Q4 2019 Earnings Call
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Greetings and welcome to the outdoor brands Q4, you're an earnings results conference call. At this time, all participants certainly listen only mode of question answer session will follow the formal presentation. If anyone should acquire operator assistance. During the conference. Please press Star Zero order telephone keypad as a reminder, this conference is.
Being recorded.
It's now my pleasure to introduce your host Eric Tracy. Please go ahead Sir.
Good morning, everyone and welcome to contour brands' fourth quarter and full year 2019 earnings conference call.
Participants on today's call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ.
These uncertainties are detailed in documents filed with the FCC.
We urge you to read our risk factors cautionary language and other disclosures contained in those reports.
Announced referred to on today's call will often be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning.
Adjusted amounts exclude the impact of restructuring and separation cost changes in our business model, the noncash impairment charges related to Iraq, and Republic trademark and other adjustments.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website ICANN two or brands Dot com.
These tables identifying quantify excluded items and provide management's view why this information is useful to investors.
Unless otherwise noted announced referred to on this call will be in constant currency, which exclude the translation impact or changes in foreign currency exchange rates.
Constant currency amounts are intended to help investors better understand the underlying operational performance of our business, excluding the impacts of shifts and currency exchange rates over the period.
Joining me on todays call, our contour brands, President and Chief Executive Officer, Scott, Baxter, and Chief Financial Officer Ruston well.
In addition on today's call will also be joined by Tom Waldron Global President brand President of Wrangler, and Chris Waldeck Global brand President of late.
Following our prepared remarks, we'll open the call for questions. We anticipate the call will last about an hour with that I turn it over CEO Scott Baxter. Thank you Eric and good morning, everyone. Thank you for joining us as Eric mentioned, our global brand President Tom altered in Chris Waldeck will be joining us for this year end review, we believe this call is it.
Great opportunity to have them share insights from post spin to today as well as go forward strategies.
Each of their respective brands, we intend to have them join us for these yearend reviews on subsequent fourth quarter call, you'll hear from each of them in a bit let me start by acknowledging what a dynamic environment. We are all currently in the last few weeks have seen the emergence of the coal bid 19, Corona virus, which has driven.
Right a bit of headline risk and uncertainty in global markets.
While conditions are fluid, we remain extremely confident in the underlying fundamentals of our business. The strategic initiatives. We are implementing coupled with our best in class supply chain and robust cash flow generation provide us with distinct competitive advantage, particularly in time such as the.
Past may not be linear, but the levers at our control are significant and we believe will unlock meaningful value creation for our shareholders overtime.
I will touch on this more in a bit but let me first share some thoughts on the past year 2019 was a highly transformational year for console brands was Europe successful transition for our organization, our leadership teams and our employees around the globe, while we have accomplished much over the last year, including delivering on our.
Financial commitments laid out earlier this year, we remain in the early stages of investing behind and leveraging our two iconic brands wrangler and Lee to drive more profitable growth longer term.
Let me remind everyone of our stated strategic plan that was purposely structure over to horizons in a way that we believe will best represent the evolution of our operating model investments in globalizing our organization.
And sequencing of our capital allocation strategies.
I want to reiterate that word sequencing because it is a really important piece of understanding our story to develop a global best in class model. We have to first set the healthiest foundation for sustainable longer term growth and that is exactly what we have done in 2019, and we will continue.
You do during what we call a rise in one the first 18 to 24 months post spin.
First.
As you think about our topline growth algorithm proper sequencing is a critical component.
Before fully capturing a multitude of white space revenue and distribution opportunities in front of us and there are many we've needed to make some difficult but necessary decisions to level set and stabilize our business.
So during 2019 and horizon, one we have been keenly focused on the implementation of strategic quality of sales initiatives that elevate our brands and will better yield more profitable revenue growth. These actions while necessary to support our sustainable brand building efforts.
At pressured near term revenue results contributing nearly three points of headwind to our 2019 topline.
In addition to our proactive strategic actions disruptions within a rapidly evolving retail landscape primarily within the U.S. have also negatively impacted our shorter term results along the way we work to be very transparent, but how we select retailer bankruptcies in door closures would impact our 2019 sales performance.
These factors weighed on our full year revenue by about two points, which is inline with our initial outlook.
While we believe it is prudent to expect some continued disruption in certain points of retail distribution in our quality of sales actions are not fully complete we believe four points are important to consider.
First our exposure to challenge the distribution within the US is limited as we exit 2092nd we continue to focus on winning with the winning retailers, including our largest customers many of which are well positioned in their respective channels of distribution.
Third while our quality of sales actions may continue we intentionally.
Frontloaded these efforts post spin.
Leading the largest projects first and we would therefore expect associated top line pressures to moderate in the back half of this year as we anniversary these items and fourth in most importantly, we are just in the beginning stages of new business development diversifying our existing revenue.
Base as we improved growth across category channel and geographic factors again, we have always planned that new business development would accelerate in the second half of our horizon, one in sequence into horizon too.
Make no mistake.
Our brands are under distributed both within the us and internationally.
Stink competitive difference to many in our peer set we have meaningful and exciting expanded points of distribution that will begin in earnest in the second half of 2020, and you will be hearing more about these programs over the next few months.
From a margin perspective, which reston will detail a bit later appropriate sequencing is again important to note.
As we executed several restructuring cost savings and quality of sale actions prior to and subsequent to the spin that have driven margin recapture opportunities.
