Q2 2020 Kontoor Brands Inc Earnings Call
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Greetings and welcome to the come to our brands second quoted because I'm trying to find out some results. All this time all participants are in listen only mode.
A brief question enough a session will follow the for my presentation. If I know shouldn't require an operator assistance during the conference. Please press star in zero on your telephone keypad. As a reminder, this conference is being recorded it's now my pleasure to introduce your host Eric Tracy Senior Director Investor Relations. Thank you you may now begin.
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Thank you operator, good morning, everyone and welcome to contour brands second quarter 2020 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.
Amounts referred to on today's call will also 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 costs.
Changes in our business model 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 that's onto our brands Dot com.
These tables identified and quantify excluded items and provide madness management's view of why this information is useful to investors.
Unless otherwise noted amounts referred to on this call will be in constant currency.
Which excludes the translation impacts of changes in foreign currency exchange rates.
Constant currency amounts are incented 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 or contour brands, President and Chief Executive Officer, Scott Baxter.
Chief Financial Officer Ruston welding.
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 the CEO Scott Baxter.
Thank you Eric Good morning, everyone. Thanks for joining US we will go through our second quarter results in a bit fear that I'd like to share my thoughts on a few key areas first I'd like to provide context around the current environment and how we continue to navigate through the coldest 19 pandemic next I'll talk to how the strategies simply.
On that at the spin are driving the decisive actions, we've taken and are supporting improvements across our business.
Right the impacts of cold.
The investments, we're making impede growth enablers quality of sales digital transformation international expansion with a focus on China, New business development innovation and sustainability and heart high ROI demand creation are helping to strengthen our core in supporting enhance growth in the future.
And finally I'll share insights as to why we believe our model is well positioned to win in the marketplace. Even as we expect an uncertain operating environment to continue.
Before I begin I want to thank our employees around the world, They're extraordinary efforts I'm extremely proud of the resilience and perseverance. They have demonstrated through this challenging time, our priority remains the health and safety of our colleagues well most of all our retail stores are now open across the globe, we continue to employ social distancing and.
Work remote protocols, where appropriate across our offices facilities and distribution centers. So let me start by providing some thoughts on how the cobot pandemic has impacted our business as we expected the impacts uncoated weighed on our second quarter results as stayed home orders and retail doors.
Closures across the world pressure consumer demand.
We said in our first quarter, Paul that we were seeing signs of improvement principally in China and the US in late April in early May we were encouraged to see these trends accelerate as we move through the second quarter with easing of restrictions and door openings supportive of improving traffic in sell through.
In Asia at the peak of the crisis, approximately 90% of our owned and partner stores were closed.
Currently the China recovery continues to gradually build momentum led by the digital channel.
All brick and mortar stores are open.
We are encouraged by the momentum we have seen broadly in China, especially in our digital business, increasing 24% in the quarter.
In Europe significant demand declines way most heavily on this region during the second quarter, our distribution network remains operational for digital and wholesale orders and while stores in the region have started reopened traffic remains inconsistent.
In North America early signs of improving consumer demand began in late April in early may and strengthened as the second quarter progressed with a combination of additional retailer door openings and improving traffic as Pos significantly outpaced shipments during the quarter.
Well no one at contours satisfied with our second quarter results given the unprecedented environment I'm extremely pleased with our level of execution on the strategies, we put in place 15 months ago. At the spent these actions will further amplified during the second quarter and we anticipate will lead to sequential improvement through the SEC.
One half of Twentytwenty.
Over the last year and a half we've talked about how investing and nurturing. These two iconic brands would take time and how sequencing matters.
Thats been some people.
Culture.
Processes in Globalizing, our organization the benefits will manifest overtime.
But as you've seen over the last few quarters. Despite the challenging landscape. These strategic investments are beginning to drive green shoots of operational improvement as we seek to evolve our model. When you consider we began on the starting line as a new company I could not be more proud of the organization and the progress we have made.
And while I am really encouraged by these early successes I am even more excited about what the future holds for contour as we are just in the beginning stages of disappeared.
So let me discuss where we are focusing our efforts to accelerate fundamental performance and unlock value creation for all stakeholders.
We've talked about horizon, one for the first 12 to 18 months post spent.
Being a period of optimization as we set the foundation for long term success. We told you our focus would be on quality or sales enhancing gross margin and using our strong cash flow generation to aggressively delever, our balance sheet all through our TSR lens. Despite one of the most difficult consumer environment. Some history, we've made tremendous progress.
Yes on many of these strategic efforts.
Rustom will provide more insight with respect to margins and capital allocation, but I'd like to share my thoughts with respect to the topline, including solid proof points of how our strategies are paying off as well as how we expect to accelerate more profitable and sustainable revenue growth in the future as a reminder, our focus has been set.
Third on four key growth areas.
First strengthening our core by winning with winning retailers and optimizing distribution.
Investing in quality of sales innovation sustainability and demand creation.
And leveraging our world class integrated supply chain.
Second distorting growth to D to C and becoming a digital first consumer led organization.
Third expanding internationally with a laser focus on China.
And fourth broadening categories beyond denim, capturing meaningful opportunities across outdoor in T shirts. So let me start with the core while the cobot pandemic has had significant impacts on both the wrangler and Lee US wholesale businesses, we were encouraged by how each experienced strengthening sell through as the second quarter progressed.
