Q4 2020 Kontoor Brands Inc Earnings Call
[music].
Greetings welcome to contour brands fourth quarter earnings call at this time, all participants will be in listen only mode.
And answer session will follow the formal presentation.
If anyone today should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note on this conference is being recorded.
At this time I'll turn the conference over to Eric Tracy Senior Director of Investor Relations. Mr. Tracy you may begin.
Thank you operator, and welcome to contour brands fourth quarter and fiscal 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 SEC.
We urge you to read on risk factors cautionary language and other disclosures contained in those reports.
Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly defined on the news release that was issued earlier this morning.
Adjusted amounts exclude the impact of restructuring and separation costs business model changes.
Noncash impairment charges related to our rocket Republic trademark and other adjustments.
<unk> of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release.
It is available on our website, a contour brands dot com.
These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Unless otherwise noted amounts of free referred to on this call will be on constant currency, which exclude the translation impact of changes in foreign currency exchange rates constant.
Constant currency amounts are intended to help investors better understand the underlying operational performance of our business, excluding the impacts of shifts in currency exchange rates over the period.
Additionally, as a reminder, our fiscal 2020 included the benefit of a 50, <unk> week, which fell on the fourth quarter.
Joining me today on today's call are contour brands, President and Chief Executive Officer, Scott Baxter, and Chief Financial Officer Rustin Welton.
In addition on today's call. We will also be joined by Tom Waldron Global brand President of Wrangler, and Chris Waldeck Global brand President of Li <unk>.
Following our prepared remarks, we'll open the call for questions.
We anticipate the call will last about an hour with that I'll turn it over to CEO, Scott Baxter, Thanks, Eric and thank you all for joining us today on behalf of contour I Hope you and your families continue to be healthy and safe.
As Eric mentioned, our global brand President, Tom Waldron, and Chris Waldeck will be joining us from its year end review. We believe these year end calls provide a great opportunity to have them share insights from the past year as well as go forward strategies for each of their respective brands, you'll hear more from each of them in a bit.
We are pleased to share our fourth quarter and full year results with you today results that came in ahead of our expectations driven by broad based improving performance across the business. Let me start by thanking our colleagues around the world as the strong fourth quarter results and momentum we are seeing into 2021.
Direct reflection of our team's tremendous efforts over the last year, the resiliency agility and focus on execution. During these unprecedented times has been truly inspirational like.
Like most companies during 2020, we experienced challenges never seen before as the impacts of COVID-19, we're far reaching however, we were nimble and we quickly focused on supporting the safety and wellbeing of our associates.
We're also strengthening our financial and liquidity positions.
And as important we've been flexible and evolving our strategies and in fact amplified many of these proactive initiatives to not only help navigate the near term environment, but also set the foundation for long term success.
Recall at the time of the spin we defined horizon, one as the first 12 to 24 months as our own independent company. During this time, our focus has centered on stabilizing and optimizing our model through restructuring and quality of sales initiatives to bolster margins, while driving <unk> accretive.
<unk> from our significant cash generation Rustin will take you through more detail on these measures later, but these efforts have helped de risk our model and where the exact right thing to do and setting the stage for healthier sustainable long term growth even with the challenges from the pandemic the strategies we've implemented.
And the investments we've been making have allowed us to end 2020 with great momentum.
These strategies are clear.
First enhance and accelerate the core through share gains and expanding the marketplace within U S wholesale segment.
<unk> transformed our DTC and digital ecosystem and driving channel expansion.
Third expand geographically with a focus on China and sport broadened our reach in the new categories and usage occasions, emphasizing outdoor T shirts in workwear.
The pandemic and support of realizing these strategic growth opportunities, we've been laser focused on ramping investments behind key enablers. These include amplifying demand creation and marketing spend elevating innovation platforms, including becoming an industry leader in sustainability.
Driving further competitive separation with our best and classify chain <unk>.
Walking efficiency and productivity gains through the implementation of our global ERP and digital infrastructure, yielding enhanced consumer insights and building data analytic capabilities.
And finally, identifying and cultivating world class talent to create a high performance.
Purpose led culture.
These are the investments in strategic priorities that will fuel our transition to horizon to capitalize on fundamental growth greater cash flow optionality and the evolution of our CSR model overtime we.
We will provide much greater detail on this next phase at our upcoming virtual Investor day in May, but we're really excited to share. What lies ahead with all contour stakeholders.
Turning to our fourth quarter results, we saw strong fundamental improvement across all areas of the business with revenue margins and cash flows coming in above expectations overall revenue sequentially improved in Q4, increasing 1% on a reported basis compared with down 43%.
<unk> and 9% in the second and third quarters, respectively.
Importantly, we.
We saw growth across both of our global brands and in the U S Europe and China.
The U S business saw continued strength in the quarter led by Wrangler, and our digital business as well as the continued development of the Lee brand in both premium and value channels.
Our digital transformation continues to be a bright spot with an evolving platform that is driving elevated consumer engagement traffic and AUR.
We saw really nice growth across the U S own dot com business, which was up 50% in Q4.
As well as the U S digital wholesale that increased 75% in the quarter.
As we think about the U S landscape I want to be clear, we are winning in the marketplace, taking share and adding incremental business as well during 2020. According to NPD, we added over 200 basis points of share with our core denim and casual business.
