Q2 2021 Kontoor Brands Inc Earnings Call
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Greetings and welcome to the current core brands second quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Eric Tracy Senior director of Investor Relations. Thank you you may begin.
Thank you operator, and welcome to contour brands second quarter earnings Conference call.
Participants on today's call, we will make forward looking statements. These.
These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ.
We'll open the call for your questions. We anticipate this call will last about 1 hour.
Scott.
Eric and thank you all for joining us today for momentum comp for experience to begin the year continued in the second quarter with results coming in well above our expectations.
Our performance in the quarter once again illustrates the power of the K television model, which affords us the opportunity to not only deliver on our near term goals, but also to continue to invest in the strategic gross catalysts outlined at our recent Investor Day [laughter].
A huge thank you to our colleagues all around the world and a special call up to the teams engaged in the implementation of our ERP platform during the quarter as their incredible efforts are helping to transform our organization.
Hopefully you had a chance to attend our recent virtual Investor day, where we communicated our strategic vision for Catalyzing growth over the next 3 years during horizon won the optimized our model and set the foundation for growth as.
As we execute on horizon, 2 strategies, we expect to leverage investments to drive more sustained profitable growth.
We expect to accelerate revenue, primarily driven by focusing on the following growth catalysts.
First enhancing and accelerating our core use wholesale business.
Second elevating our day to see and digital ecosystem for.
<unk> expanding the brands internationally, particularly in the China region, and fourth diversifying our product mix through category extensions, including.
Outdoor <unk>.
Workwear and T shirts.
And to support this growth, we continue to invest behind critical tsi accretive enablers, including.
Enhancing demand creation platforms scale.
Scaling product and manufacturing innovation with sustainability and ESG as our guiding tenant.
Unlocking efficiency and productivity gains through the implementation of our global ERP and digital infrastructure and finally, leveraging our world class talent to build a purpose led high performance and increasingly growth minded culture and.
And we have increased optionality within our capital allocation strategy, which is reflected in the $200 billion share repurchase program, we announced today.
Let me know share some highlights from the second quarter that demonstrate how these investments come to life and how our strategies are working.
Overall reported revenue increased 41% year over year or 37% in constant currency Rosten will take you through some of the puts and takes in a bit but I would note that our top line results exceeded the our internal expectations.
Most importantly underlying momentum of the business continued to strengthen as revenue growth sequentially accelerated from the first quarter.
With broad based performance across our brands channels and geographies.
In the us despite the timing shifts associated with the ERP implementation somewhat tempering our growth rates, we continue to see improving trends with both brands posting strong growth during the quarter compared to last year.
Our brands continue to benefit from the incremental investments, we are making within talent.
Marketing.
Product innovation and design.
All of which support elevated pricing and product, allowing us to win and our largest channel.
U S wholesale.
During the second quarter, we continued to elevate are branded demand creation platforms influencers, such as Georgia May Jagger nominally connect the wrangler brand with the younger female consumer, but also fuels significant brand heat across distribution channels.
Another Great example of our enhanced marketing efforts is wranglers recently announced collaboration with iconic surf brand billable the Billabong and Wrangler collection launched in late July in anticipation of the back to school season with a second fall inspired installment planned for September of 2021.
The collection celebrates the best of both brands and is the exciting result achieved when you put a western spin on a vintage surf.
We launched with a heavy digital first approach as well as paid social influences and amplified PR.
We are estimating over 95 million social media impressions around the launch and this colab continues to highlight are diversifying distribution with.
With products sold on branded sites, and and Billabong stores and other specialty channels.
And at least during the second quarter, we launched a collaboration with street or brand. The hundreds this colab masterfully blends the past with the present to achieve the perfect balance of classic workwear with a street, where twist across denim Ts hoodies and outerwear the collections are selling exclusively through.
The brands digital platforms as well as the hundreds la store.
After the successful debut a second collection is scheduled to drop later this year.
And the pipeline of collaborations for both brands is only getting stronger we look forward to sharing some incredibly exciting all holiday partnerships with you in the coming quarters.
From a channel perspective, we continue to see strong returns on our investments and transforming our digital ecosystem as evidenced by our second quarter performance.
Q2 saw great growth over last year, but was even more impressive compared with 2019 with both global at U S owned dot com, increasing more than 80 per cent and digital wholesale increasing more than 100 per cent.
As we outlined at our Investor Day, we remain highly under index relative to our peers in this accretive channel and we will continue to distort investments to drive towards our goal of 10% penetration over the next 3 years.
We also continue to benefit from investments in new categories, such as outdoor workwear and T shirts with nearly $150 billion in total addressable markets. These categories represent significant opportunity for the incremental business the.