Additionally, beyond the impacts of coded we also experienced a timing shift that had a negative impact on Q2 wrangler revenue, but will benefit the third quarter.
Our continued optimization within the wholesale channel is a major distinction from many of our competitors with three of our four largest retail partners Walmart.
Good and Amazon remaining open throughout the pandemic, while Kohl's, we opened doors during the quarter, we've made tremendous strides in our quality of sales efforts domestically and our exposure to challenge retailers in channels is very limited given our assumption that the us will experience a prolonged cold operating environment we are.
Really well positioned with this key best in class retailers.
And how do we expect to not only strengthen this core position, but growing.
By continuing to invest in key enablers, such as innovation sustainability and demand creation.
From an innovation perspective during the second quarter, we continue to scale technology platforms like never before with body optics, and MVP freely and Eightg included for Wrangler, We're scaling innovation, both vertically up and down the pricing spectrum and horizontally across various product categories to more effectively capture.
Consumer mind and wallet share.
Energy in climate initiatives to further scale, our sustainability platform in the years to come.
As we are excited to announce today that we will be publishing contours sustainability goals report during the third quarter and we look forward to sharing more detail with you at that time.
Beyond innovation and sustainability, we're also investing in demand creation efforts to strengthen our core we will be consumer led organization and staying engaged with our consumer during the cold depend dentek has been critical as we focus our efforts on high ROI marketing areas.
During the second quarter, our teams did an amazing job of creating tone right campaigns that connected with our consumer in empathetic yet powerful ways.
For Wrangler, we continued our successful long live Cowboys campaign, and can't stop music country series driving enhanced consumer connections during the cold the crisis.
We also introduced new collaborations with Newton musical artists such as Diplo partnering for the release of is highly anticipated country album, and any color of what we have been.
Bob Marley in honor of what would have been Bob Marley 75 per day, we recently announced a partnership with the Marley family to launch a limited edition collection with heavy reggae influences and revival of Marlys favorite Wrangler styles. These are just a few of the initiatives that are allowing the wrangler brand to reach a younger in more diverse consumers.
Yeah.
The demand creation investments in digital and social are fueling the strong growth we saw in us wrangler dotcom during the quarter and enhance our core positioning with key retailers.
These initiatives also support new distribution opportunities, including our wrangler by Fred Ziegel collaboration that we will be launching it nordstroms. This fall.
Both in store in on digital platforms.
And with Lee, we drove incremental demand creation spend in the second quarter in support of our upcoming launch in over 2000 doors with Walmart. This fall in China, We leveraged live streaming events with two premier online Influencers in the region buyout and Austin.
With our event with via we sold 4000 women Schwartz in 25 seconds and with our event with Austin, We sold eight hours in pairs of genes in 30 minutes. We remain excited about the direction. The brand is headed in the second half of Twentytwenty and beyond.
And last with respect to strengthening our core we continue to leverage our only manufacturing here in the western hemisphere to service, our large customers with scale and speed further driving competitive separation within the market.
Our advanced manufacturing capabilities allowed us to aggressively align production with demand in with inventory levels down 20% in the quarter, we are well positioned for the second half of 2020, and even more importantly for 2021.
We believe this has been and we'll continue to be a distinct advantage relative to much of our competition in the marketplace.
Beyond strengthening our core we continue to embark on the Companys digital transformation.
With new leadership now in place we are enhancing our total digital ecosystem from owned dotcom to digital wholesale to retailer dotcom.
And while still in the early stages. The second quarter provides solid evidence that our investments are paying off.
During the second quarter US owned dotcom grew 48% with wrangler, dotcom, increasing 62% and lead dotcom increasing 22%.
While digital wholesale grew 36%.
We also went live with our us in European digital platforms during the quarter.
Consumer behavior was already rapidly migrating to digital and we believe this adoption has only accelerated during the cold and pandemic as new users become increasingly comfortable with buying online.
And our categories in particular are ideally suited to this new environment.
This is creating massive new opportunities to evolve our digital capabilities from interactive live stream platforms to growing social channels.
And developing this new digital ecosystem, the consumer must be at the center of everything we do benefits will accelerate over time, but we will leverage our growing data analytics capabilities and unlock value from our new global ERP infrastructure to ensure contour is a consumer led digital first organization.
While we are and while we are under indexed with digital currently we are aggressively investing in support of this accretive growth opportunity and we intend to leverage improved systems.
Processes and capabilities to drive significantly greater digital penetration over time.
From a geographic perspective, we continue to augment our core us business by accelerating international growth with a sharp focus on China as I stated earlier the recovery in the China region continues to gradually stabilize while China declined in the second quarter it sequentially improved from.
Quarter in by month in Q2.
But beyond the near term quarterly results are distorted investments in China are creating significant opportunities for both of our brands. We're confident that we will extend our leadership position with the Leibrand utilizing key regional in floors that we discussed earlier in new collaborations such as our recent partnership with Coke coal to drive further brand heat in the region.
We have more than 25 years in the market, but the Leibrand is just getting started with deeper penetration of existing markets and significant runway in extending its reached tier three and four cities.