And importantly, these share gains are healthy.
With a balance of additional units and increasing AUR.
Our strategies are paying off with quality of sales, new innovation and design initiatives, helping support the mixing up of price across the business.
Turning to select international markets are Europe, and China businesses continued sequential improvement during Q4 as expect.
Both inflicting positive in the quarter with Europe, increasing 7% and China up 11% on a reported basis.
Given increasing lockdowns in the region, we do expect volatility in Europe will continue but new business development wins, particularly with our Wrangler Atg line as well as our recently announced lead licensing collaboration with <unk> are examples that we will remain on offense.
Positioning <unk> for long term success in the region when conditions normalize.
And certainly China will continue to be a focus for our strategic investments given the significant white space opportunity the region represents.
At the risk of stealing <unk> Thunder, we are already seeing great returns on our investments in the Lee brand in the region as a leadership position on denim was extended during 2020 and with respect to Wrangler, we've been extremely pleased with our soft launch of the brands into the marketplace. During Q4, while we are in early days we.
We're really encouraged by the early reads in our broader launch in the region remains on track for this spring.
I'll, let Russ can take you through greater detail on a bit but I'd be remiss, if I didn't highlight comp force solid financial position, we announced today the proactive early termination of the covenant relief period, and our amended credit facility on a testament to our improving fundamentals and robust cash generation our board of directors also decline.
<unk> quarterly cash dividend of <unk> 40 per share in Q4, our first quarter in which we could reinstate under the amended credit facility and despite the pandemic, we've been aggressively delevering our balance sheet over the past several quarters and that continued in Q4 as we paid down an incremental 100.
Third $25 million in debt, taking our net leverage ratio to under three times to end 2012.
Our improving fundamentals, coupled with increasing cash flow optionality affords a powerful combination.
We position our comparable model to transition into horizon two.
Before I turn it over to Tom and Chris Let me close with this.
We win together.
And I couldn't be prouder of our teams efforts to manage through this highly dynamic environment. We ended the year strong and while macro conditions remain uncertain I'm confident that we are executing on our strategic playbook investing in key growth enablers, such as demand creation and setting the stage for an exciting next phase.
Of the journey.
That should continue to unlock great value on.
All <unk> stakeholders.
Tom.
Thanks, Scott and good day, everyone as Scott mentioned, while the past year has brought significant challenges with impacts from the pandemic. The wrangler brand is better positioned now than it's ever been greatly benefiting from focus investments in people products and processes and as proud as I am of our team's incredible efforts in <unk>.
20, I am EBIT more excited about the great momentum Durango brand has going into 2021 and beyond.
So I'd like to take you through some highlights of the year in the quarter and then I'll provide some insights on a few key areas were prioritized investments have and should continue to yield or sustained profitable growth for the brands.
Wrangler saw accelerating trends throughout the year.
Global revenues inflect positive increasing 7% in the fourth quarter, we experienced balanced strength across the globe with both U S and European businesses, increasing 8% on a reported basis in the quarter.
In the U S. Our wholesale business has increasingly benefit from our optimized distribution strategy, our partnerships with best in class retailers, such as Walmart Amazon and target have strengthened during the pandemic as we saw increased share gains in our core denim business throughout the year, including substantial market share.
<unk> outperformance during the fourth quarter as measured by NPD. These share gains are highly correlated to the strategic investments, we are making across design innovation and demand creation we are.
Also seeing the increased ROI in our western and work businesses, both of which sequentially improved throughout the year and in Q4, particularly strong given that western business is truly the most authentic expression and ethos of the Wrangler brand. This performance is really great to see.
And we are augmented this improving U S core and elevated wholesale distribution, including nordstroms and free people. These premium price points of distribution, coupled with focused demand creation spend such as our pop up store in Fort worth during the Wrangler National Finals Rodeo Championship in December provided a nice.
Hello that cascades back to the core.
Further elevating our distribution strategy Wrangler Dot com continued its evolution during the past year as our U S owned dot com increased 57% during the fourth quarter, driven by strong traffic and increasing.
And more exciting our digital business is expected to accelerate growth in the future as investments in both front end commerce and backend infrastructure, helping transform our digital ecosystem from transactional to a more consumer led seamless experience investments in digital demand creation across our own dot.
Calm and social media platforms as well as successful collaborations with stranger things and Rick and Morty have allowed the wrangler brand to reach new younger consumers like never before.
While still in the early stages digital will increasingly become our pinnacle expression are brand enhancing vehicle that is also margin increases.
In Europe, we had a successful launch of our outdoor wrangler Atg line and dress mens, which combined with the day view of retailer Cubist This spring.
Extend distribution of the collection to more than 700 doors across the region.
Sell throughs have atg now our mens and womens line has been really solid exceeding our expectations, our outdoor business within the U S was up 73% on a reported basis during the quarter.
Let me unpack atg and more broadly our focus on outdoor a bit more this category is a great representation of how investments in innovation.
Play to a growing macro consumer trends fuel incremental growth across categories and extended distribution into new channels. We know the category is accelerating as more people want to be outdoors, and we are leaning into this trend and building high performance product at a great value.
This serves to not only diversify and augment our core denim business, but affords the opportunities to open new channel distribution, particularly in the outdoor specialty and sporting goods. We look forward to give you more specifics on the outdoor strategy at our upcoming Investor day, but wrangler outdoor has tremendous growth opportunities ahead.
