Q1 2021 Kontoor Brands Inc Earnings Call
[music].
Greetings welcome to Contra brands first quarter earnings call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
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, Eric You May now begin.
Thank you operator, and welcome to contour brands first quarter 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.
On <unk> uncertainties are detailed in documents filed with the SEC.
We urge you to read our risk factors cautionary language and other disclosures contained in those reports.
Boston Welcome.
Following are prepared remarks will open the call for questions. We anticipate the call will last about an hour Scott.
Eric and thank you all for joining US let me state at the outset, we would tend to keep our prepared comments a bit tighter today as we look forward to articulating greater detail on a revolving strategies with you at our upcoming Investor day in a few weeks on the 24th.
But today, we are really pleased to share our first quarter results.
Results that continue to accelerate across nearly all areas of our business.
Our performance in the quarter demonstrates how the powerful combination of strategic investments and solid execution come together to yield imprudent fundamentals and we think this quarter provides a great example of the opportunity ahead as we are just getting started.
As always I wanted to start by thanking our global team with a special call up to those colleagues working on our ERP implementation is this dedication to excellence by our employees around the world. It is at the core of this quarter strong performance and is why I'm, so confident and contours future. We are much more work to be done.
Done and we will remain humble and focused on areas within our control, but I know our colleagues are committed to delivering on our strategic plan.
Over the last two years, we have consistently communicated the following strategy to drive more profitable and sustained growth over the longer term.
First enhanced and accelerate our core U S wholesale business.
Second.
Elevate our direct connection with consumers through channel expansion focused on involving our day to see and digital ecosystem.
Third thoughtfully extend our reach around the globe prioritizing opportunities within the China region and force.
Diversify our product mix through category extensions amplifying outdoor.
<unk> and T shirts.
And then support of these long long term growth opportunities. We have also discussed where we are distorting tsi accretive investments and the neighbors, including.
Elevating and prioritizing the highest RLI demand creation platforms.
Scaling product and manufacturing innovation with the sustainability and ESG thread throughout unlock and productivity through the implementation of our global ERP and digital infrastructure to generate improved debt analytics and consumer insights and finally developing world class talent to build a high performance purpose let.
And increasingly growth minded culture.
Let me know share some of the highlights from the first quarter that provide great proof points of how these strategies and investments are paying off.
Overall reported revenue increased 29% over the first quarter last year.
Instyle shoot on Instagram, featuring Jennifer Lopez wearing newly designed Lee product I would encourage you to take a look and I would add this was organic what an incredible statement and brand elevating moment per Lee.
We remain committed to amplifying our demand creation efforts with a focus on the on the T. S. R. Bolstering areas and this includes digital.
We continue to see strong returns on our investments and transforming our digital ecosystem, while Q1 experienced great growth over 2020, more impressive or U S. Digital gained relative to 2019 with on Dot com, increasing 70 per cent and digital hotel wholesale up 132%.
Given the accretive nature of this channel financially and strategically we will continue to distort investment dollars to drive elevated and sustained growth and digital.
More details to come on the building frocks for this growth at our Investor day in a few weeks.
We also continue to invest in talent as well across global positions, including design and marketing. We are building a world class team with an increasing focus on developing the growth oriented organizational mindset.
In addition over the past few months. We are also welcomed to new members to our board of directors today, we announced the appointment of Mark Schiller, the President and CEO of the Hain Celestial group and in March we welcomed Rob Lynch, the president and CEO, a Papa Johns as we move further build out our team and capabilities both mark.
And Rob will bring incredible experience and insights to our board.
Turning to our investments within innovation or foot remains on the gas pedal during the first quarter, we expanded one of our key sustainability platforms into good to include additional water savings technologies. We also recently announced a collaboration with Panther biotech to accelerate the commercialization and scale capability of hemp grown in the.
U S. Another proof point of our commitment to be a leader in the sustainability and ensure responsibility sourcing all over the growth.
Momentum and our outdoor line a T G is only increasing.
Taking the wrangler brands, two additional channels and extending our reached a new consumers.
Elevated designed within Lee is also driving increasing permission on the brand to play premium points of distribution.
And we know enhanced innovation supports pricing and the mixing up of a <unk> a critical component of brands health.
By now I'm sure most of you have heard or read of the potential emergence of a denim cycle.
We think about this a bit differently as we realized cycles by definition are finite nature. So we are most focused on structural change not cyclical trends. This speaks to the very investments, we're making and the brands investments that not only allow us to participate in casuals Asian or denim cycles, but actually drive that so not only takes share.
But expand the marketplace and we are doing just that in our court and within our largest market.