And we will leverage this tremendous experience in the region to launch the Wrangler brand in China, while we chose to delay the launch in light of coated we are ready to go and we will be executing a soft launch this fall in a more robust full launch planned for spring 21 to most effectively optimize the consumer environment. We expect the business will take time to scale.
But the long term white space opportunity remains tremendous.
And last but certainly not least our ability to extend these brands into additional categories beyond core denim is enormous we see two primary areas of focus outdoor and teachers.
With an outdoor our wrangler all terrain gear line or 80 GE has had incredible early success on natural extension for the Wrangler brand Eightg affords the customer high quality performance product had an exceptional value.
The nearly 30 billion dollar global outdoor market is poised to accelerate in a post covert world and we intend to leverage this brand right opportunity. During the first half of 2028, TG experienced up to triple digit year over year growth with our key retail partners a great proof point for the early traction the line has garnered and.
And with key new international distribution set for the second half of 2020, including presence in over 400 dress means for us in the fall and opportunities in the outdoor specialty in sporting good channels. The future is bright for Eightg in comp was evolving outdoor platform.
With respect to T shirts.
As we previously discussed the addressable market for contour is significant and we intend to increase investments to capture share for the first time, we recently hired a category leader to focus on this important opportunity we are adding design in marketing talent in defining our go to market strategies from logo.
To lifestyle to license Ts afford us the ideal organic extension for our brands expect to hear more on this opportunity in the coming quarters.
The how do these strategies come together in support of our rapidly evolving model investments in new business development innovation sustainability and demand creation active enablers to not only strengthen our core positioning but accelerate growth across category channels and geographies.
And while we continue to expect a prolonged cobot operating environment. These strategic decisions looked at through our TSR lens will position us for more sustainable and profitable growth combined with our underlying structural margin expansion and robust cash flow generation that fuels optimizing our capital structure, we as.
The leadership team remain as excited as ever about the incredible opportunities ahead.
With that I turn it over to rust.
Thank you Scott and good morning, everyone I will discuss our second quarter results in a moment, but I'd like to begin by addressing a few key topics I know or on your minds.
Specifically I will provide an update on Q2 trends and the current operating environment.
Our balance sheet strong cash flow and debt repayment.
And finally, how our key strategic initiatives are driving improved fundamentals, even given the challenging landscape.
On our Q1 earnings call. We shared that we had begun to see early signs in late April in early may have strengthening wholesale order patterns and digital trends.
As we move through the second quarter, we saw sequential monthly improvement in our global business.
Our strategies of winning with winners and accelerating digital as levers to differentiate performance were evident in the quarter led by the 48% growth in us owned Dot com.
Next we were able to strengthen our balance sheet during the quarter by driving improved working capital performance.
Cash generation is the cornerstone of our operating model and capital allocation strategy for contour.
Accordingly, as the primary levered to influence cash generation inventory has been and remains a critical component of our working capital focus.
Post spin we began a journey utilizing a TSR driven approach to drive improvement by focusing on quality of sales initiatives business model changes and exiting select non strategic lines of business and points of distribution.
In the back half of 2019, our net inventory decreased $80 million or 15%.
In 2020, our plans focused on continuing to drive incremental inventory improvement.
As liquidity became Paramount for all companies with the acceleration of coven.
Our vertically integrated manufacturing allowed us to rightsize production in light of decreased demand.
Avoid creation of excess inventory and minimize cash flow impacts.
Accordingly.
Our first half 2020 inventory levels decreased $25 million or an additional 5%.
And our exiting the second quarter at the lowest levels since 2015.
So in light of our progress to date and volatile operating environment. How are we thinking about inventory in service in the back half of 2020.
We want to be thoughtful imprudent regarding inventory by ensuring close alignment with our trade partners unexpected demand.
Our owned manufacturing provides a distinct competitive advantage.
As conditions warrant and government restrictions in capacity permit we are able to respond to changing demand to scale production and minimize service issues for our partners.
While we are actively managing to optimize the supply demand balance and are pleased with our performance to date. We believe there are additional opportunities to reduce inventory levels, all while supporting the marketplace and new program wins.
And as a result of these inventory and other working capital actions I am pleased to say, we made an additional discretionary payment of 75 million on the revolver in the quarter due to our strengthening cash generation and liquidity.
This payment was in addition to paying down 175 million on our revolver in may in connection with the closing of our amended credit facility.
As we have also discussed our model is differentiated among other things by its durable and consistent cash flow generation.
This consistency was clearly demonstrated in the second quarter as we drove positive free cash flow.
Positive operating cash flow and improved liquidity, despite the challenging macro headwinds.
And finally, I will spend a few moments discussing the progress we have made transforming our business for future profitable growth amplifying cost saves and supporting our global ERP initiative and other key growth platforms such as digital.
Let me share a few examples.
As we discussed last quarter, we have both engaged associates around the world to rethink business processes, while also challenging all operating expenses from travel to outside services.
These proactive measures drove a significant reduction in SDMA expense in the quarter, something I will touch on momentarily.
Furthermore, we are continuously evaluating areas of the business to better align with our TSR driven approach, including the via FFO platform. For example, with move into headquarters. We previously announced we will seek to optimize the business near term through select rationalization and reformatting of underperforming doors.