And last but not certainly least let me discuss our launch of Wrangler brand in China. As you know given the pandemic, we chose to begin to seed product into the market last year with a soft launch on Tmall and while early findings are extremely encouraging across all kpis metrics the rollout is exceeding.
Our expectations.
We are on track to more broadly launch in the region. This spring supported by enhanced marketing initiatives and live streaming events with high value Influencers. As we've stated previously we will be measured in our approach to scaling in the China market, but needless to say the team couldn't be more excited to build on early momentum and similar to.
Outdoor on eager to share EBIT more details on our longer term strategy at our Investor day.
I want to reiterate our confidence same language position as we begin 2021 and importantly, thank the entire global team for their collaborative efforts over the last year.
With the increasing strategic investments that we have been making since the spin. We are confident the actions. We are taking will fuel future accelerated growth for the wrangler brand growth that will be more sustainable and profitable over the long term with that I turn it over to Chris to take you through Lee. Thank.
Thank you Tom.
Let me also convey my appreciation to all of you for joining us today.
Similar to Tom Im thrilled with the Lee brand accomplished in 2020 and I'm, even more excited as we turn the page into 2021. These achievements over the last year were significant and my sincere. Thanks to the team for not just weathering the storm, but the great execution on our strategies, including brand elevating initial.
Lives material, new business development wins, and perhaps most important delivering substantial profit profitability gains for the business.
First I will walk you through some of the key takeaways from 2020, and the fourth quarter and then I will hit on the many exciting opportunities that lie ahead for Lee.
As most of you know since it's been one of our points of focus has been and repositioning Lee for healthy long term growth on the Covid pandemic has only validated our strategy.
Given lease historic exposure more challenged points of distribution within the U S and select international markets. One of the biggest investments. We've made has been within our quality of sales initiatives.
During last year, we accelerated these quality of sales measures, which impacted near term topline, but will support sustained GSR accretive growth.
This is a game changing cultural shift relative to how the lead business was historically run.
Great proof point this was the brands seventh consecutive quarter of adjusted gross margin expansion in our largest market.
While we have prioritized profitability and brand health, let me be clear we have remained on offense investments in innovation and design demand creation and new business development are delivering significant opportunities across categories channels and geographies.
Overall revenue increased 1% on a reported basis in the fourth quarter revenue in the U S was relatively flat on a reported basis with a focus on quality of sales, while we achieved sequential improvement in our China, and Europe business, which increased 11% and 5% respectively. During the quarter on a reported basis.
Moving further into the U S business, while more temporary non strategic headwinds impacted the quarter, we're really encouraged by the gains within structural areas of the business.
According to NPD during the fourth quarter, the Lee brand realized strong share gains across both men's and women's categories in the U S.
Let me now turn to new program wins, consistent with our <unk> arm loans, we continue to develop new distribution opportunities with a focus on select premium and value channels.
As you know we launched the <unk> Master brand with Walmart in Q3, and I am excited to share that as in store point of sale became fully set we saw a strong correlation with sell through and these trends have only accelerated as we start the new year, a testament to how our investments in demand creation are paying off this.
This is just the beginning as we look to expand the program into new categories and doors over time.
Additionally, we entered premium points of distribution, such as Anthropologie nordstroms and free people when we invest in design innovation and demand creation. The Lee brand has increasing permission to play in these elevated channels.
To further highlight new business development wins during the fourth quarter, we announced a significant new licensing collaboration with <unk>.
With focus on iconic legendary looks bolstered by the brands sustainability platform for World. It works. This partnership brings the Lee brand into over 1000 doors across 61 countries, reaching a new and younger consumer.
Additional powerful collaborations with key tearing up harvest <unk> life provide perspective that we are clearly investing in elevated demand creation platforms that will continue to transform the Lee brand.
We are only scratching the surface on our long term opportunity rest assured our pipeline is robust.
You're going to share more detail at the Investor day in a few months.
Another important element and leaves evolution is our increasing efforts on transforming our digital platforms globally on a reported basis, our dot com business increased 28% in the fourth quarter, while digital wholesale increased 32%. We will continue to distort investments in digital capabilities to drive further brand elevation and.
Our closer connection with our consumer.
Finally, let me touch on our business in China as I mentioned, we saw solid growth in the region during the quarter, but more importantly, as Scott discussed we believe the Lee brand extended its overall, leading denim share position in the quarter outpacing the overall market and our next closest competitor and the momentum.
Continues as we start the year, China will remain a focus for strategic investment with a spotlight on highly successful partners partnerships with key influencers such as any bank in our stand tall campaign. This campaign generated 340 million views on our social media platforms during the quarter on.
Our investment in these demand creation efforts are expected to support further share increases in existing channels.
Measured expansion into tier four and five cities.
Further diversification of our digital platforms.
There'll be more to come on the building blocks of our growth plans for this region at the upcoming Investor day, let.
Let me summarize by thanking my colleagues throughout the lead team for the amazing work done over the past year.
In the face of incredibly difficult macro conditions.
We didn't just persevere, we were able to deliver outstanding profitability improvements and market share gains on.
While keeping our foot on the gas pedal driving new incremental growth aligned with our <unk> accretive principles.