And outside of the U S. We continue to see improvements despite an uneven macro environment.
<unk> revenue was down 5% on a constant currency basis, while we expect condition is to remain difficult in Europe. The evolution of our digital platform and new business development programs should help somewhat mitigate near term headwinds and position us for success in the region over the longer term.
And in China.
Our ongoing strategic investments continue to yield accelerating results.
With first quarter revenue seeing triple digit increases year over year, and 20 per cent constant currency growth compared with 2019.
With a premium lifestyle offering strong collaborations and partnerships with key local influencers. The leibrand continues to build on its leading denim position in the region.
And we are pleased to share that the wrangler launch in China has been very successful exceeding our expectations to date building momentum throughout the quarter and setting the foundation are skilled growth overtime.
Finally.
Let me provide an update on new business development as we've discussed over the last several quarters. Despite the challenging environment. We remained on the offense.
To take our brands into new points of distribution driven by diversified incremental category extensions.
Lee business with Wal Mart continues to gain momentum with increased category offerings. This spring and solid visibility to the fall order book.
Turning to a wrangler Atg line within North America, we continue to build in the core mass channel, but also expand within a new channels, such as outdoor specialty and sporting goods she'll have premium sporting goods retailer is a perfect example of where the a T. G line can take the wrangler brand launching this spring and <unk>.
Extending to additional stores this fall.
Position and ramp up activities.
This is a significant accomplishment and milestone for contour and we look forward to our final regional implementation scheduled for the second half of 2021.
Technology initiatives like ERP and digital are excellent examples of how we remain committed to making the necessary investments to drive long term sustainable growth and efficiency improvements.
These actions are enabling execution to enhance and accelerate our core U S wholesale business.
Spanned under indexed accretive channels like digital.
Enhanced international penetration in key markets like China.
And extend our category reach with programs like outdoor workwear and T shirts.
Investments are not only leading to improved fundamentals and profitability, but also continuing to enhance optionality.
On the last earnings call in early March we mentioned that we had already made $75 million in discretionary debt repayments in the first quarter.
Given performance, we made an additional incremental debt repayment of $25 million in the quarter to bring the total to $100 million in the period.
With these additional repayments and in spite of significant headwinds from the pandemic over the past year, we have reduced net debt or long term debt less cash.
Over $320 million since the first quarter of 2020, while remaining laser focused on investing and executing to deliver sustained long term benefits.
With this progress on de levering the balance sheet. We are excited about the enhanced optionality as we transitioned to horizon two net.
Now, let's turn to our first quarter review I will focus my comments on key highlights and encourage you to refer to this mornings release for additional detail on the quarter.
Also given the impact COVID-19 had on prior year results I will provide select references to the same quarter 2019 results for additional context beginning.
Beginning with revenue.
Global revenue increased 29% on a reported basis and was up 27% in constant currency compared to the same quarter last year.
Revenue gains during the quarter were broad based across segments regions and channels.
U S and international wholesale digital wholesale and own dot com all delivered strong results in the quarter.
As expected and discussed on the fourth quarter 2020 earnings call first quarter revenue benefited from a shift in the timing of shipments from the second quarter to the first quarter ahead of the company's North American ERP implementation.
Scott mentioned, though even with the timing of shipments ahead of our ERP transition, we saw significant topline upside to our internal expectations.
Strength in the first quarter revenue was partially offset by the impacts of the strategic actions announced at year end to rationalize our U S outlet fleet and transition to a new license business model in India.
Combined these actions represented approximately five points of headwind in the quarter.
Additionally, COVID-19 continued to negatively impact results in select channels and markets, particularly in Europe.
Compared to adjusted revenue in the first quarter of 2019 global revenue increased 3% on a reported basis.
On a regional basis for the quarter U S revenue increased 29% compared to the same quarter last year, driven by wholesale new business development wins and digital.
Strategic investments in our digital capabilities continue to yield strong returns.
U S. Digital wholesale has increased 132% and on Dot com has increased 70% compared to the same quarter in 2019.
Even with ongoing investments in promising early returns, though we remain under index and we will continue to prioritize investment in this important channel moving forward.
International revenues increased 30% on a reported basis and 21% in constant currency compared to the first quarter 2020.
Improvement was driven by the strong China results on a one and two year stack basis that Scott mentioned earlier.
Despite ongoing headwinds from COVID-19 in many markets European reported revenue increased 4% over prior year led by digital where digital wholesale increased 98% and one dot com increased 39%.
Turning to our brands.
Global revenue of our Wrangler brand increased 31% on a reported basis and 30% in constant currency compared to the same quarter in 2020.