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We also continue to invest in our global information technology initiatives.
During the quarter, we launched our new E com platform.
In both Europe and the us.
Which were key contributors to the strong digital growth Scott discussed earlier.
In addition, we're pleased to report that the first phase of our new ERP platform and infrastructure recently went live in Asia, marking our first region to be implemented.
We are excited for the unlocks these investments will afford and are eager to share additional gains and efficiency improvements in 2021 and beyond.
Finally during the quarter, we moved all of our European distribution to a threepl consistent with our plans since the spend under our transition service agreements.
We continue to make progress against our key strategic pillars, which are providing solid proof points that we are executing against the right priorities as evidenced by our second quarter results.
So, let's get to our second quarter review.
Global revenue decreased 42% on a reported and constant currency basis in the second quarter compared with adjusted revenues for the same quarter in 2019.
Revenue declines during the quarter were primarily the result of widespread impacts of coated.
Retail and owned door closures and stay at home orders as well as a timing shift of shipments from the second to third quarter within the wrangler business, which I will touch on in a bit.
On our last few calls we've talked about our ongoing quality of sales actions that began in 2019 as well as planned declines in select dilutive lines of business.
While this continues to negatively impact near term revenue. These actions will continue to drive transformational change to improve operational performance and position us for long term profitable growth.
On a regional basis for the quarter us revenues were down 40% compared with adjusted revenues for the same quarter in 2019.
Declines were primarily the result of Cove, it impacts partially offset by digital wholesale increasing 36%.
The us represented 83% of our revenue in the quarter.
Outside of the US International revenues declined 47% in constant currency compared with adjusted revenues for the same quarter in 2019.
Beyond Cove it impacts the second quarter International decline was affected by planned exits and business model changes quality of sales actions and foreign currency, which combined pressured international revenue by mid single digits.
Turning to our channels our reported revenue in our us wholesale channel, which represented 72% of our revenue was down 39% compared with adjusted revenues for the same quarter in 2019.
Declines were driven primarily by the impacts of Covance.
Our non us wholesale channel, which represented 13% of our revenue decreased 52% compared with adjusted revenues for the same quarter in 2019.
Our branded direct to consumer channel, which represented 12% of our revenues declined 31% due in large part to owned brick and mortar door closures.
Our owned digital business increased 36% driven by 48% growth in the us and 24% growth in China.
We are encouraged by the positive results from our recent investments in our digital platform.
Even the accretive under index nature of this channel, we will continue to distort investments to grow in this area.
Finally, let's turn to our brands.
Global revenue of our Wrangler brand declined 30% on a reported and constant currency basis compared with adjusted revenues for the same quarter in 2019.
Wrangler us revenue declined 27% in the period.
Impacts from Covidien, including retail and owned store closures drove the majority of the decline.
And approximate $33 million shift in timing of all load ins from Q2 to Q3 2020 also adversely impacted the quarter.
These declines were mitigated in part by strong growth in both owned and wholesale digital.
Wrangler International revenue was down 54% compared with adjusted revenue in the same period last year driven by Cove. It impacts the actions taken in India and business model changes in Europe.
Leibrand global revenue declined 57% compared with adjusted revenues for the same quarter in 2019.
Let us revenue decreased 66% in the period.
Kobin related impacts drove the majority of the decline.
Beyond the co bid we remain encouraged by the underlying progress of the lead us business, including the upcoming significant new program win set for the second half.
Lee International revenue was down 45% on a reported basis compared with adjusted revenues in the second quarter of 2019.
Over one third of the decline was driven by the EMEA region as many countries were under lockdown during much of the quarter.
Now onto gross margin.
Total adjusted gross margin decreased 160 basis points to 38.4%.
The decline was primarily driven by the following factors first the cost of downtime at our plants as we reduce production to align supply and demand taken with inventory reserves netted to a 450 basis point headwind in the quarter.
Next lower international revenue also adversely impacted geographic mix by 60 basis points.
These declines were mitigated by the underlying benefit of accretive mix shifts and proactive measures. We have discussed as an important part of our business model and TSR drivers.
During the second quarter, the favorable impact of channel mix.
Quality of sales initiatives pricing and product cost improvements positively impacted gross margin by 350 basis points.
Adjusted EPS DNA decreased $38 million on a year over year basis to 129 million or 36.8% of revenue.
Fixed costs de leverage due to revenue declines and credit losses due to coded were partially offset by tight expense controls mentioned previously and restructuring benefits.
We delivered an adjusted loss per share at 22 cents in the second quarter.
Now turning to our balance sheet and cash flow as we've discussed and suspend the compelling durable and consistent free cash flow strength is foundational to our operating model.
Despite an operating loss driven by cobot impacts and continued investment in our strategic ERP and infrastructure cash from operations and free cash flow were both positive in the quarter.
Working capital improvements were driven by inventory, which declined 56 million or 11% from Q1, and 105 million or 20% versus the prior year.
We finished Q1 with 479 million in cash and debt of just under 1.4 billion.
At the closing of the amended credit facility in May we repaid $175 million of our revolving credit facility balances to comply with the available cash limitation.
In June we made an additional discretionary repayment of 75 million on our revolver due to our positive cash flows and improved liquidity position.