The future is bright for the Lee brand and we really look forward to sharing this transformation with all <unk> stakeholders Ruston. Thank you, Chris and good day everyone.
<unk> come through loud and clear with the team's remarks, so far but let me reiterate despite a highly dynamic environment solid execution of strategic initiatives is yielding improving fundamentals as evidenced by our fourth quarter results.
We have consistently stated that sequencing of our story matters.
With the focus in the first few years post stand on the optimization of the model.
And even with the global pandemic I am proud to say, we have done just that.
I am confident we are entering 2021 as a stronger more profitable company.
For the balance of the call I will touch on a few key areas.
First I will discuss how the actions we've taken over the last 12 months have fundamentally improved our operating model and positions contour for success going forward.
Next I will speak to how enhanced profitability supports investments to catalyze and accelerating top line.
And finally, I will close with highlights of our fourth quarter results and outlook for fiscal 2021.
As we've discussed since the spin our core focus during horizon, one is making the strategic investments and business model changes that will set the foundation for longer term sustainable tsi, our accretive growth.
This included quality of sales initiatives global ERP and digital investments.
Efficiency and cost savings efforts and deleveraging the balance sheet.
Together these actions have driven meaningful improvement in our underlying fundamentals.
Let's discuss a few of these items in more detail starting with our it investments.
Progress on the strategic ERP implementation continues as planned.
Following our successful go live in Asia during the third quarter, we remain on track for the remaining regional implementations in 2021.
As you would expect there will be some timing shifts on quarterly cadence associated with the rollout across the U S region in early Q2.
We continue to see meaningful efficiency opportunities that will drive tangible improvements to our cost structure and reduced non strategic spend providing fuel for investments in areas like demand creation digital and international.
We also amplified actions in the fourth quarter to optimize our distribution, including strategic initiatives within our U S outlet in India businesses.
Recall over the past three quarters, we discussed the strategic evaluation of our VF outlet operations in the United States.
We have now completed this work and taken appropriate action.
Before detailing the actions, let's level set where we were.
Entering 2020, we operated approximately 80 doors in our U S retail fleet of which over 80% were branded VF outlet.
Slightly under half of the sales in these stores were dilutive non contour branded goods.
With the balance primarily being distressed Lee and wrangler product.
Following our strategic review, we opted to close 38, VF outlet doors and convert approximately 15 doors to our Lee wrangler formats.
Over 75% of the door closures were lease expirations that were not renewed and.
And we will continue to evaluate and optimize the fleet as leases expire.
Importantly, these actions will first provide an.
On improved consumer experience with greater in store presentation for Lee and Wrangler products.
Second support overall profitability, including accretion to our operating margin in the first year.
Third right size, the fleet and establish a healthier foundation for our evolving DTC strategy.
Something you will hear more about at our upcoming Investor day.
And finally this allows us to brands all stores Lee and Wrangler.
And in India, We began rationalizing select points of distribution prior to Covid and to.
Action recently to proactively revise our approach to better position our brands in the changing marketplace.
Accordingly, we are entering a partnership to convert the business to a licensing model.
This will provide a number of distinct benefits for our brands in the region, including.
An enhanced consumer experience aided by greater investment in our brands.
Omni channel capabilities for the first time in the market across both digital and brick and mortar stores.
And a more sustainable and profitable business model with accretion to our operating margin expected in the first year.
The impact of these strategic actions are included in our full year outlook that I will cover shortly.
And at this time, we do not foresee any additional business model changes in any of our major commercial markets.
Another critical area of focus has been our steadfast commitment to delevering, the balance sheet and improving our overall capital position.
This remains an essential element as we transitioned from horizon, one horizon, two and 2021 unlocking greater optionality.
Based on another quarter of strong cash generation, we made a $125 million on discretionary debt repayments in Q4.
While improving our overall net debt position to $665 million.
And debt reduction remains a focus in 2021.
In fact, we have repaid an additional $75 million, thus far in the first quarter.
As Scott discussed based on our improving fundamentals, we announced the early termination of the covenant relief period, and the amended credit facility.
This action will help reduce interest expense in 2021 and has been contemplated in our outlook I will provide shortly.
Next let me touch on the progress we have made improving overall profitability.
Adjusted gross margin increased 230 basis points during the fourth quarter the.
The increase continues to be supported by the structural drivers we discussed last quarter and it is really important to note that we are in the early innings of these gross margin improvements are structural enhancements remain ahead.
The combination of quality of sales actions supply chain initiatives mix shifts to both digital and international and leveraging our own manufacturing base will result in sustainably higher gross margins over time.
This allows us to pivot from horizon, one two horizon two this year on offense.
Providing increased deal to invest behind the key enablers that will create a virtuous cycle of growth.
As our outlook implies you can expect to see us to amplify our demand creation enhanced.
Enhanced innovation and further distort investments into accretive channels, such as digital and China, all leading to a more sustained top line algorithm.
We will discuss in more detail during our upcoming Investor day.
Now, let's get to our fourth quarter review I encourage you to refer to this mornings release for additional detail as I will focus my comments on key highlights.
Global revenue increased 1% on a reported basis and was flat in constant currency compared to the same quarter in 2019.
Revenue gains during the quarter were primarily the result of strength in U S wholesale digital wholesale and own dot com, partially offset.