Wrangler U S revenue increased 38% led by broad based strength in our wholesale digital western and workwear businesses.
The western business continued to deliver strong results with revenue increasing 54% in the quarter led by men's and women's bottoms.
In addition, key program initiatives and category extensions, including Atg, the female heritage collection and expanded distribution for workwear drove strong growth.
Wrangler International revenue was flat on a reported basis and decreased 6% in constant currency.
New business development wins, with our Atg program and digital growth in Europe, offset the business model change in India and ongoing COVID-19 related impacts.
Compared to adjusted revenue for the same quarter in 2019 Global Wrangler reported revenue increased 10%.
On a constant currency basis Wrangler reported revenue increased 7% compared to the same quarter in 2019.
Lee brands Global revenue increased 37% on a reported basis and 33% in constant currency compared to the first quarter of 2020.
In the U S. Lee revenue increased 28% driven by wholesale including new distribution wins and continued strength in digital wholesale and own dot com, which increased 73% and six 9% respectively in the period.
Broad base across both genders and multiple categories led by denim and non denim bottoms.
Lee International revenue increased 50% on a reported basis and 40% in constant currency.
As previously mentioned, China, where so sequential momentum continues led the improvement.
Compared to adjusted revenue for the same quarter in 2019 Global Lee reported revenue increased 4%.
On a constant currency basis globally reported revenue increased 2% compared to the same quarter in 2019.
And finally from a channel perspective, we saw broad based improving performance during the quarter.
On a reported basis U S wholesale increased 37% non.
Non U S wholesale grew 30% and global own dot com increased 62% compared to prior year.
Now on to gross margin.
Gross margin increased 830 basis points to 46, one percentage of revenue on a reported basis compared to the same period in the prior year.
Fundamental improvement continues to be driven by favorable channel customer and product mix as well as quality of sales initiatives. In addition to period benefited from product cost enhancements as well as lower inventory provisions and higher production volumes than prior year.
Before moving to SG&A I want to make a couple more comments about our gross margin in future investments.
As we have highlighted previously we see opportunities for sustainable structural margin enhancements as growth and currently under index accretive channels and geographies begins to materialize.
Although improvements may not always be linear on a quarter to quarter basis, our first quarter gross margin performance is an excellent early proof point.
On how focus areas like demand creation digital capabilities and quality of sales are beginning to manifest.
These enhancements create oxygen in our P&L for us to reinvest back into the business and we will continue to do so.
Finally, I realized that our prior year gross margin contained some COVID-19 related impacts in the period that may distort comparisons accordingly to better illustrate the progress that has already been made I wanted to highlight that our first quarter gross margin increased 500 basis points compared to first quarter.
A 2019 on a net adjusted basis.
Now on to SG&A, adjusted SG&A increased $12 million on a year over year basis to $181 million.
Increased demand.
On an higher volume related variable expenses were partially offset by lower bad debt expense than in the prior year adjusted earnings per share was $1 43 compared to 27 in the same period in the prior year and compared to 96 cents in the first quarter of 2019.
Now turning to our balance sheet.
First quarter inventories decreased $139 million versus.
Versus the prior year to $350 million or down 28%.
The year over year decline reflects tighter inventory controls the reduction in the VF outlet fleet that took place at year end and the business model change in India.
Excluding VF outlet in India inventory decreased approximately 21% compared to the prior year.
Historically working capital in the first quarter tends to be a use of cash as opposed to a source of cash.
However, due to our performance and ERP implementation working capital in the first quarter was a source of cash and is expected to be a use of cash in the second quarter.
We finished the first quarter with net debt of $586 million and $230 million in cash.
We anticipate prudently moderating our currently elevated cash balances towards pre COVID-19 levels as we move through 2021.
And as we previously announced our board of directors declared a regular quarterly cash dividend of <unk> 40 per share.
<unk> on June 18, 2021 to shareholders of record at the close of business on June eight 2021.
And now onto our outlook.
Given the strength of the first quarter, we are raising our fiscal 2021 guidance per revenue gross margin and adjusted EPS.
Although we will not provide a quarterly outlook I will share some additional color on anticipated quarterly cadence in light of the ERP implementations.
As we shared on our fourth quarter earnings call, we anticipated some timing shifts around the implementation of our ERP specifically as you would expect we.
We believe there were some order pattern timing shifts from the second quarter into the first quarter somewhat tempering Q2 revenue growth rates and corresponding profitability, while aiding the first and third quarters. These.
These timing shifts should have no impact on our full year results.
Let me now turn to the specific 2021 guidance.