At the end of Q2, we finished with 256 million in cash and debt of just over 1.1 billion.
There are no material debt repayments required over the next 12 months.
Our overall liquidity improved in the quarter and our leverage ratio further credit facility calculation for the quarter was three and a half times compared to our original limit of four times and the amended limit of five and a half times.
And now onto our outlook.
As we previously announced and as a result of the uncertainty and significant business impacts caused by co bid. We went through our 2020 guidance provided on our fourth protocol in March and we have not provided an updated outlook at this time.
While we're not providing formal guidance additional perspective and assumptions related to our second half are as follows.
First we continue to take the necessary proactive steps to accommodate a prolonged coded operating environment.
Revenue in the second half of 2020 should experienced sequential year over year improvement and is expected to benefit from new programs and distribution gains as well as the timing shift of shipments.
Third we anticipate structural gross margin gains from restructuring and quality of sales actions to continue in the second half of 2020 in spite of more difficult year over year comparisons on realized gains during the similar period in 2019.
And finally inventory or remains a critical component of our working capital focus and we expect levels to continue to improve in the second half of the year.
Inventory is expected to be well positioned to support new program wins and demand in the marketplace.
In closing I want to reinforce our confidence in the proactive actions, we have taken to improve our long term operating performance that began in 2019.
Despite the challenges of the current operating environment, we generated positive free cash flow further delevering the balance sheet managed down inventory, all while investing behind key strategic initiatives.
These strategies are clearly proving the right actions in this current environment and will best position contour for continued success.
This concludes our prepared remarks, and I will now turn the call back to our operator operator.
Thank you I will now be conducting the question enough attention is you would like to ask a question. Please press star in 100 telephone keypad.
The confirmation John will indicate your line is now the question Keith.
I started to electrical motors question from weekend.
For participants can speak appointment and may be necessary to pick up you had said before pricing thats turnkey.
One moment, please pilot poll for questions.
The first question comes from your line of Erinn Murphy with Piper Sadler. Please proceed with your question.
Great. Thanks, Good morning, and thank you for taking my question I guess my first question.
Sure Scott Canadian Ratemaking, when you talk about strengthening trend throughout the quarter with Pos now outpacing shipments.
Are you in a position that you're chasing that demand now and then just curious maybe for rest and Howard that fitting into your commentary when you referenced the sequential year on year over year improvement in the back half and then I'll follow up.
Sure. So we're in this is Scott good morning, Thanks for joining today and I'll start we did see really nice improvement as we mentioned both rest denying the second quarter. So we were pleased with that one of the things that we've talked a lot about you've heard me talk about it is that we're under distributed here in the United States, specifically from a brand standpoint, both brands in these big wins that we've had that we show.
Third last time, and we actually added a little bit more color.
For 2000 doors with Lee both male and female which is the key component both men's and women's denim in men's and women's.
Casuals for the fall and then in addition to that we have some additional programs next year in spring of 21 with those two programs and then the dress pants program with Eightg really bringing eightg two while Europe in a pretty big way that we think with that and also the fact that we've really done the nice job as far as our strategy about winning with the winners in who we.
Do business with and then we talked a lot about at the beginning how we've cleaned up this quality of sales initiatives you couple of those things together and we feel like theres going to be sequential improvement going into the second half of the year Reston anything to add to that.
No I think the only other thing I would add is sort of the timing shift Aaron that certainly as material.
You saw that it was 33 million in.
In the quarter that is in the Wrangler us business, just a little bit of context and perspective, there Wrangler you asked in the quarter was down 27%. So.
Had those timing shifts.
Occurred as originally.
Or has historically taken place in the Wrangler business would have been down about 16% in the U.S., So a pretty material impact and obviously that will move to the third quarter and you may recall and we talked about at on our fourth quarter call as a timing shift that we were expecting moving from from Q2 to Q3 and.
So thats, what we were referencing.
Okay. Thank you you kind of answered part of my second question, maybe I can just ask on that on the U.S. landscape broadly in the second half can you speak a little bit more about what you're seeing in that channel and how you're seeing promotion from our perspective. It does seem like they're very lean inventory and the math can offer some of your brands and even some of your peers just.
Curious on your expectation broadly for the landscape. Thank you so much.
Yes, So air and I'll go ahead and start the Scott we feel pretty good about second half like we said from a sequential improvement standpoint, our inventories are in tremendous shape, we're really clean specifically in the mass channel also so we feel really good about that we're probably going to chase a little bit and back to school and we actually think thats a good place today, but I'll tell you why we think.
It's a really good place to be is and we've talked about this a lot and it's a real strategic advantage that really got to flex its muscle during this time and thats owning our own distribution about a third of our own manufacturing facilities, we're going to be able to really go ahead manage that here the rest of the year owning those in relative to what the supply and demand is so we feel like we're in a real enviable position.
And having that right here.
In the North American market rested.
Yes, I would just say from our inventory position.
And you talked a little bit about that.
I would say that this journey really started at the time of the spend and.
We really started focusing on quality of sales in the business model changes and really exiting some of the non strategic.
Aligned to the business all through at TSR lands and so on the back half of last year, we drove an 80 million dollar improvement or about 15%.