And really critical to our margin expansion story, we remain highly under indexed in under distributed within DTC.
Digital and international.
As we invest behind in distort growth in these areas, we will benefit from the structurally accretive mix shifts to drive incremental profitability expansion.
Further.
Both of these higher margin businesses will generate the capital that allows us to more meaningfully invest back into revenue enhancing areas like new product development design and innovation and demand creation.
Building, a productive virtuous cycle over time.
And finally.
As it relates to sequencing.
Let me touch on free cash flow generation, and our capital allocation strategies with a focus on 2019 and horizon one.
One of the key pillars to our story remains our robust consistent free cash flow generation. Despite facing top line pressures driven by our quality of sales actions in 2019 that strong cash generation continue.
We've stated that during horizon, one beyond our investments and standing up the organization our capital allocation strategy with focus on aggressively delevering the balance sheet.
In paying a superior dividends.
We're pleased to announce that within just seven months post separation, we've paid down $127 million in debt $27 million above our initial guidance, even while making significant restructuring investments in the business.
And we've now paid two consecutive quarters of dividends at 56 cents per share with a third just recently approved by our board to be paid out in a few weeks.
Our superior dividend yield allows us to return cash to our shareholders. While we continue to will fall our operating model. So sequencing matters sequencing of our revenue growth margin expansion and capital allocation strategies are essential in the proper evolution of our model.
Rustom will go through more specifics on our full year 2020 guidance, but as we turn the calendar I'd like to offer a few highlights of our 2019 performance relative to our financial commitments and share some thoughts into 2020.
We are on track executing on the strategies established at our spend and our playbook is evolving as weve intended.
Weve guided 2019, adjusted revenue of more than 2.5 billion and deliver actual adjusted revenue of 2.52 billion in line with our expectations, even as we amplified brand elevating initiatives that pressure shorter term topline results.
For adjusted EBITDA, We guided 2019 at 340 to 360 million.
We delivered the actual adjusted EBITDA of 341 million with out the amplified actions in India, we would have been above the midpoint of our original range.
We set our restructuring and quality of sales actions should result in improved healthier and more durable gross margins and we are seeing just that with gross margin expansion the last two quarters.
Finally, we set our capital allocation strategy during what we call for rise in one would focus on aggressively delevering the balance sheet and paying a best in class dividends, we paid down significant debt well ahead of guidance our dividend payout offers an attractive yield to our shareholders.
As we continued to evolve our operating model.
While we are absolutely moving in the right direction, we acknowledge some unexpected softness during the fourth quarter.
As you've heard from many of our branded apparel and retailer peers traffic in the US was soft during the holiday period, and we were not immune to this slower traffic coupled with the exit or reduction of some noncore programs and lower distressed sale sales caused us to come in a bit softer than we expected from a topline percent perspective, however, as we.
We entered 2020, we saw trends improve and we're confident in continuing to optimize in globalize our model through horizon one.
These actions that require some patients will set the stage for what accelerating growth with cash flow optionality in horizon to while yielding more profitable and sustainable growth that unlock substantial value creation.
For our shareholders.
Our outlook for 2020 maintain solid underlying structural fundamental improvement.
But.
We recognized the heightened uncertainty around factors beyond our control most notably the potential impacts of the recent cobot 19 Corona virus development.
So let me share some thoughts on the subject as I know it's on your minds, we are carefully monitoring the situation.
Which as you all know is highly fluid.
As always our top priority is to ensure the health and safety of our employees.
And our efforts are focused on addressing their needs.
Our thoughts are with those impacted during this difficult time.
We have created in internal Corona virus task force that monitors developments daily with contingency plans in place should conditions worsen.
We realized that from a demand perspective, the potential impacts are no longer just confined to the China region, and we have factored the global impact within our first quarter color, but most is derived from our commercial business in China I.
I do want to note that prior to the emergence of Corona virus, we were seeing really solid trends in our China business. In fact during January our China comps were up a solid double digits year over year.
And while we expect some impacts to near term results. We are confident that we will regain momentum as conditions normalize.
We have not seen any material issues within our supply chain or sourcing.
And while we believe our owned western Hemisphere production.
Provides a distinct competitive advantage in a challenging environments such as this we will certainly continue to monitor events as they develop.
As you all know we were scheduled to launch the Wrangler brand in China. This spring.
Given the current environment, we believe the prudent course of action is to delayed the launch for a short period until fall of this year. When we can more effectively optimize our go to market strategies, our interactive consumer engagement and better leverage our demand creation spent while.
The team is extremely excited to get going and we are ready. This is the best decision for the brand and most importantly, our employee safety.
We remain optimistic about the long term growth potential of this market for both our brands and we will execute against our strategies to most effectively capture the opportunities.
And finally, I want to reaffirm our commitment to our longer term TSR model of 8% to 10% annualized returns.
Especial, thanks to our employees all around the world for their tireless work ethic.
Inspiring collaboration.
Openness to change and dedication to success in 2019 in the year ahead.
With that I turn it over to Tom Waldron Global President of Wrangler.
Thank you Scott and good morning, everyone. Let me begin by saying without a doubt 2019 has been the most transformative year and Wranglers history.
While maintaining the authenticity of wranglers Western heritage under contour, we have now been able to invest in the brand to drive future revenue growth.