The new categories also augment and diversify the collection beyond our core denims bottoms business and do so in a highly organic way.
Within outdoor and our Atg line, we've established a brand positioning and value equation that is a true white space in the market and we are beginning to scale distribution with an outdoor specialty in sporting goods channels, both domestically and abroad.
As examples we are excited to announce 2 great New partners for Atg. We are currently testing with Academy sports in the us and interest sport in Europe, both brands enhancing incremental points for distribution for the Atg lie.
We also have some exciting new sports specialty product introductions on the horizon. This includes our wrangler angler line focused on the rapidly growing fishing market that is expected to launch in the coming quarters.
M T shirts, a 100 billion plus addressable market. There are 3 key areas, we are aggressively pursuing <unk>.
Logo lifestyle and license teeth teeth are a natural category extension with a pair of jeans and we're just getting started and realizing the significant opportunity ahead of us.
Leveraging the strong brand heritage of both the Lee and Wrangler brands. We believe there are clear pathways to create great product that will resonate with current loyalists and attract new consumers. We recently, 1 new T shirt programs with both Wrangler and Lee with a key domestic retail partner, including selling and over 1700.
<unk> with store expansion to come and 22.
Our work where business is also experiencing great momentum with potential for strong expansion in the quarters and years to come in the specialty in farm channel. We continue to see strong organic growth opportunities for our wrangler wigs product line. These retail segments have shown resiliency throughout the pandemic and we believe we can continue to scale.
New products for men and women and this tier of distribution.
And finally, we expect to significantly increase our recently launched Wrangler work where program with the major U S. Retailer. This year in fact, we will more than double our door count with this key domestic partner from spring 21 to fall 21, taking us into over 3300 doors.
This is a great Testament to how additional investments in category expansion are generating incremental business development opportunities for our brands.
We expect growth from our op outdoor work and teeshirt categories to add over $200 million in revenue for contour over the next 3 years.
And finally, let me turn to how our investments and geographic expansion played out in the second quarter. We continued to see improvements despite an uneven macro environment or European business saw significant year over year improvements up over 250 per cent in constant currency compared with 2020 and over 40% in constant cough.
RNC compared with 2019.
Driven by digital and timing of shipments ahead of our European ERP go life.
While we expect conditions to remain difficult in Europe, the evolution of our digital platform and new business development programs should help mitigate near term headwinds and position us for success in the region over the longer term.
And in China are ongoing strategic investments continue to yield great results with reported second quarter revenue, increasing 20% year over year end up 10% in constant currency.
Importantly trends in the region accelerated throughout the quarter largely dictated by some phasing within wholesale digital in the region remained extremely strong up 33% for last year, it's 67% 2019 on a constant currency basis.
With a premium lifestyle offerings strong collaborations and partnerships with key local influences. The leibrand continues to build on its leading denim position in the region.
And the launch of the Wrangler brand in China continues to gain momentum exceeding our expectations to date building momentum throughout the quarter and setting the foundation for scaled growth overtime.
Before I hand, it over to rest and let me close with a few comments about the balance of 2021.
We continue to operate in a very fluid and uncertain environment that includes restrictions in select locations inflationary pressures and global supply chain disruptions and that's what we have repeatedly said we are not immune to these macro economic challenges. However, as we highlighted at Investor day, our operating model has been <unk>.
<unk>, we believe consumers migrate to trusted quality value oriented brands like Wrangler and Lee in times of uncertainty and in fact, we continue to see solid momentum across both are brands. Accordingly, we intend to distort and amplify brands enhancing investments in the second half and areas like.
Demand creation.
Digital and international expansion to accelerate momentum in 2022, while leveraging our differentiated global supply chain to chase incremental demand and mitigate or minimize global disruptions where possible.
We believe contour resides in a unique position of strength as are accelerating fundamentals, coupled with increasing optionality of our capital allocation strategy provides a powerful combination that should unlock significant value for our stakeholders Ruston.
Thank you Scott and thank you all for joining us on today's call.
Scott mentioned, we are very pleased with our strong second quarter results that exceeded our expectations and I look forward to walking you through the details shortly.
Before we dig into the quarter, though I'd like to briefly recap 2 key financial strategies that we outlined during our Investor day.
First we reviewed in detail, what we refer to as our virtuous cycle specifically.
Specifically this refers to our strategy to grow revenue and expand gross margins to create the oxygen in our P&L and allow us to distort investments and our brands and capabilities to drive future top line growth, while delivering enhanced operating margins.
Our second quarter is a powerful illustration of how we are continuing to execute on this strategy to drive meaningful improvement in our fundamentals.
Delivering near term performance, while investing for long term growth is a cornerstone of our financial strategy.