As we came into this year inventory remained a really important focus for us and in the first half the year, we drilled about a $25 million improvements for an additional five 5% just for perspective in 2019, our first half inventory actually increased.
$50 million. So we're certainly focused on inventory aligning the supply and demand signals that we're getting from our retail partners as Scott mentioned.
And making sure that we can service the market and so we feel good about where we're positioned from an inventory perspective, and our ability to service those new program wins.
In the marketplace demand in the back half.
Great. Thanks.
The next question comes from one line of bump trouble with Guggenheim. Please proceed with your question.
Hi, guys good morning.
Motive of morning.
A couple of questions actually I think the first one.
Can you elaborate a little bit more on terms of where you are like you mentioned, the ERP implementation, but just sort of.
One of the milestones through where you are what we should be looking for.
And second question is.
You talked about minimal exposure the challenge retailers.
Can you just talk a little bit about like doors that you were selling last year just sort of.
That are close how many doors like that are closed in sort of do you see any risk in.
The doors that you're continuing on the challenge retail side. Thanks.
Yep. Thanks, Bob I'll go ahead and started on the ERP implementation.
You know certainly it was it's been a big series of activities for us over the past hundred days or so as it relates to the implementation.
Certainly as you know we began the ERP project at the time of the spin and there's been significant.
Work ongoing on that obviously as we moved into 2020 with the advent of coded and working remotely. Some additional challenges you know certainly as we prepared for this second quarter activity, but couldnt be more proud of of the team and how they work together.
You know heavily relying upon collaboration tools.
During the quarter, we did have some significant milestones that were out there from an ERP perspective so.
Scott talked a little bit about in his prepared remarks going live on both a new E com platform for a may add and the us in the second quarter.
We also shifted over our production.
Our distribution should stay.
In Europe to a Threepl and then just recently went live with our first region on the new ERP and infrastructure platform and in Asia.
And so in terms of the timeline you talked a little bit about that we still have are making great progress and we still have the us in Europe in front of us.
And that's the last region Asia last region, we had planned for this year so.
Hopefully that gives you a little bit of color more color on the ERP side. Scott you went away in lieu of heavy exposure to challenge retailers, so far but we think about it we really think about going back to our horizon, one in our strategy and how we thought about how we one of the set this business up for success and we took a hard look at the marketplace globally, and said where do we want to line.
And who do we want to align with and we chose from certain folks to make big investments with and they are really paying off now so one of the things that we've talked a lot about is that our four largest customers represent about 50% of our business. So if you think about Walmart target Amazon Kohl's, we feel really good about how we think about that from a win win.
Winners in our position really well going forward and then if you think about department stores and we've talked about this we just always had very limited distribution there and now we have even more limited distribution there. Unlike our competition so for us that puts us in a really good really good position as far as going forward and I think the other thing is from the very begin.
Adding we've talked a lot about the fact that we were going to amplify our digital and we have spent an incredible amount of time and energy and investment on doing that and it's starting to show both for us and I talked a lot about how thats kind of started to really pay its benefits back to the organization, but we think there's a long lead adult and we've hired a new leader that's doing a terrific job and we've made investments in that.
Business. So the combination of those things, we think puts us in a really good spot in.
As far as going forward.
Great. Thanks, guys.
Thanks, Bob Expo.
The next question comes Milan Alexandra Wovens with Goldman Sachs. Please proceed with your question.
Okay.
Good morning, everyone. Thanks, so much for taking the question on book to question on the first question.
I Wonder if you could share any thoughts on the structural changes that could result from the coated unbundled as it relates to mobile phones to go to market, particularly interested in how the wholesale model evolves.
How wholesale partners will approach holding inventory and taking receipt in the future and how you're positioned for that I'm on a go to follow up question.
Okay. Thanks, Alex Good morning addressed and I'll start with the first piece about some of the structural changes.
There were seeing a little bit internally and then then asked Scott to weigh in about a little bit more on the wholesale market dynamics that we're seeing but but certainly I think as we think about structural changes with covidien, we've talked a little bit about.
Now it's.
We have taken a step back and really examined all of our expenditures in the business and.
How we work together, so last quarter, we talked a little bit more.
You know just even about doing kind of virtual design work and certainly virtual sales meetings.
So we're seeing some changes from a structural side the that we're certainly looking at we did take a number of temporary actions the furloughs in salary reductions.
To manage through this year, but certainly we're looking at.
How we would spend those dollars moving forward Scott mentioned quite a bit about the focus on digital.
In many of the investments in the strategies, we really had in place at the time of the span.
Certainly we are trying to the stored and amplify now we're early in that journey, but it is we are taking fresh looks as a result of co bid.
About how much we're spending and where we're spending or dollars to make sure that were prudent there. So Scott maybe you want to weigh in on the on the market side, yes from a strategic standpoint, Alex I think this is one of the areas, where we have really benefited and we had a vantage points in the very beginning taking a business that was kind of despair over the world.
Doing their own separate things, making their own product, having their own offices and all that and we brought it all together and we're in the process right now and it's happening very quickly globalizing. This company in doing that in many different ways. So whether its reston speaking about the ERP or Tom and Chris and how they're bringing the global product teams together across the world.