The impact from Covid as well as the previously mentioned VF outlet actions.
On a regional basis for the quarter U S revenues increased 1% compared to the same quarter in 2019.
International revenues increased 4% on a reported basis driven by continued sequential improvement in China, and Europe, partially offset by ongoing impacts from Covid and the business model change in India.
On a constant currency basis international revenues were flat.
Turning to our brands global revenue of our brands our brands increased 7% on a reported and constant currency basis compared to the same quarter in 2019.
Wrangler U S revenue increased 8% led by strength in our digital wholesale.
Western and workwear businesses. Additionally.
Additionally, our U S owned dot com business increased 57%.
In U S digital wholesale increased eight 7%.
Wrangler International revenue increased 5% on a reported basis and 1% in constant currency.
Covid related impacts, particularly in Europe weighed on performance.
However, this was more than offset by new program wins, including the launch of Atg dressed men and strength in digital wholesale.
<unk> global revenue increased 1% on a reported basis and was flat in constant currency.
Lee U S revenue was flat driven by new business development wins as well as continued strength in digital wholesale and 36% growth in own dot com.
These increases were primarily offset by COVID-19 related headwinds.
Lee International revenue increased 3% on a reported basis, driven by China growth of 11% on.
On a constant currency basis international revenue was flat.
Ongoing headwinds from Covid, particularly in Europe continue to weigh on results.
And finally from a channel perspective.
We saw broad based improving performance during the quarter.
On a reported basis U S wholesale increased 4%.
European wholesale grew 15%.
In global own Dot com increased 37% compared to the same quarter in 2019.
Now on to gross margin as I mentioned earlier adjusted gross margin increased 230 basis points to 43, 2%.
We see ongoing gross margin tailwind continuing in 2021, which I will touch on momentarily.
Adjusted SG&A increased $5 million on a year over year basis to $187 million.
As we indicated last quarter, we distorted spending in demand creation, which was up 16% compared to the prior year.
Gross and SG&A was also driven by investments in the business in support of our digital initiatives.
Adjusted earnings per share was $1 23 in the fourth quarter compared to 97 in the prior year.
Now turning to our balance sheet.
Fourth quarter inventories decreased to $117 million versus the prior year to $341 million or down 26%.
The year over year decline reflects tight inventory controls as well as the VF outlet actions mentioned earlier.
We finished the fourth quarter with $248 million in cash and net debt of $665 million, our best net debt and liquidity position since the spin.
And now onto our outlook.
As you know prior to Covid, our practice was to provide guidance on an annual basis and we are moving back to that approach for our fiscal 2021 outlook.
However, given macroeconomic uncertainty associated with the pandemic I will share some perspective on quarterly cadence.
Similar to our Q4 review I refer to our release this morning for more detail.
And I will focus my comments on key items.
First revenue is expected to increase in the low double digit range over 2020 levels include.
Including a mid single digit impact from the strategic actions with VF outlet in India discussed earlier.
Adjusted gross margin is expected to increase 150 to 200 basis points.
Driven by the previously discussed structural benefits to the model.
Adjusted EPS is expected to be in the range of $3 15 to $3 60.
Including the accretive impacts of actions taken with the VF outlet in India businesses.
As it relates to quarterly color I'll share a few additional points.
As you know during Q4, we amplified demand creation that enhanced holiday 2020 and continues to yield consumer demand benefits into early 2021.
This top line strength combined with anticipated significant margin improvement compared to the first quarter of 2020.
Is driving strong first quarter momentum.
As I mentioned previously our U S. ERP go live is planned for early in the second quarter.
And as you would expect.
We anticipate some order pattern timing shifts around the transition.
Somewhat temporary in Q2 revenue growth rates and corresponding profitability, while aiding the first and third quarters.
Finally from an EPS perspective, we expect second half earnings on a dollar basis to be modestly above the first half of the year due.
Due to Covid recovery and the natural seasonality of the business.
And lastly, I would like to remind everyone of our Investor day is scheduled for Monday may 24, which will be held virtually.
We look forward to sharing more on many of the topics we discussed today as well as on a go forward strategies for driving greater shareholder value.
This concludes our prepared remarks, and I will now turn the call back to our operator.
Operator.
Thank you we will now be conducting a question and answer session.
Do you like to ask a question. Please press star one from your telephone keypad and income.
Formation tone on indicate your line is in the question queue.
Do you mean first start to when you would like to remove your question from the queue for.
From participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Thank you and our first question is from the line of Adrienne <unk> with Barclays. Please proceed with your questions.
Yeah.
Yes, good morning, and let me congratulate you.
We have made it to horizon two are growing sales. So congratulations I know it was a hard left.
So I guess my question. My first question is going to be for you on.
The prepared remarks were great in the detail we've been hearing disruption on kind of port congestion et cetera, and I know that your Dcs are primarily on the east coast. So I'm just wondering if you could talk to us about the inventory being down 26% you seem very comfortable with that.
Obviously, I'm assuming that most of the surface.
<unk> on the East coast. So if you could talk to us a little bit about that.
Tom If you could talk to us about.
The wrangler launch in China, specifically.
The brand positioning the brand awareness.
And then kind of this debt.
Digital aspect of that and then finally for Chris If you could talk to US also about.