Accordingly, I would like to provide an update on 1 of our key investment areas are global ERP, an I T infrastructure project.
On our first quarter earnings call, we announced that we successfully went live early in the second quarter in our largest region North America.
Today I'm pleased to announce that we also successfully went live early in the third quarter in Europe are third and final region.
While still early days, particularly for Europe. These implementations represent significant milestones for contour and I want to thank the organization for their tremendous efforts on these major accomplishments.
These investments have both short and long term implications on our operations and results.
In the short term our quarterly cadence was affected by timing shifts in shipments in advance for the implementations.
As expected this resulted in net transitory pressure during our second quarter with certain north American shipments shifting into the first quarter, while certain European shipments shifted from the third to the second quarter.
Since North America represents roughly 75% of our global business. The net pressure was most pronounced on our second quarter results, but is not expected to have an impact on the full year.
In the long term the investments will enable us to run our operations globally as opposed to regionally, while delivering the efficiency improvements in phase 2 costs saves that we have previously outlined.
The investments we are making in the business, including technology support are capitalizing gross strategy to deliver long term sustainable and profitable growth.
Investments was scale thoughtfully throughout horizon too in areas, such as digital innovation and demand creation to support growth and underpenetrated channels geographies and categories.
Based on early proof points, we will continue to look for ways to distort and amplify investments and these tsi accretive areas in the quarters ahead.
The second key financial strategy I want to highlight is our enhanced capital allocation optionality.
And horizon, 1 we focused on 2 foundational capital allocation priorities delevering, the balance sheet and paying is superior dividend.
Accordingly, we made considerable progress in paying down debt to help optimize our capital structure.
In terms of the dividend as superior dividend will continue to be a key element in the contour investment thesis.
As we pivot to horizon too we have the ability to add powerful optionality to augment our organic foundational capital allocation elements.
Strong fundamental performance has been and will continue to be an increasing component of our mid teens plus targeted tsi's are fuelled by the investments we have discussed today.
Over the next 3 years, we are expecting approximately 1 billion in cash from operations that will enable us to support a multi faceted capital allocation strategy.
Accordingly, as Scott mentioned and you saw on this morning's release, we announced a $200 million share repurchase program as a powerful example of this optionality.
In addition to offsetting dilution, we believe share repurchases provide another attractive vehicle to return cash to shareholders through opportunistic buybacks pending market conditions.
Combined with improving fundamentals and our superior dividend, we remain committed to strong total shareholder returns.
We are pleased with how the virtuous cycle within our model is evolving and are excited about the capital allocation Optionality materializing in the early days of horizon too.
Now, let's turn to our second quarter review I will focus my comments on key highlights and encourage you to refer to this morning's release for additional detail on the quarter.
Also given the impacts COVID-19 had on prior year results I will provide select references to the same quarter in 2019 for additional context where appropriate.
Beginning with revenue global revenue increased 41% on a reported basis and was up 37% in constant currency compared to the same quarter last year.
Even with the controlled ramp up of our ERP post go live and timing shift of shipments discussed earlier, we saw topline upside to our internal expectations.
Strength in the second quarter revenue was also partially impacted.
By the strategic enact actions announced in the fourth quarter of 2020 to rationalize our Vf's outlet fleet in the U S. Discontinue the sale a third party branded products and all domestic outlet stores and transition to a new license business model in India.
Combined these actions represented approximately 3 points of headwind in the quarter.
Compared to adjusted revenue in the second quarter of 2019 global revenue decreased 19% on a reported basis due to these factors and continued COVID-19 impact in select markets and channels.
On a regional basis for the quarter U S revenues increased 27% compared to the same quarter last year growth was driven by wholesale new business development wins and continued strength in our western channel.
In addition, we drove continued strength in digital as Scott mentioned are digital penetration remains underindexed and we will continue to amplify investments in this important channel.
These investments are yielding strong returns.
Despite being adversely impacted by our North American ERP cutover activities.
U S digital wholesale and U S owned dot com increased 49%.
And 28%, respectively compared to the same quarter in 2020.
U S digital wholesale and use 1 dot com increased 106% and 89% respectively compared to the same quarter in 2019.
International revenues increased 106% on a reported basis and 87% in constant currency compared to the second quarter of 2020.
Growth was broad based across all regions aided by easing lockdowns and timing shifts in Europe.
Continued growth in China and strength in our digital businesses.
Turning to our brands.
Global revenue of our Wrangler brand increased 24% on a reported basis and 22% in constant currency compared to the same quarter in 2020.
Wrangler U S revenue increased 14% driven by strength in our western business, new product categories, such as outdoor and female as well as digital with digital wholesale and owned dot com, increasing 82% and 25% respectively.