Team has never been more excited to compete in the marketplace and I am truly proud of our efforts over the last year to support the successful transition and setting the stage a really great things pick up.
First let me level less level set everyone outwear wrangler plays today.
We are primarily a us based brand with a focus on western mass channels.
These are our roots and we will continue to defend and grow this core business, but investments. We are now making will also allow us to push the brand beyond the core and will act as a key enablers and elevating the brand and growing to completely new ways.
Let me highlight a few.
We've invested in Calvin leadership to help enhance our go to market strategies, we hire the brands first ever global lead designer and global head of marketing and brought a new Gms in both Asia and Europe, a really important as we executed against our first global brand architecture.
We have accelerated investment and innovation from a product perspective, we launched our new outdoor performance altering year or HKG, which launched the key retail partners. This past fall.
And we've made significant investments of sustainability, which drives innovation across both product and manufacturing.
These include sustainability platforms, such as India, good and rooted each launched this past year. These are really solid proof points that serving the consumer needs driving enhanced profitability and doing the right thing for the planet can be harmonized and finally, we are enhancing our demand creation and focused on the high.
As ROI.
Last fall, we launched our global brand campaign, where with abandoned which kicked off in the us and will expand its global reach very soon.
We've continued to accelerate our collaborations with key retail partners, such as spreads Eagle and nordstroms, NYSE as well as partnering with organic celebrity brand investors and micro Influencers.
When you invest in people product design innovation and demand creation you weigh in with your core retail partners and consumers and we are beginning to see some good traction.
Excluding the impact of key retail bankruptcy, the wrangler us business was flat in 2019 outpacing the market.
According to NPD is retail tracking service for the total measure market Wrangler grew its dollar share and men's casual pants and genes in the fourth quarter and 29 team.
These investments also gives us permission to begin to stress the brand expanding third category channel and geographic vectors.
First category extension.
Other new design leadership, we began to build on the women's category with enhanced design and innovation and both bottoms and tops.
As we said on our last call the future category is a significant opportunity and we are in the early days of developing the platform.
Just as a reminder for perspective, we currently sell roughly 500 pairs of gains for every one T shirts sold compared to most of our competitors that sell at many aspire to use for every one pair of jeans sold.
We just put the final pieces of our leadership team in place and we are ready to aggressively go after this opportunity.
Our hcg line is another example of how we are making natural extensions for the Ranco brand.
We have outdoor at our DNA and we are developing more performance based outerwear that augments, our core and Dusseau at higher Eurs, something our key retail partners love as they seek to migrate up the pricing spectrum and the apparel category.
The early results for HKG are really encouraging and we can wait for you to see how the aligned line evolves in 2020 and beyond.
Next is channel expansion because of the investment and design and innovation, we have permission to begin to play an elevated price points of distribution as wrangler has begun selling upper tier retailers, such as nordstroms free people urban outfitters, and Fred Ziegel all at elevated price points importantly, we see some broad base.
Success across men's women's as well as non denim based tops.
Further hcg is not only provided category expansion with our core customers, but also beginning to lead to opportunities within the outdoor specialty and sporting good channels. We plan to have more exciting distribution gains to share with you over the next couple of quarters.
Our investments are driving growth and our evolution of our DTC business, primarily with digital our digital wholesale business grew 29% and 29 team and our own dock Tom continues to evolve from a transactional to an experiential, allowing us to connect with our consumer more effectively than we ever have and from a.
Geographic perspective white space growth opportunities are meaningful for the regular brand.
In Europe. These investments support our reside in the region, where we have been accelerating trends over the last few quarters Wrangler inflected positive in Q4, excluding business model changes a key proof point that our investments are paying off and finally these investments provide the foundation to launch the regular brand into China.
While we have pause our entrance with a regular brand for two months to delay will not have material impact on our full year results. As we have always plan for 2020 to be a test and learn year, we could not be more excited about the vision. The go to market strategy with our digital partner team all and the leadership, we have in place to execute against us.
Amazing growth opportunity for the brand in the region.
We are in the early days of our brand transformation and a lot of work ahead remains to navigate that dynamic retail environment, but the strategies, we have put in place and they admit vestments. We are now making our positioning the regular brand for sustainable and profitable growth going forward.
Let me now headed over to Chris who will take you through the Leibrand's.
Thanks, Tom and thank you all for joining us today.
Perhaps even more than wrangler leaves experienced meaningful transformation during 2090.
We're in the midst of significant change as we look to reposition elevate and drive more quality of growth for lead.
In 2020, particularly in the second half, we expect to see the benefits of our teams incredible efforts and can't wait to share. Some these exciting wins in the months to come.
I want to acknowledge something on the gate under prior ownership the Leibrand wasn't prioritized in terms of brand investments under contour and this leadership team. This is clearly changing.
We've had a loss leading up to do and are pleased with the progress we've made.
Let me provide a few examples of the significant actions and investments we've taken to create the building blocks for lease future success.
First the relocation believe business to our global headquarters here in North Carolina has begun to manifest enhance talent acquisition processes.
Better leverage of scaled results resources and robust cost savings opportunities.
From a quality of sales perspective under contour, we've exited unprofitable points of distribution in the us India in Europe.
These actions are the right strategic decisions to support the long term health of the brand.
And we've begun to realize the benefits was lower markdown and distressed sales that have contributed to margin recapture experienced during the last few quarters.