That structurally is really important to us going forward and then as you complement that with how we think about digital and how we're thinking about headquarter office, where we brought Lee here. We brought the team together, we've talked a lot about that and.
Can't stay enough about how much that's benefited us as an organization. So structurally we were way down that path and only now we just continue to accelerate so for us it's actually been our will push in a good one.
Awesome and then my second question is on.
Cash generation to wonder you can share any color on whale for coffee and cash generation and for the year.
To expectation in this quarter and use that to make incremental discretionary.
All debt Paydowns can you talk about how where youre forecasting for the year and how youre thinking about paying.
The pace of debt pay down.
Yes, thanks, Alex distressed and I'll take that so.
We've talked many times since the spin cash generation is of Paramount importance to our investment thesis and just really frankly, our operating model. So we have maintained focus upon cash generation since the spin and as I talked a little bit earlier about some of the inventory trends that we saw late last year with an $80 million improvement at UBS.
Back half.
Continuing to accelerate that certainly in light of coded and liquidity as we moved into Q2. So as we think about the back half of the year, certainly I'm not going to guide specifically on cash generation, but we did call out that we do use have line of sight to continued.
Inventory improvement.
That is out there in the back half so we do see additional improvement.
We're pleased with the progress we've made so far.
But that is the single largest lever from a working capital perspective, we can pull.
In terms of cash generation. So it made it continues to be a focal point for us and we see additional opportunities to continue to improve in the back half.
Perfect. Thanks, so much protocol.
Thanks, Alex.
The next question comes from one line of Sam Poser Susquehanna. Please proceed with your question.
Thank you for taking my question over everybody as well and I got a handful.
Let's start with arm is going to ask them and then we can deal with them with dividend what is the status of your plans for the dividend.
And then I'll follow up on that if I need to.
What.
What are are you is or are you expecting the sales to be positive in the third quarter given the.
Wrangler that shipped over 33 million plus the Walmart.
We order and can you give us some idea of the size of that Walmart order.
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And.
Same thing show on the gross margin given that things are starting to get cleaned up.
So like sort of on a non like on a comp basis out those new businesses.
I assume you're expecting some.
Improvement in the trends and then you add those new businesses then.
Where does that leave you I know you want to give specific guidance, but these are too.
Large large orders I would guess, okay, well sand why don't I go head to start with the dividend and then Rustom will go ahead and take it from the from there for the next two so as we've stated and release, we want to reinstate the dividend as soon as appropriate obviously, we hear as a team it's been part of our investment theses, we absolutely understand how important it is.
Just to remind everybody we suspended for the second and third quarter 20, and we can make payments as long as certain criteria is Matt asked for the third quarter and we know how important it is to the story and I hope everybody here knows how important is to our board into all of our shareholders. So we take it very series there are a lot.
Of things that go into that decision as we work with our board to go head to reinstate we're going to go head and comment on that in the next quarter of course, and bring everybody up to speed or we're not going to go into any specifics at this time, but again, we know absolutely. How important is we will go head comment in the next quarter on it and bring everybody up to speed.
Customer you want to go ahead and talk about the sales morning, Sam I'll go ahead and take your next two questions. Obviously as we stated we're not going to guide on the back half.
But we did talk on the revenue side about seeing sequential improvement in the second half and that's.
Certainly.
The timing shift of the $33 million that we talked about in the new distribution gains.
Specifically, the Walmart program with Lee, which we won't dimensionalize, but but you do know it's over 2000 doors.
Just to give you a little bit of perspective will help.
And that's where we're seeing some of that sequential improvement, but I will stress Sam that we continue to assume a prolonged operating environment and we we stated that last quarter. We continue to believe it's prudent to assume a level of uncertainty from a macro perspective so.
Thats how were envisioning the sales in the back half again sequential improvement from a gross margin perspective.
We talked a little bit.
About.
Tougher comps.
Certainly in the back half of 2019, as we started to see some of that improvement from our quality of sales initiatives and the restructuring.
We started to inflect a little bit in the back half of 19, So we will be up against.
Tougher comps channel mix.
Will.
Shift a little bit as well certainly not a lot of distressed goods necessarily being sold in the front half.
That there'll be a little bit more distressed.
And again that timing shift from Q2 to Q3. So we do anticipate will likely have some continued downtime in inventory reserves, but we anticipate there was a moderate Sam as we go into the back half.
And so thats, a little bit more sort of context again on the gross margin, but we won't guide specifically on on the margin fees. So.
If I guess.
Next question comes from one line Adrienne again with Barclays. Please proceed with your question.
Yes, good morning on stellar wanted to talk about on Q.
Strategic.
I should it I guess.
Your own brand digital can you give us the penetration that it is.
Of it in the U.S. versus the in China, and then what has Kobe done in terms of those targets either on a next year basis or on a three year long range plan basis, how has that accelerated that.
Then on category expansion little bit one altering gear.
The notion of moving from Jeanswear inclusive outdoor and then Keith how much bigger is the total addressable market you gave a number on in your prepared remarks that who's buying it.
The new customer to the business to wrangler and so just wondering how much bigger that footprint looks like then for Reston on I think you think you're not talking about markets I would ask again anyway, given your inventory discipline and it's additional sales and the third quarter should we expect a positive gross margins.