We are particularly pleased with the strength in our western business, which continues to carry strong momentum from the first quarter with second quarter revenue up 42%.
Wrangler International revenue increased 137% on a reported basis and 115 per cent in constant currency.
Digital new business development wins, with our Atg program as well as easing lockdowns and timing shifts in Europe contributed to the strong growth in the quarter.
Compared to adjusted revenue for the same quarter in 2019 global Wrangler revenue decreased 14% on both the reported in constant currency basis.
Leibrand global revenue increased 105% on a reported basis and 96% in constant currency compared to the second quarter of 2020.
Lee U S revenue, which was more adversely impacted then wrangler by a retail door closures in the same period in 2020 increased 118%.
Driven by wholesale new distribution wins, and our digital businesses with digital wholesale and owned dot com, increasing 3% and 33% respectively.
Lee International revenue increased 91% on a reported basis and 73% in constant currency driven by digital.
In addition, the quarter benefited from the easing of Lockdowns on a brick and mortar stores and timing shifts due to the ERP go live in Europe.
Compared to adjusted revenue for the same quarter in 2019 Global Lee revenue decreased 15% on a reported basis and 17% on a constant currency basis.
And finally from a channel perspective.
We saw continued broad base strength compared to the same quarter in 2020.
On a reported basis U S wholesale increased 29%, while non U S wholesale grew 100% in constant currency.
Global branded DDC increased 48% in constant currency with 1 dot com up 33% compared to prior year.
Now on to gross margin reported gross margin increased 760 basis points to 46.1% of revenue compared to the same period in the prior year.
Favorable channel customer and product mix benefited the quarter as well as strength in the accretive businesses such as western.
We continue to see structural benefits from the fundamental drivers we outlined at our Investor day.
Mix shifts to under index, and highly accretive channels and geographies.
Proactive supply chain initiatives.
And AUR mix supported by innovation and select pricing.
As you would expect.
Given compares the second quarter also benefited from certain discrete prior year items.
As we discussed during the second quarter last year gross margin was negatively impacted by COVID-19 related headwinds, particularly from downtime in our own manufacturing.
In the current quarter leverage of our own manufacturing relative to these 2020 impacts favourably benefited the second quarter by 370 basis points on and adjusted basis.
Given these transitory distortions I want to provide additional context relative to 2019, which more clearly highlights the progress we have made against our gross margin strategies.
Relative to the second quarter of 2019 gross margin increased 750 basis points on a reported basis for 610 basis points compared to adjusted gross margin driven.
Driven primarily by the fundamental factors previously mentioned.
Now onto SG&A.
Adjusted SG&A increased $39 million on a year over year basis to 168 million incur.
Increased demand creation digital and higher volume related variable expenses were partially offset by better fixed costs leverage on improving revenue and lower bad debt expense than in the prior year.
Adjusted earnings per share was 70 cents compared to a 22 cent loss in the same period in the prior year and compared to 96 in the second quarter of 2019.
Now turning to our balance sheet set.
Second quarter inventories decreased $30 million versus the prior year to $403 million or down 7%.
The year over year decline reflects the fourth quarter of 2020 actions to reduce the fleet and discontinue the sale a third party branded products and our domestic outlets.
As well as the business model change in India.
Excluding VFR outlet in India inventory increased approximately 4% compared to the prior year in support of higher projected demand.
We made $25 million in debt repayments in the quarter and finished the second quarter with net debt or long term debt less cash of $615 million and $176 million in cash.
Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the second quarter was 1.5 times within our targeted range of 1 to 2 times.
And as previously announced our board of directors declared a regular quarterly cash dividend of 40 per share payable on September 20th 2021 to shareholders of record at the close of business on September 10th 2021.
And now onto our outlook.
Scott mentioned earlier, we are not immune to macroeconomic challenges, including recent global supply chain issues experienced in most all industries. However.
We believe are diversified global supply chain offers of this state competitive advantage in the scale and speed and we remain focused on being agile and responsive while working to mitigate disruptions.
Our brands have momentum and are winning in the market and we intend to continue amplifying investments in the back half to support topline growth in 2021 and 2022 day.
Best position for the accelerating demand, we see we anticipate select elevated transitory costs such as free in the back half of 2021 day.
These transitory costs have been calm contemplated in our increased gross margin guidance.
Based on the strength of the second quarter and momentum of and demand for our brands. We are raising our fiscal 2021 outlook for revenue gross margin and adjusted EPS.
Revenue is now expected to increase in the mid teens range over 2020 to 2.39 billion to $2 for $2 billion as compared to a low teens range in the prior guidance, including a mid single digit impact from the Bf's outlet actions in India business model changes.