Leveraging learnings from our international business, particularly in Asia, We have 20 plus years of operating as a premium lifestyle brand.
We are now finally able to make the necessarily investments that helped bring those successes from product to innovation to distribution strategies back to the us market.
Success will continue as we win share with existing customers and we are confident you will see increasing signs of this during the coming year end success in growing the addressable market through category channel in geographic extensions.
So let me walk you through the specifics of these growth opportunities.
With respect to category extension a perfect example is our body optics technology platform.
This was historically confined to Asia region last fall, we were able to bring this innovation sweet starting with shape solutions to the mass channel here in the U.S.
We're really encouraged with the first season and a programs in place to build on body optics platform in more premium channels.
Our next generation stretch technology called NBP has been one of the most successful new innovation platforms. This year.
Enabling the brand to play at elevated price points.
And earlier this year, we launched lease global sustainability platform for a world of works at the international fashion Fair in Copenhagen, Denmark.
We've been thrilled with reaction from sustainability community, our retail partners and most importantly, our consumers.
When we think about channel expansion, while very early days the impact of the first ever global head of design is having on product is showing through in.
An example of this the female vintage modern collection has begun to spur green shoots of an enhanced brand expression.
It's increasing permission for lead to play in premium tiers of distribution and this has begun to create a halo effect on the brand.
It's gaining across existing distribution.
And with respect to geographic growth, let me be clear, we have significant opportunities internationally with the leibrand.
We remain highly underpenetrated in the European region relative to our peer said.
We will use both traditional wholesale distribution expansion as well as distorting investment within our digital ecosystem to catalyze growth.
As Scott stated, our China business began the year strong and we will experience some near term disruption due to the unfortunate corona buyers situation.
We expect to regain momentum in the region as consistent as conditions normalize.
Long term white space opportunities for Lee brand remains significant in the Asia region.
Driven by deeper penetration into tier one and two cities.
Further evolution of digital and expansion into tier three through five cities.
So taken altogether, we are confident in the trajectory of the lead business, we have some really solid proof points of success.
In areas, where we've made sound investments and perhaps most importantly has visibility as we move through this year and beyond that future successes are even brighter for the leibrand's.
With that I turn it over to Ruston.
Thank you, Chris and good morning, everyone I am excited to share our results with you and we'll focus my remarks. This morning on three key areas first our progress to date on transforming our model, including our cost savings projects, our global ERP implementation and our quality of sales efforts.
Second our fourth quarter results for 2019, and finally, our initial outlook for fiscal 2020, and the potential Corona virus impact on our first quarter.
We have a lot to cover so let's get started with an update on our key transformational initiatives.
Previously, we announced a restructuring and cost savings program that is expected to yield more than $50 million in annual savings upon completion.
We are executing in two phases and all actions in the first phase have been completed these actions included exiting unprofitable markets streamlining our supply chain operations, including closing three manufacturing facilities.
And consolidating and relocating operations.
We projected $20 million to $25 million of annualized savings in 2019 in 2020 from this first phase and we are ahead of schedule with significant benefits accruing to our second half results.
Phase two cost savings of $25 million to $30 million are anticipated to begin in 2021 as global processes and systems began to be implemented to drive global efficiency improvements.
Our global ERP and information technology infrastructure projects will continue to be our largest investment to enable the globalization of the business in 2020 as planned we will incur significant one time cost associated with the implementation and we remain on track with our first scheduled regional.
Alive in mid 2020.
The remaining two regions are scheduled to go live in 2021.
The phase two cost savings that will begin in 2021 will aid in mitigating the effects of the technology investment.
Finally, we have undertaken a variety of quality of sales actions since the spin.
Although this creates near term topline headwinds and we'll continue to affect our first half 2020 results until we anniversary. These actions we remain committed to our TSR approach in evolving our business and our pursuit to establish the strongest foundation for our long term success.
Now, let's get to our review of the fourth quarter results.
All comments, we'll refer to our fourth quarter results unless otherwise noted.
Throughout 2019, we have undergone transformational changes in the organization.
From restructuring and cost savings to business model changes to quality of sales efforts.
All of the changes will improve performance address a variety of internal and external factors and set the stage for long term growth.
We will highlight how these changes are impacting our performance as we go through our results.
Our global revenue decreased 8% compared with adjusted 2018 revenues.
The revenue declined was significantly impacted by three factors.
First proactive strategic quality of sales initiatives, including business model changes actions taken to exit underperforming country and other global points of distribution, including select channels in India.
These actions contributed three points to the decline.
Second reduced sales of certain lower margin lines of business and lower distressed sales. These actions represented one point of the decline.
And finally, the impacts of a major us retailer bankruptcy in the fourth quarter of 2018.
This drove another one point of headwind.
As you'd expect we will continue to see revenue headwinds from these first two actions until their anniversary dates which are largely in the first half of 2020, but both are contributing to our strengthening margin story.
On a regional basis, adjusted Us revenues, which represented 79% of our revenue in the quarter declined 6% with approximately four points driven by the previously mentioned factors.
The balance was primarily driven by the softer than anticipated us retail environment that Scott acknowledged earlier as well as the exit or rationalization of select noncore programs.
International revenues, which represented 21% of our revenue in the quarter declined 13% with the previously mentioned quality of sales efforts accounting for nine points of the decline.
To further delineate market exits and business model changes in Europe, and South America represented approximately six points of the decline while proactive actions to exit select points of distribution in India drove three points.