The investments in lead product design and development and what that has borne out.
On 'twenty.
So much Scott I'm, giving you a rest of the day.
Thanks Adrian day.
Thanks, Adrienne interest and good morning, I appreciate the question I will answer your.
<unk> around port congestion in inventory and then turn it over to Tom about the Wrangler launch in China.
Certainly as we think about.
Port congestion, we're not immune to the challenges that are taking place in the operating environment, whether that port congestion higher freight rates or labor shortages.
And rest assured we're aggressively working to minimize those impacts including intentional port diversification.
As you are well aware Adrienne certainly select ports, primarily on the west coast with L. A and long beach.
Are more impacted than other ports.
And as you talked a little bit about we really believe our diversified supply chain affords.
Benefits for us as we manage through this time.
With approximately a third of our production in this hemisphere and two thirds of our sourced production coming from 225 facilities in over 200 over 20 countries around the world.
We can be a little more creative I'll say in navigating some of the challenges.
Our outlook has considered kind of prolonged headwinds through the better part of 2021.
Based on some of these measures, but we're continuing to work our way through that.
As it relates to inventory you talked a little bit about being down 26% in the fourth quarter. You know this has been a focal point for us since the spin.
Second quarter, we were down 20% the third quarter. We were down 21 were down 26 in the fourth quarter, but that also takes into consideration the model changes that we've made a CFO. So if you exclude the VF outlet stores and really the discontinuation.
Third party goods were down more like 20%, which is really in line with prior quarters.
We continue to manage this we feel good about the quality of the inventory heading into 'twenty one.
Clean and we really believe the levels are appropriate given the uncertainty, but also support the momentum we're seeing in 'twenty. One we continue to work closer than ever with our customers to align the supply and demand signals to maximize the in stock.
And certainly leveraging that diversified supply chain that I talked about earlier to minimize those important logistic disruptions, so thats, a little bit around inventory and with that I'll turn it over to Tom to talk about wrangler in China.
Hi, Adrian.
Really excited about the soft launch in China. It went very well exceeded all our kpis expectations.
We will have a more robust full launch on track for this spring when the consumer environment will be healthier.
We will be measured test and learn from this initiative, but what I'm really excited about is the team on the ground they've been driving the China brand for well over 20 years, they understand how to emotionally connect with the Chinese consumer and certainly they couldnt be more excited about the wrangler brand going after you talked about the brand positioning it's younger it's male female fashion oriented.
So really excited about this initiative.
Andrew It's Chris.
Thanks.
Youre right its really all about product and delivery that consumer low cost product and we have made significant investments on the lease side and the wrangler side around product design innovation and when we look at this we talk internally about style crafted with purpose and we think about that is that elevated style.
<unk>.
Leveraging innovation, so we can deliver the consumer exceptional fit comfort quality.
But again at at that style pushes day truly need. So we're excited about the investments. We've made we're seeing that come through on our and our sell through right now sits at Walmart.
Our partnership with <unk> and the share that we're gaining over and over in China. So we're excited about these investments.
More to come with that as we as we get into it. So thank you for the question.
Thank you. Our next question is from the line of Bob <unk> with Guggenheim Securities.
Good morning.
Just got a couple of questions.
The first one is can you elaborate a little bit more just on the wrangler strength in the lead deceleration in the U S and.
Really sort of how you think that's playing out and sort of where we are going in next few quarters with both of those brands specifically here in the U S. And then the second question is on a run.
And if you could.
It's been maybe as you look at the year on the gross margin expectations are.
Pretty healthy I was just wondering if you might be able to just walk us through a little bit more quarterly expectations.
Throughout the year that would be helpful. Thanks.
Hey, Bob how are you Scott I'll go ahead and start from that Tom and Chris will help me out, but we're really pleased with the arc of the Wrangler and Lee brands as you know for many years under Investor day, but I think what Youre seeing now in the marketplaces, just investing in the brands and the consumer response, one of the most significant pieces of that is that we're building and designing really.
So our consumer is loving what were doing and now Youre seeing US go ahead and get to a better position financially, which we've talked a lot about we talked a lot about capital allocation, we talked a lot about investing back on these brands at the appropriate levels because they've been underinvested in and what we're seeing is we're seeing an acceptance in the broad global marketplace relative to the brands.
Around categories channels geographies and both brands are able to go up and down the value scale. So we really like what we're seeing is I'll tell you one of the things that I think you can measure, which is really important and I think Tom on Crystal type of comment is that we're fielding a lot of incoming calls about people that want to do collaborations with our brands and with our people.
Because they are seeing in the marketplace. The strength of these two brands globally.
Chris.
Yeah. Thanks Super excited about the momentum wrangler is hitting on all cylinders right now it's a combination of really great product.
Fueled by design and innovation and then really great storytelling, we mentioned.
Rick and Morty, we mentioned stranger things, making sure that we're connecting with younger consumers and that's just pulling through from a consumer demand standpoint, and as Scott mentioned, we're able to invest behind the brand like we never had before so really excited about wranglers trajectory on and off Chris Hey, Bob It's Chris.
Ryzen one for Lee was really all about focusing on on a cultural shift and I talked about that and we're on our remarks, and we've really brought that to life and focused on CSR accretive growth for the Lee brand and we've set ourselves up sells up nicely for that we're starting to see that come through seven consecutive quarters of sequential margin.