Gross margin is now expected to increase by 330 to 380 basis points to 44.5% to 45% as compared to 230 to 270 basis points in the prior guidance.
The increase reflects higher anticipated structural growth and more accretive channels, such as digital and international.
SG&A investments will continue to be made in our 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 to support second half of 2021 revenue and accelerate momentum for 2022.
These increases will be partially mitigated by ongoing tight expense controls and sustained structural post pandemic cost containment initiatives.
Adjusted EPS is now expected to be in the range of $3 and 90 to $4 per share as compared to 370.380 per share in the prior guidance.
This EPS guidance does not assume the benefit of any share repurchases.
Before closing I think it is important to consider are updated fiscal 2021 outlook in context of our historical results and our Investor day projections.
Relative to 2019 are updated fiscal 2021 outlook at the midpoint of our ranges imply.
Revenue is projected to be at or slightly higher than adjusted 2019 revenue levels. Excluding the mid single digit impact from BF outlet in India.
Gross margin is projected to be up nearly 400 basis points compared to adjusted gross margin in 2019.
And adjusted earnings per share is projected to be above 2019 levels, even with amplified investments and SG&A.
Finally, our updated fiscal 2021 outlook puts us well on track if not ahead of plan to deliver on our 3 year financial targets outlined at a recent investor day.
In closing I would like to reiterate Scott's earlier remarks.
We are very confident in our team and business and are pleased as we entered the second half of 2021 with great momentum.
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.
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1 moment, please for recall for your questions.
Our first question was coming from the line of J Salt with UBS. Please proceed with your questions.
Great. Thank you. So much you just obviously raised guidance today and the tone on some of the things you mentioned sounds like you have confidence.
And that raised guidance, we can just talk us through a little bit more maybe elaborate on what's giving you confidence to be able to raise the guidance today and looking for advice you might be ahead of your Investor Day plan.
Hey, Jay how are Ya Scott good morning.
Thanks for the question.
J when we look at it goes goes back to our strategy from the very beginning on how we started this and the amplification of the brands we knew and the reason we wanted to spin if we had such a great opportunity ahead of us and these brands for Super powerful, but they hadn't been invested in will now we're starting to see with this incredible investment that we're making supported by some really strong.
Demand creation programs my hat's off to our global demand creation teams and we're starting to see the brands really come to life. What I'm. Most pleased with is how we're communicating with the consumers around the globe and how that for 2 way communication, that's really taking root and we think there's a lot more there as far as the future.
There are some uncontrollable from the background you know book you saw how well we handle that during the pandemic, which I thought was really important we've got an incredible playbook and we're really happy about what's happening here going for we've got some visibility in the future from a business development standpoint from a category extension standpoint, geography. So that is all reflected in our guidance but.
Just to sum it up as we wanted to take the company public because we knew we really has some special in these brands net starting to come for life as we play out our strategy.
Understood maybe if I can ask 1 more just on that point you mentioned the virtuous cycle of gross and company seems to be humming along that demand creation. Scott that you mentioned was a strong gross margin games.
It sounds like you are talking about total.
The top line could really accelerate top on grocery to make an accelerant over the long term and even in the second half of the year is that fair and maybe just give me you can connect the dots restaurant hobbies demand creation investments are really going to whether it's category expansion or new business brands like how that's really going to drive a top line.
To appropriate above maybe what we've seen in the past.
Yes, good morning, Jay addressed and I'll go ahead and take that Yeah. You absolutely are correct on the virtuous cycle, it's something we talk about quite a bit.
Strategy really has to start to grow that top line revenue, which you have seen as do over the last several quarters and expand gross margins to create that oxygen and the P&L and so you've seen some some pretty significant gross margin gains as well with some of the efforts we've taken to the Avi obviously distort an accelerated gross.
In a more accretive channels quality of sales restructuring actions and that's creating that oxygen and the P&L, that's really allowing us to distort investments in the brands and capabilities of Scott talked about earlier to drive that future top line growth, while delivering the enhanced operating margins and I think that's really <unk>.
And you've heard us talk a lot about earning our way to investing into these brands.
And where is clearly doing that and you are seeing the investments start to manifest and I think this quarter's results are a great illustration of kind of how that virtuous cycle comes to lie.
Thank you our next questions come from a line of Erin Murphy with Piper Sandler. Please proceed with your questions.
Great. Thank you. Good morning, I was hoping you could speak a little bit more about the shelf space game for years to carrying across a number of new categories and retailers and if you could talk about anything at some of these new program and then a follow up for Roxanne I guess relatedly.