Revenue is now expected to increase in the low teens range over 2020 as compared to a low double digit range in the prior guidance.
Including a mid single digit impact from the BFS flow outlet actions in India business model changes.
We expect second half revenue will be modestly above the first half of the year.
To be clear we.
We expect second quarter growth rates to modestly accelerate from the first quarter.
Gross margin is now expected to increase by 230 to 270 basis points.
Above the adjusted gross margin of 41, 2% achieved in 2020.
As compared to 150 to 200 basis points in the prior guidance.
Although second quarter margin margin will be adversely impacted by downtime in our production facilities for the ERP implementation.
The annual increase reflects continued benefits from ongoing quality of sales initiatives as well as higher anticipated growth in more accretive channels, such as digital and international.
SG&A investments, we will continue to be made in brands and capabilities.
Due to the strengthening revenue and gross margin outlook, we expect to amplify SG&A investments in demand creation digital and international expansion.
These increases will be partially mitigated by ongoing tight expense controls and sustained structural cost containment initiatives.
Adjusted EPS is now expected to be in the range of $3 70 to $3 80 per share as compared to $3 50 to $3 60 per share in the prior guidance.
We expect second half earnings on a dollar basis to be modestly above the first half of the year due to COVID-19 recovery and then that natural seasonality of the business.
In closing as Scott indicated I would just like to reiterate how our first quarter results demonstrate improving fundamentals driven by the powerful combination of strategic investments and solid execution.
We look forward to sharing our go forward strategy is to drive greater shareholder value at our upcoming Investor day.
This concludes our prepared remarks, and I will now turn the call back to our operator operator.
Yeah.
Thank you.
At this time well be conducting a question and answer session.
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One moment, please when we pull for questions.
Thank you on our first question is coming from the line of Jay sole with UBS. Please proceed with your questions.
Great. Thank you so much on.
Wanted to ask about the ERP impact and the timing of the implementation, Russia. I think you said that the company has successfully gone live and is executing but there's still some final regional implementations for the back half of the year can you, maybe just elaborate a little bit on <unk>.
What percentage of the ERP system has been implemented and sort of what's the risk profile right now in terms of.
The business the operational risks associated with these kind of things.
How much risk is still there what can you tell us about that.
Sure. Good morning, Jay Thanks for the question in terms of the ERP impact maybe just let me first start with where we are on the ERP implementation schedule you.
You May remember Jay we implemented our first regional implementation in Q3 of 2020.
And that was in our Asia region and as we indicated this morning on our prepared remarks.
We just went live in North America.
Here early in the second quarter. So obviously as you know Jay we are predominantly a north American based business with roughly 75% of our sales in North America.
So certainly the largest region is live and as I indicated on the remarks, we're certainly executing according to plan with our transition and ramp up activities.
You think about the timing impact J specifically.
As we said on the last call, we anticipated that there would be some timing shifts.
In order patterns that would really help Q1 and potentially Q3, while tempering Q2 a bit more.
As a reminder, though I would say that those timing shifts are expected to have no impact on the full year results.
So as we think a little bit more about our Q1, there were a number of puts and takes J, both positive and negative that impacted the quarter, including stimulus as Scott talked about Lockdowns in Europe lapping the VSO in India model changes quality of sales initiatives.
Participate in and we feel real strongly about what position to extremely well, but we see this thing is a big movement J, we see it as a global movement. The customization and you know when I casually nation. So when we think about this we think about the fact that we can play now with the globe because of our business, where restructuring where we're set up around the world we've.
Got a really really nice set of initiatives that play really well into it. So if you think about all the work that we've done on our innovation all the work that we're doing on our design you've seen the product that we're producing now on how good it is globally and the demand creation portfolio that we put out you know some of the stuff that I talked about today with Georgia May Jagger and J Lo those things, they're really helping the consumer.
<unk> into this casuals Asian around the globe, which is really important because we think of it as a much bigger dynamic a much more global dynamic and something that will be able to participate in for the long term, but I think the key thing for US is we believe we're the ones that are driving it. So we're taking share and what we're doing which is really important for our business.
Going forward is we're expanding the marketplace.
So J if if you were to spend time like you do in London, and New York and San Francisco globally, you're seeing that as people come back to work, they're dressing differently. The world went into you know a really tough situation that we're all trying to come out of now and his people are coming out of it they're saying themselves in the future I'd like to be a little bit more casual denim, it's gonna be my play there and the physician.
Ourselves really nicely.
Thank you. Our next question is coming from the line of Arab Murphy was five per Sally.
She was your question.