Lastly, a timing shift on a shipment in China drove an additional two points of headwind.
For the full year, our China business increased 2%, while the fourth quarter was down 7% due to the previously mentioned shipment.
Excluding this shipment China was up 3% in the quarter as we continued to see strong comp store sales and digital growth.
Turning to our channels.
Our us wholesale channel, which represented 66% of our revenue in the quarter declined 7% driven by the previously mentioned factors.
In the US wholesale channel, we continued our strong performance with our digital wholesale business increasing 52%.
Our partnerships and investments in this area continue to provide distorted returns and we remain bullish on this accretive growth opportunity.
Our non us wholesale channel, which represented 16% of revenue in the quarter declined 16%.
Proactive strategic initiatives, such as shifting the business model in Russia, Israel in Chile, as well as rationalizing select channels in India contributed roughly 10 points to the decline.
As previously mentioned timing shift in China also contributed approximately three points.
Our branded direct to consumer channel, which represented 14% of our revenues increased 3% behind the global strength of our own digital business that increased 15%.
We were very pleased that the digital strength was seen in all regions with the us increasing 17%.
Europe up 36% and Asia up 8%.
Given the accretive under index nature of this channel we will continue to invest heavily in this important growth area.
Now, let's turn to our brands.
Global revenue of our Wrangler Bryant brand declined 5%.
Wrangler us revenue, which represented 88% of the brands global revenues declined 3% due in large part to the previously mentioned domestic factors.
International sales, which represented 12% of the brands global revenues declined 18% due in large part to the actions taken in India and business model changes in Europe, and South America.
In Q2, we indicated that we anticipate a global wrangler sales would accelerate in the second half of the year driven primarily by improvement in our us business.
Although our global sales were higher in the second half of the year compared to the first half our year on year comparisons were softer than we anticipated as the second half finished down 5% compared to the first half finishing down 2%.
The previously announced softness in the us retail landscape around holiday coupled with the actions taken in India impacted our results.
Global revenue of our Leibrand declined 11%.
Lee Us revenue, which represented 57% as the brands global revenues declined 12% due to the three factors mentioned earlier as well as the softer us retail environment any exit or reduction of select non core programs.
Lee International revenue declined 11% driven by the actions taken in India and market access and business model changes in Europe, and South America.
Now onto gross margin.
Total adjusted gross margin increased approximately 40 basis points for the quarter.
Year over year gross margin comparisons have improving each of the last four quarters, including a positive inflection during the last two.
The improvement was due primarily to the impacts of quality of sales initiatives and favorable channel mix, which more than offset the negative impacts of actions in India.
Cost savings initiatives also continue to mute inflationary product cost pressures.
Moving forward structurally accretive mixed shift to higher margin channels, such as digital and international will fuel further gross margin expansion.
In addition, we anticipate cost savings from our initiatives to drive improvements in product costs.
Adjusted EPS DNA as a percentage of sales decreased $23 million or 80 basis points to 28% of revenue.
Despite fixed costs de leverage due to revenue declines we were able to reduce SDMA costs with tight expense control as well as the benefits of restructuring and cost savings initiatives.
Adjusted operating profit was $85 million or 13.1% of sales an increase of 2% from prior year driven by the margin expansion and SGN a reduction from the transformational changes made to improve the business.
Adjusted EBITDA was $93 million or 14.2% of sales compared with $92 million last year. The actions. We took in India drove an approximate 4 million dollar adverse impact in the quarter.
Net interest expense was approximately $15 million and our adjusted effective tax rate was approximately 21%.
We delivered adjusted earnings per share of 97 cents in the quarter.
Finally from a balance sheet perspective, we would like to highlight our inventory performance.
Inventories as mentioned declined 3% to end the year.
During the quarter, we reduced inventory by more than $85 million are over 15%.
Despite the softer than anticipated shipments given the us retail environment at holiday, we delivered on our commitment to drive inventory below prior year levels.
We are pleased with the results. However, we have more work to do and inventory debt reduction will remain a focus in 2020.
Overall as Scott outlined earlier, we're pleased with our full year financial performance and meeting our financial commitments that were outlined in April.
Given the complexity of executing a spin transaction transitioning from a regional to global operating models implementing a multitude of restructuring cost savings and brand enhancing initiatives and developing a new global infrastructure, including the building of a global ERP platform.
We accomplished a great deal in 2019, but the journey is just beginning.
Scott highlighted sequencing matters greatly.
We've been very intentional in the way, we restructured our actions during the first year, allowing us to deliver on near term results. While also giving us the opportunity to do what's best for a long term business and our shareholders and now.
Before covering our 2020 outlook in detail.
Let me begin by providing some additional context.
In the news release this morning, we shared our outlook for 2020.
As we considered how to provide guidance in the midst of the very fluid and dynamic macro backdrop with the emergence of the Corona virus situation.
We wanted to make sure we presented a clear view of the underlying an ongoing fundamentals of our business.
2019 was a year of transformative change as discussed and we understand there is complexity as our model evolves.
We went to make sure we provide the best line of sight to the underlying operations of the business.
Including contacts for quarterly cadence, while also providing some color with respect to potential corona virus impacts.
With this his background lets turn to our outlook.
Again, all figures exclude the impact of Corona virus.
Our outlook for fiscal 2020, which includes the 50 Threerd week compared to adjusted 2019 is as follows.