Why would that not imply our better than at 2 per cent back have payless guidance by running the math for at mid teens that feels like the back half around 2 per cent. So just curious smith from it or sell and why that would not be higher.
Good morning, and I'll I'll go ahead and start we're really pleased Darren 1 other things as the brands hadn't had a chance to go ahead and really flex what they can do and the consumer has really shown us a really big opportunity for us to go ahead into different categories channels and 1 of the things that we did is from the very beginning we identified several.
Categories outdoor work, where a tee shirts that are really fundamental to what we do and we have seen that as we've gone ahead and built in this is a great compliment to our teams built incredible product at a really great value with a trusted brand and brought those to these different categories that we've seen really good acceptance that we seem really good shelf shelf space.
As you mentioned acceptance and that has been translating for awhile as we've talked about and looked several for our last calls, but now it's really starting to take hold and we talked about all for the last couple of calls with some big programs internationally and domestically and now we're just layering off with some really key customers like Academy here in our sport in Europe isn't workwear was a big.
[noise] topic is investor day really important for us from a category standpoint, we had a customer that was going to come in with almost 2000 doors and because the program is so good for the product is so good and it's such a great value, they're going to come in at 3300 doors in the fall. So another great example of how we're facing that in and then we've talked a little bit from a T shirt standpoint, a big 100 Bill.
Category, which compliments, our bottoms denims business really well for both genders globally, a category, we should be stronger in with hired a really good team. There were really excited about that and we're going to address that several different categories in areas within T shirts, and we've won a couple of big programs here recently, which were really pleased about 1700 plus stores that will.
Happened, both fall and spring. So as you can see a lot of concentrated effort into these categories that we hadn't been in before but are really complementary to what we do is accompany.
Aaron Good morning interest into I'll take the second part of your question about the.
Sales improvement in the back half you are correct in terms of when you look at the Guy that we issued this morning. It implies a low single digit back half improvement relative to 2020, but I also want to highlight you have to take into consideration as well the strategic exits that we made.
In the fourth quarter of 2020, specifically to to reduce the VSO fleet and half discontinue the sale of third party branded goods and all of our domestic outlets and then transition the.
India business from direct to a to a licensed model all of those are weighted disproportionately a little bit more towards the back half because clearly.
<unk> has most impacted last year is it related to Covid and so you need to take that into consideration net mid single digit annual impact from those strategic exits as well a little bit more weighted on that back half hopefully that helps answer your question.
Thank you. Our next question is from from the line or Adrian <unk> with Barclays. Please proceed with your questions.
Good morning, everybody and congratulations great quarter.
Scott So I always like to ask you about sort of high level Tran.
Levis price and <unk> with their denim offering the strength. This morning, I think I've got exactly your price point for uncle reporting.
Blow out numbers over 19, and so how are you seeing back to school denim shaping up and then how do you foresee it as we go into kind of the back half of the year more importantly, how long can that trend lost.
And then for rest and.
Really wanted to focus on.
You talked about modest inflation may be hitting the AUC, but then the gross margins are so robust it seems like either your guest your supply chain working for you. So any commentary on how you're going to manage that.
And then remind us that the far east really is not impactful to you in terms of sourcing. Thank you so much.
Alright, I'll go ahead and start Adrian good morning, Thanks to hear from you. So.
Let's start with let's start with back to school I have a school age child at home and we haven't bought school both for him for 2 years is 40 pounds heavier.
There is there's no way he can fit into in school clothes for 2 years ago. In addition to the fact of styles and trends have changed that was 2 years. So we think is really from pent up demand because kids just aren't going to want to go back for both they were in and they aren't going to fit those and there was no school back to school season at all last year. So we believe that's going to be real.
Good for both of US the industry and also our consumers and our customers. So that'll be a good moment in time for US all as we returned to normal as far as denim goes you've seen our survey that we put out.
A little while ago, and we think that there is a positive just structural changes and keeping the globe in the casual location and we've seen all the major metropolitan markets across the globe, whether it be London, Paris, New York City, San Francisco people are moving to Casuals Asian as the worker comes back into the <unk>.
Office, even if it's flex environment doesn't matter, they're wanting to be casual like they were at home. So they're reinvesting in a casual wardrobe, which I don't believe the cyclical I believe it's here to stay for the long term going for and then I would also complement that with we like where we are and where we're positioned as a company because if you think about the.
<unk> of our strategy and we've only been around now as a public company for a shade over 2 years, we've been able to go ahead and build these great categories like outdoor workwear and T shirts that are very complementary that we believe or at the very beginning stages of the powerful categories for us for the company over the very long term so as I think about.
Future I think about denim I think about the categories that we've entered and the opportunities that we have in front of us I am really really exciting.