Great. Thanks, Good morning, I was hoping Scott you could talk a little bit more about that tmall lunch at the Wrangler brands you set it exceeded expectations. How do you see that scaling in the region over time, and then just curious China bigger picture for both brands, what's the promotional landscape and like first is the pre pandemic and then I have a quick follow up on all correct.
<unk>.
Sure sure no problem, so from a tmall standpoint in the regular lunch you know we feel really good about lunch you know we've had all of our internal expectation you know with the higher profile over there I think the thing that's really important for us we talked a little bit about this is going to have such a head start with our leibrand. We've been in the marketplace for a really long time, we know the consumer we know the.
Marcus we know the customers. So we really know how to operate with a really senior T. So he got a terrific team on the ground there so bringing our brand wrangler to that marketplace was a real benefit force, having that kind of expertise. So we've seen and hit the metrics that we've established for self but I think the most important thing was that our team was very strategic.
Sure you know Q2 is our lowest volume quarter and so as you would expect we will have a bit more pronounced impact on profitability, particularly as we continue to invest behind strategic initiatives and demand creation to support that top line not just in 20.
On the back half of 2021, Erin, but in 2022 and beyond.
You know and finally, you know as we've stated you know we will be we do expect to be modestly higher in the back half a day EPS on a dollar basis and the second half of the year you know the other thing I would sort of highlight Aaron is that uhm, obviously, there's a lot of macro on sir.
Mia, Scott and I, both referenced in our discussion earlier, whether that's.
Continued lockdowns in Europe, certainly supply chain disruption. So you know, we we certainly want to be prudently conservative and and feel like we've taken those into consideration, but really want to make sure that we're in for sizing those investments to support the longterm topline as well on the back half so.
Hopefully that helps a little bit more with the shaping in the year and how we're seeing it play out.
Thank you are.
Our next question, where you're coming from the line of Adrian He with Barclays. Please proceed with your question.
Good morning, Uhm, let me add my congratulations.
Yeah. This is the second quarter in a row, where we're really starting to see that horizon to play out so well done there.
I think they're firing it.
You're welcome.
I was wondering if you can talk about the China Wrangler watch what you're seeing there has strong in China seems to be a hotbed of positiveness in terms of the strength of the recovery and then on the other side you know we have had put in doubt questions about <unk> retailers.
Having exposure and I noticed the day kind of political subject that you know to the extent that do you have exposure. How do you know that you have if you. If you were to have cotton you know, perhaps that <unk> to that Jim downgrade in and if you can talk a little bit about risk you know any risk reward.
<unk> <unk> from China upside versus any exposure. Thank you very much.
Good morning, Adrienne how are ya. Thanks for joining us today, it's Scott I'll start with pay per that China question to rent.
Hi, nice to hear your voice I'll start with the China Wrangler question, you know, we talked a lot about it on the prepared remarks, but it's an opportunity to kind of talk more about it now so I. Appreciate it you know it was a big decision for us to go there, but it was a very easy decision that we made early on in our strategy our portfolio there with Lee the business.
We hit built the leadership team that we have in place and the experienced that we have in the marketplace over a very very long period of time and quite frankly, the success that we've had there was an easy decision for US. It was just the timing standpoint when would we go ahead after the spin and make the decision to move so since the decision to to move in and it was delayed during the pandemic is you know a little bit.
We've been really pleased we've been pleased with how the consumer has taken the product we've been pleased with the demand creation and how the consumers absorbing demand creation. What do you mean by that is that the consumer really get the story and they get the branch and I think that's the really important part and then we can capitalize on the infrastructure that we already have in place, which is really important and now.
No we're kind of phasing into kind of our second kind of thought process on strategy around how do we go ahead and start to really grow the brand there and that we launched his you know digitally first and now we've gone to it on the channel Omnichannel thought process and how we go ahead. The wholesale on how we have that on physical stores too in the marketplace. So it's a really good position for us to be in as far as.
<unk> exposure you know as you know we don't buy cotton as you know it's fabric you know that we buy and for US you know, we do a really nice job one of the things that we pride ourselves on is our supply chain here at comparable brands on very well established one of the great part about our spin was that our supply chain had been established from the world by supply chain long.
Term supply chain. So this wasn't new to us and we brought a lot of talent or so they've done a really nice job with making sure that working with our suppliers around the globe that we are buying the right type of fabric for a product. So right now we feel very well positioned and how we are positioned in that situation currently.
Okay Fantastic that's super helpful that I knew I knew that we've touched on the den and cycle, but I I guess I actually I'm more curious whether you think every day you know fashion shift component to it. So I, we understand that their day you know.