Expansion in our biggest market. So we feel good about how we're positioned as Scott said, our investment behind design and innovation are starting to really come through for us. So we're.
We're excited about what the future holds and look forward to talking to you more during our Investor day.
And Bob a trusted good morning, Thanks for joining let me provide a little more kind of shaping around the quarters.
That's certainly top of mind as you're looking to build your model for the year, Although I wont provide specific quarterly guidance given the macroeconomic uncertainty let me just give a little bit of additional color as youre thinking about it.
So as we as we mentioned in our prepared remarks, we we really see strong strong topline momentum coming into the first quarter supported by that amplified demand creation investments we made during Q4.
Actually we would anticipate Q2 growth rates to accelerate sequentially certainly that Q2 of 2009.
<unk> 19 was most impacted by Covid as you're well aware and we would expect those Q2 growth rate again actually ahead of the Q1 growth rates.
We would however, just remind you Bob as Youre thinking about this that Q2 is typically our lowest volume quarter.
And with the U S ERP planned in the second quarter.
That certainly will have some implications as well as we talked about so we really view kind of the topline growth rate is a bit more balanced both on a one year and two year stacked basis.
And so that is kind of how we're thinking about the top line as we speak.
About <unk>.
Gross margin.
Certainly we're pleased with the progress we've seen over the last two quarters gross margins have topped 43% both in.
Q3, and Q4 up 230, and 240 basis points.
So we're pleased with the progress we've seen again confidence in talking about that expansion of 150 to 200 basis points off of that 41, two we delivered on an adjusted basis in 2020. So as you think a little bit about the cadence of profitability.
Bob on earnings again, I would expect strong momentum into Q1 and as you would expect the ERP go live is going to cause some timing shifts, helping Q1, even more as well as Q3, while temporary in Q2, a bit more again on our lowest volume quarter.
So as we said to in the prepared remarks, given the typical seasonality and some of these timing shifts we would expect EPS on a dollar basis to be modestly higher in the second half of the year.
So hopefully that provides a little more color Bob that youre thinking about constructing the models. Thanks for thanks for the question.
Our next question is from the line of Erinn Murphy with Piper Sandler. Please proceed with your questions.
Great. Thanks. Good morning, I guess first question is just on the Lee and HSM partnership I was curious if you can speak to the shelf space gains you're capturing right now is that temporary or is it more permanent and then just bigger picture Scott for you as you think about being a leader in sustainability can you talk about how you're prioritizing some of your consumer fee.
<unk> efforts, whether it's the recycled pet in partnership with Eaton am waterless dying sustainability source for sustainably sourced cotton et cetera, just curious on that.
Why don't I go ahead, and start and I'll handle the sustainability piece.
Thanks for the questions Darren let me turn it over to Scott.
We're really proud of our efforts in sustainability, we published.
Two of our company. So early on in our history, our first ever sustainability report early on so I would encourage everyone to go out our website and take a look at that I think it's a really really good piece, but we are focused on three pillars net people products planet and those are the key pillars that we're going to focus on going forward, if we're going to be.
We have stated and we're very serious about that being a leader in sustainability going forward. So I can give you a couple of examples from a product standpoint.
Our planet standpoint, we've got a goal by the Europe 2025 to 10 billion liters of water and also a goal by 2025 to have all of our operating facilities using renewable energy, but we take all components in all pieces of the value chain within within sustainability very serious so look for more from us.
You mentioned, our foam dyeing process, a very important part of our water savings initiatives, but there'll be much more going forward.
Thanks for the question Chris.
It's Chris.
Interesting about the <unk> partnership and you've talked about sustainability as it was really all based around sustainability and lease platform for a world that works.
Your question about is this a onetime thing with with <unk>. This is a collaboration so by definition as it is one time from that standpoint, but what I will say is that we really had a great partnership with <unk> and we're really encouraged by that our teams up albeit had to do everything virtually because of COVID-19.
Really got along well so I think there is there is a high likelihood that there'll be additional partnerships between contour brands. If it's Lee <unk> Wrangler, but then also with with other vertical retailers as we think about the different opportunities out there.
Thank you.
Our next question is from the line of Sam Poser with Susquehanna. Please proceed with your question.
Williams trading, but thank you.
Just a quick one on.
The impact of India, where that comes from and did any of that impact the fourth quarter or is that.
Is that kind of flow through I mean, I would assume that.
The impact Lee.
The more that you're well, India is going to impact Lee, but can you give us sort of could you spell it out and flow it for us a little bit.
Yes, Sam it's Russ and good morning, I'll go ahead and take that I appreciate the question.
Certainly as we think about the India market, we do have both brands there it is wrangler and Lee.
And as we talked about sort of on our outlook for 2021.
Said, a low double digit topline growth for contour.
Including a mid single digit impact from from both the BSO actions that we take this morning as well as India Sam.
So while I won't get into sort of the specific impacts of each of those.
We'll sort of emphasize for you that we do expect both to be occur.
Accretive for us.
From a margin perspective in that first year and importantly, we're really confident these are the right things to do from a brand perspective.
It is really aligned to our tsi.
Our focused approach so hopefully that helps understand things in terms of the Q4 impact.
As we talked about will be transitioning to that new model in the first quarter. So certainly there were some Q4 impact.