Revenue is expected to be largely consistent with full year 2019, adjusted revenue with branded Wrangler and Lee revenue anticipated to increase low single digits, while the other non strategic revenues for non branded products sold through our VF outlets domestically as well as our rock and repo.
I'd like brand is expected to decline double digits for the full year 2020.
The 50 Threerd week is expected to contribute approximately one half of a point to full year revenue.
The negative impact of 2019 strategic business exits quality of sales initiatives and lower revenue associated with non strategic lines of business are expected to represent up to three points of headwind.
The full year 2020 revenue with the majority occurring during the first half of the year.
In addition, timing shifts between our second quarter in third quarter shipments are anticipated.
Due to these reasons first half revenue is expected to decline.
Second half revenue is expected to grow year over year based on the moderating headwinds from restructuring and quality of sales actions.
Benefits of expanding programs and points of distribution.
As well as the timing of shipments the strongest revenue growth is anticipated in the fourth quarter.
Gross margin is expected to be in the range of 41% to 41.5% compared with full year 2019, adjusted gross margin of 40.8%.
Driven by ongoing restructuring and quality of sales initiatives as well as structural mix shifts to more accretive DTC and international businesses.
Adjusted EPS is expected to be in the range of $3.55 to $3.65 compared with full year adjusted 2019 earnings per share of $3.84.
Our outlook for 2020 includes an additional five months of interest expense that impacts full year adjusted EPS by approximately 23 cents.
Compared with 2019, adjusted EPS, which will negatively impact first half 2020 comparisons.
Cash flow from operations is expected to be greater than 325 million.
Generating significant financial flexibility.
We anticipate our strong and durable operating model will be augmented with significant working capital improvements.
Free cash flow after funding capital expenditures, including the investment in our global ERP and infrastructure is anticipated to be an excess of 255 million, which provides ample opportunity to support our best in class dividends and continued aggressive debt repayment priority.
Piece.
We'll refer you to our news release for greater detail, but some high level thoughts on other full year assumptions include.
At the midpoint of our guide we expect adjusted EBITDA to increase mid single digits compared with full year 2019, adjusted EBITDA of 341 million.
Capex is expected to range between 55 million and 70 million, including 30 to 40 million to support the design and implementation of our ERP and information technology infrastructure.
We anticipate that total reduction in long term debt for 2020 to be in excess of 125 million.
We expect an effective tax rate of roughly 22% and interest expense, including funding fees related to our accounts receivable sale program are expected to be approximately $50 million in 2020.
Finally, I will conclude my remarks today with providing a little more color on the potential Corona virus impact for the first quarter for your models as a reminder, the following impacts are excluded from our outlook.
In terms of commercial impacts our China market has been most impacted during the first quarter. So let me provide more context on our operations in this important market.
China represents approximately 7% of our annual global revenue.
Consisting of wholesale channels, including digital and partnership stores.
As well as owned and operated full price and outlet stores.
As Scott mentioned earlier, we had a strong start to the year in January during the month of February the majority of our owned and partner retail doors were closed for the month, while most of the remaining Doug doors.
Saw very severe reductions in traffic and comps.
But over the past few weeks the number of opened doors is increasing.
And today, we are at approximately 75% of doors open.
Although we anticipate more door openings will occur as we move through March we also anticipate significant reductions in traffic and comps will continue.
Globally, including China, and other select markets in Europe, we anticipate the impact of the Corona virus situation could potentially pressure first quarter revenue by approximately four points again. This is not reflected in the previous 2020 outlook. We just discussed.
In terms of supply chain impacts, while you may have others, citing problems today, we have not experienced any material issues.
In fact, we believe our supply chain creates a distinct competitive advantage with our scale vertically integrated manufacturing in the western hemisphere.
As of today, nearly all of our China Mills have resumed operations with minimal product flow issues.
At this time, we do not anticipate any material interruptions in our ability to supply the market.
With that update it's now time to turn the call back to the operator for the question and answer discussion operator.
Thank you. Thank you will note to conduct a question and answer session.
Let's ask your question. Please press star one of your telephone keypad.
Confirmation total indicate your line is in the question Q you made press star to if you'd like to your question from MCU for participants using speaker quit maybe necessary to pick up your handset before pressing star one.
One moment, please will be poll for questions.
Our first question today is coming from Erinn Murphy from Piper Sandler Your line is that lives.
Great. Thanks, good morning, gentlemen.
My first question for you just on the guidance and your guidance excludes around a virus and you've obviously given some context for Q1, just given that China hit in particular, so are you telling us that first half revenue is obviously down but on top of that Q1 has another four percentage point kind of head just trying to marry that coupon.
If you exclude it from your guidance that there's clearly a realtime hit.
They are and how are you. This is Scott I'm going to go head to start then I'll turn it over to rest in because I think it's important that I talked a little bit about the entire situation. It's currently have very fluid situation, but I think it's important for everyone to know that we're closely monitoring it one of the things. That's been helpful is that we've learned some things from this already happening in Asia.
Yes, so that has been beneficial for us we've got a really complete task force on this of which many on our executive leader Tiet ship team sit on it we're meeting daily on this sometimes more than that it's important to note. The we have contingency plans in place. So we're pleased with where we are the one thing that we've done is that we've really decide.
Did that we're going to base all our decisions on fact, so we're not going to get ahead of ourselves and we're not going to speculate but we've really tried to base all the decisions and our strategic actions on the facts and what's happening in the marketplace.