Transferring to at leisure, perhaps to perhaps down which is sort of more broad day, but on top of that you know can you talk about a fashion component of it maybe can't in silhouette et cetera, and then for us and really want to get a little bit more color on a you see progress I know that you have had continue day you see <unk>.
Right in the face of rising input pricing pressure, so will help there would be great. Thank you.
Yeah for sure. So I'm project that question because you're the first person was picked up on that component in that piece of <unk>. Let me tell you why that's really important and and why I'm really impressed with the question because you're thinking about it in terms of the fact that we're extending the marketplace and that's exactly what we're thinking about we have set a ton of energy time money in our.
<unk> and also in our design and that innovation and design is bringing our our product to a more premium level, which is really good cause that just creates incredible brands heat throughout the entire portfolio, but what we're gonna see throughout this casuals Asian and I'm actually just a little bit earlier. This is why it's important big cities major metro markets around the globe for London for you <unk> San.
Francis those to Paris, as the Munich's, they're moving to a casually they should process those people and those people that come back into not just the workplace, but coming back into social environments concerts, you know things like that they were going to want to dress with a little higher design fashion element from a denim standpoint, so we were playing right into that extended market.
<unk>, that's why I said earlier that this you know the cycle is great and we're gonna participate there's no question, but we're going to expand the entire marketplace, that's where the real when is very long term and that set components. So so great question glad to ask that because it's a really important part and it helps us because it's really been part of the strategy and how we've been investing.
Now from an a T. G standpoint, you know we have been really pleased with a T. G. I think the thing that's really important force free T. G is it's been very easy for us to take the wrangler line into the <unk>, because it's really just an extension of who that wrangler consumers and we've gotten really detraction as you know, especially around the globe.
So Cuba, some dressing female or male stores in the European marketplace, and then of course really really good distribution here in the United States, but I think the thing that's happening now for US it's really important as we are now starting to see folks like shield. So you know she also an incredibly strong outdoor retailer sporting goods retailer in the middle.
You know missed the central part of the United States, you know, bringing our product on I think that's pretty real validation to the product and placing it right. There next to our competition and we really like when they do that because what happens for US is the consumer comes in and they see a couple of things, it's very very obvious to them quickly one they sleep on bread.
<unk> high quality product they see it at a very very good price and they also have a trusted brands. So you add that both components. Those three things break brands Great Park right price to take out is there. The consumer reception is really good and we see really good things on the horizon and we look forward to talk to you more about art.
A T G line coming up on on May 24th, but thank you for the questions I appreciate it.
And Adrian interest and I'll go ahead, and Uhm talk a little bit about rising input costs Uhm. So you know certainly as we've spoken about previously where we're not immune to the macroeconomic challenges that are that are happening in the marketplace. Whether that's you know port congestion higher freight rates labor shortages yeah. We're.
Certainly actively monitoring all of the input cost uhm and we've considered that N. B updated outlook that we provided this morning, where we raised our gross margins from the previous guide of 150 to 200 basis points versus adjusted margin from last year up to 200.
30 to 270 basis points and you know just a couple of points to highlight I mean, it was our third consecutive quarter of triple digit gross margin increases in that first quarter. You know as I mentioned on my remarks, Uhm, we did see 500 basis points improvement above R Q1 19.
On and adjusted basis. So you know the investments I think or a big key here Adrian as we think about you know our motto moving forward and and we've talked about there's quite a bit here. This morning, whether that's in demand creation innovation digital et cetera and that proactive.
Kind of margin improvement opportunities, where we've been investing in is really driving favorable channel and geographic mix and and certainly you've seen as focused on quality of sales that innovation and design is also going to help support pricing and mixing up of a large.
So you know, that's what's giving us confidence from a margin perspective, you know and certainly as we always do we always talk about our supply chain.
As a differentiator in that diversified supply chain, where approximately one third of our global production is internally manufactured in this hemisphere and approximately two thirds are sourced from over 225 facilities and over 20 countries really provides us the flexibility to divert.
First if I were if possible and minimize some of those inflationary pressures. So hopefully that provides a little more color on how we're thinking about not just average unit costs, but also pricing and mixing up of Aur's.
Thank you thank.
Our next question will be coming from the line of Bob durable, let's Guggenheim Securities to see with your questions.
Goodbye. Good morning. Good morning, Good morning, I guess, a couple of quick questions for me can you talk a little bit about your new business development wins that your same uhm can I first and I guess can you comment a little more around as you look at the digital ecosystem evolution you know.