Inflection for the third quarter. Thank you so much.
Okay, Adrian I will start with digital so you know what's a primary focus for US we we didnt put a lot of energy and effort into this older coal and so we've kind of started from new about almost two years ago in that it wasnt a priority for the business and it wasn't a priority for all kopelman.
Since standpoint, so what we've done as we've gone ahead and got the leadership situation right hired an external talent and extreme talent, we're really happy and that person's been bringing on their teeth, and we've been sequentially, making investments into that business as we grow it. So you've seen that we've had some really nice success. This past quarter, obviously with wrangler us being up 62% what.
We're really doing is turning that into an opportunity vehicle for us from the standpoint, how do we connect with our consumers in a really positive way it used to be for US. It was just simply of vehicle is making a transaction and that obviously wasn't a positive thing for us going forward. So you can see how we've transitioned we've also built new ERP.
Platforms that have gone online here just recently around the globe both in Europe in the us for both flea and Wrangler. So we're real pleased with how that's going on and then I think the other key pieces, how we tie in our data and analytics capabilities relative to the work that we're doing with our ERP. So our digital team is tied to the hip with our ERP.
In they've worked really hard to make sure that we're putting in the right systems. So that when we turn this on here it will be a very powerful machine for us going forward and we're going to continue to make investments in that business as we move forward from the standpoint of 80 Mg. It is a natural extension. If you think about how you think about.
Angler Wranglers always had a very big outdoor presses fishing hunting hiking camping. So it was a natural pharma for us from a consumer standpoint, our consumers have been asking us to go head migrate this way I think the thing that's really important for us as you take our wrangler product it's terrific product.
Its value, it's it's still really well, it's got great name brand recognition behind it and it's sold and really right and appropriate channels. So there's really big upside you heard me talk in my prepared remarks about the fact that we've had really nice success here over the last quarter with some of the comps that we see.
And now we're gaining new distribution and I think that going forward. The marketplaces. One it's a very big market is going to want to see some more types of products. Like this in addition to the factor who want to see it with a company that brings value and brings name brand recognition and we bring both that to it. So we're really pleased.
Thanks.
TG.
Over the next so.
Sorry, I know, we've got one more there with.
Just one more yesterday data in.
I'll go ahead comment quickly on your gross margin inflection question in Q3.
Lastly, as I said I can im not going to guide on Q3, specifically in and whether that inflect positive or not we do anticipate some of the structural benefits from the quality of sales restructuring product costs that we've been.
Driving to continue.
But we anticipate some of the downtime and inventory reserves, a moderate as well and as I mentioned, we have it a little bit tougher comp in the back half.
Of 19 that we're comparing to so.
I hope that helps provide a little bit additional color. Thanks.
The next question comes from the line of Jay sole VBS. Please proceed with your question.
Great. Thank you. So much you give us great color on gross margin quality sale initiatives already just want to follow up a little bit if you sort of explain maybe where you are the journey on getting the quality of sales to where you wanted to be in if you can sort of offer any examples specifically like what kind of actions you've taken to improve the companys quality of sales. Thank you.
Yeah, Jay its rest and good morning.
Ahead and take that so as we think about quality of sales. It really is a journey and so the word to use their I think's really appropriate.
As we think about it it continues on.
We do everything here contour through TSR lens, and so certainly as we came out of the spend we really looked at our operations across the world and.
Started to look at.
Unprofitable markets.
Or channels, so we exited some countries.
One in Europe, certainly, we've exited unprofitable points of distribution.
And just making sure that as Scott said in his prepared remarks that we're optimizing the foundation for continued growth so.
We've taken a lot of steps since the spin and quality of sales again. It will continue we're always going to be looking at.
SKU rationalization items like that and certainly all of this is in the context of the TSR lens, which will help us.
Drive up are you ours in our gross margins over time.
Really create that positive structural mix shift moving forward.
Got it. Thank you an impressive you just talk a little bit about liquidity given that the pandemic situation is still quite fluid you talk about what the company's liquidity position is at this point and the kind of flexibility that you have looking ahead.
Sure Yeah, Jay if if we take a step back we ended the first quarter, we had about 479 million in cash debt was about 1.4.
Billion.
As we talked about in the prepared remarks, we did pay down 175 million on that revolver on on closing of that amended credit facility in in May.
Again, the strong cash generation, we paid down an additional discretionary 75 million on the revolver.
In June so we ended the second quarter with 256 million in cash about 1.1 billion in debt.
As we think about liquidity.
We have about 200 in.
25 million or so im sorry, yes, 225 million are still in the revolver, that's available for us as well as the 256 and cash so.
Hopefully that gives you a little bit better sense on the liquidity side and I will emphasize it.
Despite all the macroeconomic challenges in the quarter, we did improve our liquidity during the second quarter. So that's that's a big milestone for us as an organization.
Got it thank you so much.
Okay. Thanks Jay.
There are no further questions at this time I will not to turn the floor back over to Scott Baxter for closing comments. Thank you.
Well as a team we just wanted to say thank you everyone for spending some time with US today, we really appreciate it we're certainly looking forward to talk new soon and spending some time with you again next quarter. So thanks, everybody have a great week.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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