I mentioned earlier and I think this is really important for us in our China business. The month of January we were up double digits in that business and we still feel really confident in that business and the people because nothing about the product the marketing or the people has changed.
And you know.
Certain slowly recover.
I would say very slowly but recovery is taking place in normalization is starting to happen at the beginning stages. So we're encouraged by that back here so with that I'll have ruston take the rest yep. Thanks, Scott Good morning, Aaron.
In regards to the outlook.
We purposely chose to provide the outlook, excluding the impact of Taranto buyers and let me emphasize again kind of why that why we took that path.
Obviously as we talked about we've had transformational change in 2019 with our actions and many of these actions will continue to affect the first half.
Primarily in 2020 as we anniversary those actions.
So to answer your question.
Yes, the 4% would be in addition to the shaping that we provided on the quarters in the outlook because again, the corona virus impact is excluded.
But we thought that was really important imprudent to make sure that everyone understood that true fundamentals of our actions and how that was affecting our business. Obviously, it's a fluid and dynamic situation. We sized up the Q1 revenue impact as Scott mentioned, because we want to focus on fact and where we are.
Confident.
We didnt want to reflect a partial year ended the outlook as it's unclear the timeline and trajectory. This will take but we did want to provide some color for you as you start to build your models.
Got it no thats helpful. Thank you and then just maybe to.
Sticking with this theme.
You talked about being a really strong trends in China pre effectively cobot 19, breaking out can you share a little bit more what you're seeing now though even.
Even it isn't even added tenets recovery phase between digital and physical within China are you seeing any outperformance in digital within China right now and then.
Secondly, you guys you're one of the first company to report contains seen this outbreak really accelerating Europe can you talk about what you're seeing now end markets like Italy.
In particular.
So all Aaron this is Scott so from Asia, China standpoint, we're really pleased with how we position the brands I think one of the things is most important for us as we entered the new year was that we've got a really good leadership team there so fairly new but we talked a little bit about that before so we put ourselves in an advantaged position in that respect all.
So our product is really good and our marketing is really good. So obviously, we were very encouraged by how it started I think the one thing thats really important about our business is we're very balanced. So we have a DTC business. We have a digital business, we have both and that really helps us in the marketplace, because we're able to cater to the consumer in any way that they want to go ahead.
Enjoy our products from that standpoint, so pleased with where we are they will slowly get itself back to normal and a lot of confidence going forward in the marketplace.
Too early to tell a little bit on Europe.
We understand what's going on in Italy, right now that's all kind of fairly new we're monitoring it really closely.
Don't have a lot of stores there. So we're right now just kind of feeling with the facts as they come in because it's a pretty fluid situation.
Thanks Art. Thank you. Our next question is coming from Adrian need from Barclays. Your line is allies.
Good morning, everybody.
I'm going to start with have focusing on cash flow one longer term horizon.
Horizon question, and then Reston I'm going to start with sort of just add clarification to the at least 325 million of cash flow. It includes 30 to 40 million of the ERP, but can you reconcile that with the adjusted EBITDA.
And exclude to 90 million as the ERP in IP expenses.
And then for Scott can you talk about actually the cash flow over the horizon wine and as we transition into horizon to just taking a longer term view of the cash flow prospects of the business I'll start with that thank you, yes, Adrian good morning addressed and let me go head start with your question around the cash flow.
Our guidance was 325 million in operating cash flow. So it wasn't free cash flow. So it does not include the 30 to 40 million of anticipated capital expenditures associated with the ERP.
Obviously in 2019, despite sort of significant onetime restructuring and separation costs.
We generated pretty significant operating cash flow.
Obviously, we've guided in 2020.
North of 325 million, which includes some significant working capital improvements.
You may recall at the time of the spend we talked about our cash conversion cycle has softened over the past several years and we saw up to $100 million of opportunity and working capital.
As we move forward, we see that opportunity.
In 2020 and are confident we're going to be able to deliver upon that and that gain is coming from inventory receivables and payables. So we have programs underway.
In each of those areas, obviously, we made significant improvement in inventory in the fourth quarter and we have some significant opportunities moving forward.
As we think about beyond 2020.
Cash flow is clearly, adding a critical part of our investment thesis and Thats why we place as much focus on it as we have so we'll continue to.
Move into horizon to as we start to go forward and that strong cash flow will generate optionality for us so that could take the place of.
Share repurchase.
M&A activities or or additional organic investments into the brand and obviously the focus in 2020 is going to be on paying this best in class dividends and de levering the balance sheet and Adrian I'll just make one comment I think from my vantage point. The thing that is most encouraging for me and the team is we laid out a strategy for both.
Hi, guys in one horizon too and as we start to merge closer to horizon. Two we're launching that strategy take hold we're watching and scheme that strategies work and we're putting ourselves in advantaged position to go head to take advantage of that going forward Rusted men mentioned the levers that we have the option to pull but if you think about.
How we laid this out and how it's playing itself out I couldn't be more pleased with how the team is executing the standpoint.
Great. Thank thank you recognize one quick.
What is the assumed margin flow through on the portion that is that that 4% to sales and at the stores that have reopened what capacity are they running at and do you see them in an improving such out on a daily or weekly basis. Thank you.
Yes Adrian.