Where do you think your how that's developing and I'd be remiss not to ask about the J Lo campaign. So I don't know if you could just give us an idea on demand creation sort of you know where you see it especially with these gross margin games and the ability to reinvest you where you are with with a J O campaign, and the Georgia May Jagger campaign, that'd be pretty helpful for us.
Thanks.
Sure about that that's no problem. Thanks for the questions really appreciate it from a new business development standpoint, I think the thing that I'm. Most pleased with is that we since the very beginning hip decided that these brands were underinvested in Underpenetrated and under distributed and we had a pretty big white space globally, and we've attacked that but I think the thing that's probably.
The most important piece of it is that we just see a ton more opportunity going forward with the brands. So you know when we had our success you know with our launch a Walmart you know we've seen really really nice results, especially since we got all our pls up feel really good about that long channel that really got us going and then you know you see the things that we've done.
With a T. G. You know and and this is a global point of view right. You know so things that we've done with Cressman thing that's gone with Cuba, and then obviously the things that we're gonna talk about on our upcoming meeting. So we're also gonna spend time with you or we're going to take you through this on a pretty significant way.
Best per day, but you know there's much more to come in and then I look at like things like Shields, right and I think about how do we structure and how do we have a new business development that really elevates the brand and put us on the next pedestal. So that they can get to the next level and when like that gets a T. G to the next level because it's such an important customer.
Such an important consumer and people see that at the right place and you're seeing are products, you know position really correctly. It just brings with additional brands. So really pleased with it from a digital standpoint, you know that that's a really big with force you know if you think about you know the work we've done from the Yorkie standpoint, and all the work that you know is Austin and Joe.
On the team has done on that it's just been exemplary and can't think the team enough, but you know I like an earlier when I said on a scale of 10, you know we would have to when I talked about some of the other stuff. We're just at the very beginning of the digital <unk> really accelerated results as you heard today you know on our.
<unk>, Arkansas Sumer is finding a phone line, they're finding us with our digital partners, they're finding us on our own digital dot com or creating much better platforms for them to go ahead and book with Us and shop with US you know, we think that we have easy product you know most consumers know their pants size most consumers know they're short size on the accessory.
That we sell so easy you know easy sell from that standpoint, but I think the keep on this but you know when you go to a site now versus two years ago, you're just seeing a much better product from both wrangler and Lee and I think that's really huge one and then what you're seeing if people were being driven there because of the incredible demand creation program that we're creating you know the heat that we get from J Lo Fi and on the cover of it.
Style magazine, all organic which is terrific you know the campaign with Georgia May Jagger for women's line with Wrangler has just been it's been off the charts successful we've been really pleased with it and I think it really has to do with the talent you know I would go as far as to say, it's the talent that was hired and promoted within the organization. So the band creation teams that both languidly.
Just you know the terrific and the work that they're doing is really terrific and you know, we're creating brand heat on the company pretty significant way. So really please and I think if I could finish with this is how it all supposed to get it right you've got new business development, you've got a digital component demand creation with our innovation and he's got all of that coming together all of it infinite.
Infancy stages, and it's really creating an exciting opportunity for contour. We're just at the beginning of that you're starting to see we've tried did the horizon too.
Really really nicely with land on the plane amount of time for it allows them to the to take off.
Thanks, a lot.
Thank you.
Our next question is on the line of samples.
<unk>. Please go ahead with your question.
Alright. Thank you for taking my questions I've got a couple one just on your on supply chain I mean, what.
You're not getting what per cent of your supply chain has come in at all from the North America and not premium package advice for the court right now.
Yeah. So so sandwich interest in good morning, you know and we talked a little bit about you know our global production roughly a third is in this hemisphere that is really serving this hemisphere and and certainly you know our plants in in central on.
Central America, you know are really servicing there's hemisphere again, two thirds of our production is source and certainly serves not just the U S, but but Asia and Europe as well and certainly you know obviously, Sam you know U S is about 75 per cent of our business. So so.
We have a pretty fair portion that is coming through with our own internal manufactured product in this hemisphere and certainly that's helping us mitigate some of the broader supply chain.
Challenges that you're hearing from from others in the peer set.
Alright, and then secondly.
<unk>.
You're you're increasing your marketing spend.
That sounds like it's pretty much for focus on digital.
I'm doing that and how much of that digital marketing do you think.
Helped the first quarter and how are you thinking about that within your guidance on the back half I have.
One more question.
Yeah. It's a great question, Sam I mean, I know when you look at this business you know we've been traditionally under index as you think about demand creation as a as a percentage of revenue sub five five per cent of our revenue has been spent historically on advertising. So we've talked.
