Wrangler, Lee Parent Posts Solid Q4 Results On Double-Digit U.S. Growth

Kontoor Brands, Inc. the lifestyle apparel company led by the Wrangler and Lee divested VF Corp. denim brands, reported fourth-quarter revenue was $732 million, a 7 percent increase (+9 percent increase constant currency) over the prior-year comparable period. Revenue increases were said to be primarily driven by strength in domestic wholesale and digital, somewhat offset by decreases in international with the continued impacts of lockdowns and restrictions in China weighing on the quarter.

U.S. revenue was $605 million in Q4, increasing 16 percent over the prior-year comparable period, with gains in both the Wrangler and Lee brands. U.S. wholesale increased 17 percent compared to the fourth quarter 2021, including strength in U.S. digital wholesale which increased 66 percent compared to last year. The gains were augmented by continued strength in U.S. own.com revenue, which increased 19 percent compared to the prior-year comp period.

International revenue was $127 million, a 20 percent decrease (-12 percent constant currency) over the prior-year comparable period. China decreased 33 percent (-25 percent constant currency) compared to the fourth quarter 2021, driven by impacts from the COVID lockdowns and restrictions in the region. Europe decreased 15 percent (-4 percent constant currency) over the prior-year comp period, with wholesale pressures more than offsetting constant currency gains in DTC.

Wrangler brand global revenue was $509 million, a 15 percent increase (+16 percent constant currency) from the prior-year comparable period. Wrangler U.S. revenue increased 19 percent compared to the prior-year comp period, primarily driven by increased shipments in U.S. wholesale, with broad-based channel and category strength including Western, Outdoor, Workwear and t-shirts. Wrangler international revenue decreased 17 percent (-9 percent constant currency) compared to the fourth quarter 2021, with gains in DTC more than offset by decreases in wholesale channels.

Lee brand global revenue was $219 million in Q4, a 6 percent decrease (-3 percent constant currency) from the prior-year comparable period. Lee U.S. revenue increased 5 percent compared to the prior-year comp period, primarily driven by Digital. Globally, non-denim categories such as T-shirts experienced significant year-over-year gains in the quarter. Lee international revenue decreased 21 percent (-13 percent constant currency) compared to the fourth quarter 2021, driven primarily by reductions in China due to the impact of COVID restrictions.

Other global revenue was $4 million, a 19 percent decrease compared to the prior-year comparable period.

Gross margin decreased 200 basis points to 40.8 percent of revenue compared to the prior-year comp period. Compared to adjusted gross margin in the fourth quarter 2021, gross margin decreased 180 basis points. Higher inflationary pressures on input costs, inventory provisions and impacts from production downtime, as well as foreign currency, primarily drove the decline. The decline was partially offset by strategic pricing and channel mix, as well as moderating transitory costs such as air freight.

SG&A expenses were $214 million in the fourth quarter. Adjusted SG&A expenses were $213 million, or 29.1 percent of revenue, decreasing 290 basis points compared to the prior-year comparable period. As expected, tight controls of discretionary expenses as well as lower compensation costs and a decrease in credit loss provisions were somewhat offset by higher distribution expenses, and an increase in strategic investments in IT.

Operating income was $85 million on a reported basis and $86 million on an adjusted basis. Adjusted operating margin of 11.7 percent increased 110 basis points compared to the adjusted operating margin during the prior-year comparable period. Benefits from tight expense control, lower compensation costs and strategic pricing more than offset higher inflationary pressures on input costs, inventory provisions and impacts from production downtime.

EBITDA was $95 million on a reported basis and $93 million on an adjusted basis. Adjusted EBITDA margin of 12.7 percent increased 60 basis points compared to adjusted EBITDA margin during the prior-year comparable period.

Earnings per share was 91 cents on a reported basis and 88 cents on an adjusted basis compared to reported EPS of 75 cents and adjusted EPS of 88 cents, in the prior-year comp period.

“We finished 2022 strong, as fourth-quarter revenue and EPS came in significantly above our plan,” said Scott Baxter, pPresident, CEO and chair of Kontoor Brands. “Despite unprecedented macroeconomic challenges, we are delivering on many of our long-term goals, with 2022 revenue and earnings ahead of our Investor Day targets. I want to thank our teams around the world for navigating these near-term external pressures while setting the foundation for Kontoor’s long-term future success.”

Full Year 2022 revenue was $2.63 billion, a 6 percent increase (8 percent increase in constant currency) over the prior year. Revenue increases were primarily driven by strength in Digital, including own.com and digital wholesale, as well as strength in U.S. wholesale. These gains were somewhat offset by a decrease in non-U.S. wholesale with the continued impacts of lockdowns and restrictions in China weighing on the year.

U.S. revenue was $2.07 billion, increasing 11 percent over last year, with gains in both the Wrangler and Lee brands. U.S. wholesale increased 11 percent compared to 2021, including strength in digital wholesale which increased 23 percent compared to last year. These gains were augmented by continued strength in U.S. own.com revenue which increased 23 percent compared to 2021.