Excellent and Adrian interest in morning.
I'll go ahead and take the second part of your question first let me touch upon kind of the last bullet you mentioned, which was kind of party sourcing. So just as a reminder for everyone.
Our supply chain or global diversified supply chain, we really feel it is is differentiated for us and does offer a competitive advantage with a little over a third of our global production internally manufactured in this hemisphere in approximately 2 thirds.
Source out of.
Overseas predominantly out of Asia.
As we think a little bit about the second half gross margin to your question.
Clearly have focused on gross margin expansion, it's an important part of that virtuous cycle that you heard me speak about a minute ago with J, just really creating that oxygen to be able to invest back into our brands and over the last 4 quarters, you've seen triple digit growth from us and that expansion and really on the fundamental structural beige.
Mrs being driven by that distorted growth in those accretive channels that geographies and categories, we've talked about as well as pursuing quality of sales and restructuring actions and we anticipate those structural benefits will continue into the back half of 2021 and beyond.
However, we do anticipate they will be moderated in part by some of the elevated transitory cost to change some of the incremental demand that Scott talked about and we talked about earlier.
Certainly the global supply chain disruption is is well chronicled and as we've stated today and previously.
We're not immune from that but we are certainly.
Pursuing the demand and the momentum that we've got behind our brands and our second half gross margin outlook is taken those factors into consideration your last point was really.
About inflation and as we think about moving for next year, we mentioned a little bit of add Investor day that we anticipated that 2022, and 2023 gross margin improvement to be modestly more weighted towards 2023.
As some of these gross catalysts that we're investing in like digital an international opportunities really scale.
And so we're really proud about the guidance.
Sorry, the gross margin, we're delivering this year and would just draw you to sort of the conclusion in my remarks at the gross margin in our outlook here is projected to be up nearly 400 basis points compared to adjusted gross margin in 2019, So clearly a focal point for us and will remain so going forward. Thanks Adrian.
Thank you. Our next question is coming from the line of Bob durable with Guggenheim Securities. Please proceed with your question.
Hey, guys. Good morning, Gratulation on my Schwark. Thanks, Bob.
I guess I have 2 questions. The first 1 is with the announcement of the share repurchase program.
Does that imply you just in the near term that M&A is off the table that you talked a little bit about your capital allocation.
I'm just wondering if you could maybe address that as you think about horizon 1 in the horizon too and then I think the second question I have I'm not sure. If you gave it gross but some of the buckets and this gross margin expansion I don't know if you could sort of break it down a little bit more just around where you see how it delivered in the second quarter.
<unk>, but also when you look at this outlook for the rest of the year the biggest buckets et cetera will be helpful. Thanks.
Hey, Bob It's Scott good morning, Thanks for the questions.
From from the share repo standpoint, I think it all boils down to is we talked about and the Investor day, we're creating a $1 billion in cash over the next 3 years. So as we've talked about from an optionality standpoint, as we phased into Verizon to like we've talked about it's really about optionality and we think it's all in and equation and that we can do multiple things so.
We're really happy about the share buyback, we think that's just a component of our allocation here as we go for it's part of our options and everything is still on the table and will be as we move forward and we will continue to update the team and everybody going for it so we feel real good.
Good morning, Bob I'll take the second part on the gross margin in the second quarter and you've certainly seen this trend continue for the last several quarters as I've talked about this was our fourth consecutive quarter with with triple digit margin improvement.
Has been a focal point for us certainly focusing on those structural drivers really being favorable channel mix geographic and product mix.
Those are kind of the largest drivers I would say Bob.
That.
And certainly as we are continuing to invest in these.
Under index categories and geographies as we've talked about we see that continuing.
Certainly.
Q2 did benefit from some discrete items such as the downtime youll.
You'll recall last year, we modified our production in our own facilities to account for the Covid impact last year, so roughly half of that.
Prove months in the second quarter relative to last year was kind of due to discrete items last year.
But but certainly the gross margin expansion remains.
Focal point for us, it's critical and just enables us to invest back into the brands as you've heard me mentioned multiple times. This morning. So.
Really really happy with the delivery on on queue, too and allowed us to exceed our expectations in the quarter.
Yeah.
Thank you. Our next question is coming from the line of Sam Poser with Williams Traitor. Please proceed with your questions.
Good morning, Thank you for taking my questions just.
I want to follow up on on the marketing spend I guess and the gross margin, but really in the quarter did you spend more in your demand creation investments than you anticipated.
Did you just or did you get a better.
Measure the return on those investments and then in the guidance of the increase investments from the back out for the year. What time of return are you have you are you expecting on that.