Ill go ahead and talk a little bit obviously, we didn't dimensionalize the bottom line impact on that flow through on the 4% topline slow too early for that so I'm not going to dimensionalize that further.
In terms of our operations you know in terms of the stores specifically in China.
Clearly, we are starting to see stores and the doors reopened but we've been very conservative about how we're anticipating kind of that traffic and the comps during the completion of the month of March.
Thank you next question is coming from Bob Global from Guggenheim. Your line is that alive.
You guys good morning.
I think you commented on the inventory position.
Yes, your own inventory versus partner inventory can you just walk us through the different areas in terms of where you think inventory levels are in the channels maybe geographically.
So so yeah I'll go ahead, Bob its rest and good morning, I'll start with sort of our owned inventory here. Obviously, we have made market improvement here in the fourth quarter as we had projected.
The inventories in really good shape as you might expect given our operations the bulk of the inventory value.
Sits in finished goods.
Here in the U.S., and that's largely where our businesses.
And maybe I'll turn it over to one of the other guys to talk a little bit about retail inventory and what you guys are seeing.
Tom maybe you can you can start.
Yes, Hi, Bob This is Tom modern yeah, our inventory our ratios at retail are really healthy right now is something that our teams and our category management our approach to managing the business has really enabled us to make sure that we're in good shape from an inventory standpoint, and making sure match well to sales ratios.
Above the top Chris.
On the lease side of it same thing with Lee our inventory levels are in good shape with our partners, both domestically and internationally and the team.
They are on top of bid as it relates to the different moving parts was accrued a virus or others. So we feel good about where we sit right now.
Okay, great and him I could just sort of follow up a little bit more on the I guess China's situation generally gave us and numbers and the updated number in terms of sourcing in the western hemisphere, but.
In terms of material sourcing and the composition of the.
The denim et cetera.
How much of the material are you getting from China and are you seeing any disruption from sourcing materials. When you think about to manufacturing process throughout the supply chain.
Hey, Bob how are you Scott.
Scott.
From a standpoint of how we sit in where we stand one of the things that we've been very fortunate about furnace talk about it a lot is our internal sourcing capability. So we're really confident that obviously in these times thats been a big strategic advantage and then the other thing is the sourced part of it we're actually in very good shape.
Rustom mentioned in his Preplanned comments about the fact that our mills are up and running again, we've heard from our mill owners.
Workforces back at 75% to 80% plus.
Which is pretty normal after the Chinese new year as people kind of trickle back in so right now bomb things are very fluid, but right now we're in really good shape, and where you know what I mean monitoring the situation daily and our supply and our sourcing team feel real confident going forward as it stands today.
Thank you. Our next question is coming from Sam Poser from Susquehanna. Your line is alive.
Thank you for taking my questions.
Yes, I want to follow up the question that Adrian asked about the EBITDA and the $90 million and you're talking it appears as if you're talking about.
The EBITDA and and what portion goes into M&A and so on.
That $90 million, you're talking about that differently than you did at the beginning of in Q2 of last year can you give us some color on on why that should be regarded as.
As an adjustment this year when it wasn't mentioned last year.
Yes, yes, Sam so at the time of the span. This is rest and good morning. Its time in the span we talked about having up to $150 million a onetime items associated with the separation and ERP was the largest piece of that so when we provided guidance for.
2019, we only spoke about the capex portion because we only guided on capex.
Obviously as we're starting to move through the implementation cycle 2020 will be the heaviest year for those onetime.
<unk> expenses and we remain on T. assays with vs.
Corporation until really the next 18 to 24 months after the span.
So those expenses are showing up here, we're just making sure that were not double counting for the investments we're making.
With the ERP system.
Okay. Thank you and then I just want to I want to follow up on first quarter.
Maybe a little bit of meeting.
Horse a bit but.
The sales come down aren't necessarily going to be recovered next year like if people were going to buy a pair of jeans. This year that in by it doesn't mean, they're going to buy two pairs in second in first quarter of next year in which case. These are sort of legit lost sales relative to what you know and you've already talked about it as a hit so.
Why why wouldn't this.
The in the guidance, despite the fact that you're making good progress.
With with all of your various initiatives.
From a long term basis, and then because.
I mean.
What is that impact in the first quarter beyond the 4% because I mean.
You can't really taken out as a non-GAAP adjustment when the dust settles here versus the 355 to 365 guidance that you gave for the full year.
Yes, Sam its its interest and I'll go ahead and Star you know as we think about the actions that we're taking in the first half or the implications. We thought it was important to provide the cadence as it relates to the quarter from a revenue perspective, because we have taken these actions in 2019, and we'll continue to see headwinds.
Until the anniversary.
So thats what were reflecting in the guidance. We did not include the crowd of Iris piece, because we absolutely wanted to make sure that it was clear for people what those headwinds would be from the actions. We took this year.
And so hopefully that gives you a better sense of the cadence of the first half in the quarterly piece.
Excluding the Corona virus fees.
Thank you we reshaping of our question answer session I like to turn the floor back over to Scott Baxter pretty further closing comments.
Thank you for joining us today, while the conditions are dynamic our undermine underlying fundamentals are improving our cash flow generation is robust and we are uniquely positioned to generate significant value creation for our shareholders over time. Thanks, again, and we look forward to speaking with all of you on our first quarter call. Thank you.
Thank you that does conclude today's teleconference. You may disconnect your lines as time and have a wonderful day and we thank you for your participation today.