Associated with those actions in advance of moving from a just from a direct to a license model.
Alright, So let me re ask the question in absolute revenue dollars can you give us.
Or as a percent of that 5% how much is coming out of the VF outlets on how much of it's coming out of India can.
Can you give us some idea.
Sam we're not going to sit on going.
I understand the profitability situation.
I'm, just trying to be able to run the model to be able just.
To break it out properly.
Or how much of the revenue are you eliminating.
Eliminating from VF outlet with the store closures I assume those stores that youre closing werent, great stores to begin with so.
Yeah, what I would say Sam again, we won't break it out but it is collectively on mid single digit impact from both BMO and India. The VSO piece.
Certainly has two components to it it's not only the 38 door closures that we talked about in the quarter, but it's also the discontinuation of the third party goods that are sold through that chain.
And again those were a little less than half of the overall sales in the chain. So.
That's a little bit more color on the on the breakout.
Yeah.
Our next question. Our next question is from the line of Jay sole with UBS. Please proceed with your question.
Great. Thank you so much I have three questions. One is on share gains on the others on digital and thoughts on capital allocation, maybe first it sounds like both brands saw nice share gains in U S. Wholesale can you just speak to what's driving this and who youre taking share from whether it's other brands or private label and then secondly on digital the digital growth and <unk> seen really strong.
Can you walk through the digital wholesale piece versus the company's own dot com and what inning are we in with respect to development of the company's on Dotcom channel and then lastly.
It was another quarter of significant debt pay down I think you are now below three times leverage I'm sure you'll provide more details on your Investor day, but I was curious about how you are thinking about the capital allocation strategy at this point. Thank you.
Alright, So Jay we will go ahead.
That is for questions and we're going to go ahead, and if it goes up a little bit, but let's go ahead and start with the share gains and you're absolutely right. We are gaining share both from a national branded and also price label and we're driving that through our first quality goods I think Tom in Crystal mentioned, we are designing and building and this is a credit to our team better product across.
The globe and also here in North America, too and we're gaining share across the wholesale channel and we really like where we stand right now with our core partnerships with people that we do business with so we're really excited about the future and all of our categories from a digital standpoint.
We've talked a lot about the investments that we've made there, but theres a couple of things that I think a really important year from a digital standpoint, we've been investing behind that we have been investing in the platforms. You saw the gain that we had both on the on Dot com.
Read platform Wrangler Dot com and <unk> dot com, but I think the thing that's not talked about enough. In these types of calls is the fact that you can have a really good platform, which will deal with higher than incredible team, but we are now starting to put really exceptional product on the site and you're seeing that takeout accelerate that is the critical components. So we've put the hole.
Teams together great team great site, great product really helping US go forward. So really pleased with that in addition to that our digital wholesale business is strong and getting stronger again. It goes back to our partnerships that we have with the winning with the winning retailers.
Back to great product, so really pleased with that looking forward to the future there.
I'll tell you. This if you want to talk about what inning. It is I would tell you. It's very very early stages and the reason I say that is that we came out of the gate from expense standpoint really at ground zero no investment in our platform very few people that were asked to do a lot too much actually until we got a team built around them.
A lot of things that happen from an investment standpoint globally, and our dot com and our own dot coms and those are just now starting to pay off and I think that we're really starting to learn what the consumer wants there and were advertising in a significant way digitally and it's hitting specifically from a consumer standpoint before I hit cash.
<unk> allocation I will just ask if anybody has a comment from Tom or Chris arrested on digital.
I think the only thing Jay this is Chris the only thing I would add on there is this is also happening outside of the U S traffic for us from China, and we're really seeing acceleration around our digital platforms in China and leveraging those key influencers talks about 340 million views on our social media platforms from a quarter, that's driving us to new.
New consumers younger consumers and it's helping us capture share.
So let me go ahead I'm going to start on capital allocation and then I'll flip it over to rustin for any comments, but you've heard us talk before.
Multiple times about the fact that we really liked our position coming into horizon two relative to we can go ahead, we can increase our dividend we could pay down additional debt. We can invest more on these brands and we're seeing the response out in the marketplace. When we do invest in these brands and we can also embarked on M&A activity, if we choose so how.
The ability to have all those options and decide what's best for our stakeholders overtime puts us on an enviable position and we look forward to talking about these things in our upcoming Investor day in net rustin.
Rustin anything debt, yes, I would just.
Highlight Jay that we have been on an aggressive debt paydown piece, we paid $300 million in discretionary payments for last three quarters, I talked a little bit about $75 million.
Paid in the first quarter as well so that will continue to be a focal point for us.
As we're sort of exiting out of horizon, one and transitioning into horizon, two as Scott talked a little bit about.
On the net leverage ratio is less than three times gross is a little north of that still so again, we will continue to be a focal point for us, but really like the optionality as we head into horizon, two that Scott talked about.
Thank you at this time, we have reached end of our question and answer session and I will turn the call back to Scott Baxter to make closing remarks.
No I just wanted to thank everybody for joining us today, we really appreciate your support of contour brands and we'll look forward to speaking with you at our upcoming first quarter call in May and we're especially excited to spend time with you at our upcoming Investor day on May 24. So thanks again for your time today really appreciate it and we'll talk to you.
Take care.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.