International revenue was $557 million, an 8 percent decrease (-1 percent constant currency) over the prior year. China decreased 23 percent (-20 percent constant currency) compared to 2021, driven by the impacts of COVID lockdowns and restrictions in the region. Europe decreased 5 percent (+7 percent constant currency) over the prior year, with DTC driving the constant currency gains.

Wrangler brand global revenue was $1.75 billion, an 11 percent increase (+12 percent constant currency) from the prior year, driven by U.S. wholesale and global Wrangler own.com which increased 25 percent. Wrangler U.S. revenue increased 13 percent compared to last year, with broad-based channel and category strength including Western, Outdoor, Workwear and T-shirts. U.S. Wrangler.com increased 27 percent compared to last year. Wrangler international revenue decreased 1 percent (+8 percent constant currency) compared to 2021.

Lee brand global revenue was $874 million, a 1 percent decrease (+1 percent constant currency) from the prior year. Lee U.S. revenue increased 7 percent compared to last year, primarily driven by Digital. Globally, non-denim categories such as T-shirts experienced significant year-over-year gains. U.S. Lee.com increased 13 percent compared to last year. Lee international revenue decreased 12 percent (-6 percent constant currency) from 2021, driven primarily by the reductions in China due to the impact of COVID lockdowns.

Other global revenue was $11 million, a 17 percent decrease compared to the prior year.

Full-year gross margin was 43.1 percent of revenue, a decrease of 160 basis points compared to 2021 reported gross margin and a 150 basis point decrease compared to 2021 adjusted gross margin. Higher inflationary pressures on input costs, inventory provisions and foreign currency primarily drove the decline. The decline was partially offset by strategic pricing and the Digital own.com mix.

SG&A expenses were $778 million on a reported basis and $762 million on an adjusted basis in 2022. As a percent of revenue, adjusted SG&A was 29.0 percent, decreasing 140 basis points compared to adjusted SG&A during the prior year. Increased strategic investments and distribution expenses were more than offset by tight controls of discretionary expenses as well as lower compensation costs.

Operating income was $357 million on a reported basis and $372 million on an adjusted basis. Adjusted operating margin of 14.1 percent decreased 10 basis points compared to adjusted operating margin in the prior year. Benefits from tight expense controls, lower compensation costs and strategic pricing were more than offset by higher inflationary pressures on input costs and inventory provisions.

EBITDA was $390 million on a reported basis and $402 million on an adjusted basis. Adjusted EBITDA margin of 15.3 percent decreased 30 basis points compared to adjusted EBITDA margin during the prior year.

Earnings per share were $4.31 on a reported basis and $4.49 on an adjusted basis compared to reported EPS of $3.31 and adjusted EPS of $4.28, in the prior year.

Kontoor ended fiscal 2022 with $59 million in cash and cash equivalents and approximately $0.8 billion in long-term debt.

As of December 31, 2022, the company had no outstanding borrowings under the Revolving Credit Facility and $488 million available for borrowing against this facility.

Inventory at the end of fiscal 2022 was $597 million, up 64 percent compared to the prior-year period and 30 percent compared to pre-pandemic 2019 levels. Year-end inventory sequentially improved by $81 million from the third quarter of 2022. Approximately 90 percent of inventory at the end of the year was core product. The company said it is taking proactive actions and expects inventory to return to more normalized levels in mid-2023.

“Even as we anticipate macro headwinds to persist through the year, we begin 2023 from a position of strength,” added Baxter. “We expect our strategic investments in talent, demand creation and innovation to support continued share gains in our core business, while also driving diversified, accretive growth across DTC channels, categories and international markets. Kontoor’s powerful combination of sustained profitability, robust balance sheet and flexible capital allocation optionality should continue to yield superior returns for all stakeholders.”

Looking ahead, revenue is expected to increase at a low-single-digit percentage over 2022 with growth fairly balanced between the first half and second half. Kontoor expects first-half growth to be driven by the U.S. with continued momentum in POS, share gains and Digital, somewhat tempered by softness in China as the region continues to recover from COVID lockdowns and restrictions. During the second half of 2023, the company assumes macro consumer demand conditions to be more challenged in the U.S., with the China market more fully reopening.

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. Expected increases from continued structural mix shifts to accretive channels such as Digital and International, lower inflationary pressures on input costs and higher AURs, are anticipated to be somewhat offset by impacts from production downtime. The company expects gross margin benefits to be more second-half weighted, driven by geographic and DTC mix, lower production downtime and reduced input cost pressures.

SG&A investments will continue to be made in the company’s brands and capabilities in support of longer-term profitable revenue growth, including demand creation, DTC, and International expansion, as well as planned normalization of compensation expenses. Compared to adjusted SG&A in 2022, the company expects full-year SG&A to increase at a mid-single-digit percentage, with second-half investments anticipated to be stronger than in the first half.

EPS is expected to be in the range of $4.55 to $4.75. Due primarily to gross margin, the Company expects EPS on a dollar basis to be more weighted to the second half of 2023.

Capital Expenditures are expected to be in the range of $35 million to $40 million, primarily to support growth in owned brick-and-mortar stores, manufacturing, distribution and IT projects.

Kontoor 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 additional share repurchases.

Photo courtesy Wrangler