

Consistent with a commitment to return cash to shareholders, the company repurchased $25 million of common stock during the second quarter. Combined with the strong dividend, the company returned $53 million to shareholders during the second quarter and $101 million year-to-date. The company has $255 million remaining under its authorized share repurchase program.

Updated 2024 Outlook
“We are raising our full-year outlook driven by better-than-expected second-quarter results and increased confidence in the balance of the year,” said Baxter. “To fuel our momentum, we are making incremental investments in both brands starting in the third quarter to support accelerating revenue, expanding distribution and category growth, as well as continued market share gains. While we will continue to manage the business conservatively in light of the uncertain environment, in the second half of the year we expect accelerating revenue growth, double-digit operating earnings growth, and significant cash generation.”

The company’s updated 2024 outlook includes the following:

  • Revenue is expected to be in the range of $2.57 billion to $2.63 billion, representing a decrease of 1 percent to an increase of 1 percent, consistent with the prior outlook;
  • Adjusted gross margin is now expected to approximate 44.8 percent (44.6 percent prior), representing an increase of 230 basis points compared to the prior year on an adjusted basis, excluding the out-of-period duty charge in that period;
  • Adjusted operating income is now expected to be at the higher end of the prior range of $377 million to $387 million, representing an increase of 10 percent to 11 percent compared to the prior year on an adjusted basis, excluding the out-of-period duty charge in that period. Adjusted operating income includes $6 million of incremental demand creation investment in both the Wrangler and Lee brands compared to the prior outlook;
  • Adjusted EPS is now expected to approximate $4.80 ($4.70 to $4.80 prior), representing an increase of 8 percent compared to the prior year on an adjusted basis, excluding the out-of-period duty charge in that period. Adjusted EPS includes an $0.08 impact from incremental demand creation investment compared to the prior outlook; and
  • Cash from operations is now expected to exceed $350 million (exceed $335 million prior).

Image courtesy Wrangler