Since this band about really wanting to invest back behind these brands Uhm you certainly saw it start to do that a little bit more when we amplified in the fourth quarter. Some of the demand creation certainly drove strong results around holiday and into the first quarter today with the results and we certainly see an opportunity to.
Continue to invest there and we're gonna drive that digital is Scott mentioned is really a critical piece, but it's not exclusively digital it's really talking about the brand and you're seeing really strong momentum obviously with both brands gaming chair in the marketplace and and really.
All of that is fueled and funded as you know Sam by that gross margin expansion. That's what creates the oxygen gives us the ability to invest back into the brands, while improving operating margins as well and and that's the secret sauce from our side.
Thank you.
Our next question is coming from the line of Jim Duffy Sniffle. Please proceed with your question.
Thanks, Good morning, Hi, Scott I, Russia, <unk> H M. I D M How're you doing.
Well. Thank you I wanted to start talking on the gross margin really Super progress really strong margin in the first quarter. The rest of it sounds like some give back in the second quarter I'm trying to think as we look towards the second half of the year is there any reason that that first quarter gross margin wouldn't be sustainable.
Is there some absorption of fixed costs to average from two to manufacturing or or what are some of the other things.
Which would pressure the gross margin relative to what you were able to deliver on the first quarter.
Yeah. It's a great question. Thanks Jam appreciate it first quarter was was really a milestone for us as you know we we've had three consecutive quarters now with triple digit margin improvement you know north of 46% Uhm was our strongest quarter to date in Q1.
One by nearly 300 basis points. So yeah, a number of drivers structurally really driving that as we talked a little bit about you know that favorable channel mix, you know quality of sales initiatives, you've seen as to undertake as well as product cost enhancements. We continue to focus on and then certainly that first quarter uhm.
Also benefited by some customer and product mix lower inventory provisions versus prior year, and certainly higher production volumes versus prior year, which were impacted by COVID-19. So yeah that gross margin expansion remains of critical focal point forest Jam and really enables asked you in bed.
Back into the brands, while improving the operating margins as we talked about you know as we think about this unfolding into the balance of the year you know certainly as we go into the second quarter. You know there will be some some margin impact M.
E R. P implementation activities with the cutover Uhm. So we said that the gross margin expansion wouldn't be linear on a quarter to quarter basis, and then as you think about the back half of the year you know as we've talked about on the call here, Jim you know certainly a lot.
Uncertainty still out there with with supply chain issues, and we're just being prudently conservative as we're thinking about the balance of the year.
And and making sure that you know we're dialing in the margin appropriately, but but obviously when you feel good about what we're seeing to raise that guidance on the gross margin again for about 150 to 200 basis points improvement up to the 230 to 270, we talked about this morning.
Okay, Great and then Rusty I wanted to ask about he bit margin and flow through the guidance on pause you that margin back above priester levels Uhm I understand your Ah reinvesting southern marketing can talk about what the demand creation budget, that's implied in that guidance.
<unk> you mentioned.
I don't want it to get it above the five per cent level or would you see it this year and then related to EBIT margin starting upside in the first quarter I'm wondering for investors is there any sort of a framework to think about like when you have upside how much of that gets passed through to investors versus reinvested in the business day.
Yeah. It was at two thirds one third one third two thirds anything you can say on that would be helpful.
Yeah, I'm certainly will go into the SG&A in our thoughts on on how to invest in and demand creation, a little bit more of an investor day here in a couple of weeks jam, but maybe maybe just a couple of points to highlight on your questions. You know you you've heard us talk from from the very beginning about earning our way into these investments.
And you're saying that materialize with that expansion on the gross margin side, and and again really creating that oxygen to reinvest back into the business. You. You saw it started to do that uhm, a little heavier than the fourth quarter of last year and we're gonna continue that this year I won't get into specifics <unk> targets around you know adverse.
Tithing as a per cent of revenue this year, but again, we really liked the momentum on the brands and really investing behind the brands you know they've been under index or Underinvested in historically and that's a key part of our thesis here is contours the ability to really invest back behind these brands and drive growth.
And certainly you'll see a lot more about that on the Investor day here in a couple of weeks, but I appreciate the question Jim. Thanks.
Thank you at this time I free chinned of a question and answer session I'll turn the call over to Scott extra for closing remarks.
I wanted to thank all of you for joining us today and certainly appreciate the engagement and the support of our company and a great question, because we had today from Tuesday. So thank you very much and I also wanted to make sure that all of you can join US on may 24th for Investor Day, We'd love to have your older look forward to a great day together and thank you again for your participation today have a wonderful day everyone.
X.
Thank you have on this will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.