Yeah, Sam Good morning interest and I'll go ahead and take that certainly we want to talk to the marketing spend in the quarter, but make it a little bit more general comments for Ya.
Certainly you know Sam with with all the engagements we've had.
Total shareholder return driven organization and as we look at investment Scott Nigh that we can make.
And of the brands and end of the business and capabilities, we measure everything that we do.
On a GSR return basis on both the near term in a long time perspective so.
Certainly we've been distorting investments into things like digital.
From a marketing perspective and.
And I think you certainly saw the results of that play out this quarter.
We talked a little bit about the growth in the quarter, but on a 2 year stack basis, those digital wholesale on our own dot com very impressive.
Results relative to 2019, so we're very happy about the investments that we're making and now that we're live on the ERP side.
In both North America, and Europe, certainly an opportunity, we see to distort and amplify those investments in the back half here that not only helps deliver the back half of 21, Sam but really accelerates the momentum moving into 2022.
Which is really important for us.
No I do understand that.
Looking really for no. It sounds like based on your guidance that you're going to probably Delever. Your SG&A in the back half of the year and they got good leverage on for from have for the year and that was telling me the truth automatically some of those investments on a relative basis, just won't give you. The current the same return for I'm really trying to figure out how much.
Of the beat and Q2 was better return on those investments.
And are you sort of guiding it's the same way you guys did cute too.
Except for those.
You know I'm praying drive per year, and then do better because it sounds to me like you're getting a better sort of near term resolved for you may have put into the numbers. Despite the fact it felt great for long term and it was intended to help for long term.
Yeah, and and Sam I would just say that we measure the returns on both the near term and a long term basis, and and clearly as we distort investments.
On the marketing side, specifically, we are looking more to accelerate the brands and the strength that they're demonstrating in this quarter.
To continue to accelerate in future quarters.
So it's not just the next quarter were looking for the longer term as well.
And obviously as you have seen the investments that we're making in the brands.
Certainly have been paying off in terms of the top line growth.
Thank you our next questions come from the line of Brook Roach with Goldman Sachs. Please proceed with your questions.
Thank you good morning, and thanks for taking my question.
Scott Rosten on digital continues to learn from momentum can you talk to the areas, where you're seeing the most success, whether that's within a particular customer segment conversion or a new customer acquisition.
Yeah, certainly can't so broke I think you have to start at the beginning of the journey. We were so under index to digital and wasn't just from from the standpoint of physical we've now broadest sales up to speed from an ERP standpoint put in the right platforms around the globe that suited infancy stage than when we started for the.
Company. We went ahead and had to hire the right teams and we started to do that in a pretty robust way, we hire the right leader and then we had to start thinking about how we communicate in a powerful way with our consumers and we started to do that with some really good programs and then we started to build better product is the different categories like we've talked about today to make our site.
More robust and more exciting from a content standpoint for that consumer the come into enjoying the journey with us going forward. So at the beginning of that journey. We saw some really good core momentum from the standpoint, the core really did well, but what's happened as that journeys kind of expanded and we've gone into other categories. We've seen really good gender momentum.
Cross the Globe book male and female and we've seen really good category momentum. So what I mean by that is our outdoor like for instance has done really well and then there's 1 other thing that I think is really interesting are consumers now starting to come to us because 1 day like the story and they like what they're seeing and hearing and they were very pleased with the product, but in addition to that we've done some really.
At a bowl co lamps, and those colab for highlighted on our digital presence too. So if you think about our big Wrangler Billabong coed that we have going on right now as we head into back to school, that's done really well and if you think about Lee in our hundreds colab and some other things that they've done recently those have done really well so combining all of those.
<unk> sets together and being at the very early stages of building better product from expanding categories. We really like how the consumer is communicating with us going forward in our digital space Rusty.
For us to would you add anything there yeah, I think you said it well Scott the only thing I would add broke as well is that we've continued to make investments in our capabilities.
And so you know certainly we are under index worried about 5 per cent of revenue now we see that opportunity as we laid out of investor day of moving to 10% penetration.
And all of the areas Scott mentioned in terms of product and consumer very very relevant. We've also made investments on the technology side as you well know going on to new <unk>.
Platforms in 2020 in both North America, and Europe, and I think you're starting to see those results.
Manifest in our P&L here, so lots of early days lots of momentum and lots of opportunities still to go broke.
Great. Thanks, and if I could just have 1 quick follow up can you talk a little bit about what you're seeing across your T. U S. Wholesale partners maybe both in terms of program momentum recently launched new initiatives or a new new business versus some of your legacy partners with more established programs such as.
Western versus.
Department store off My Department store.
For Smith, Thank you.
For thanks broke I'll I'll take that yes.
Like we mentioned in our pre prepared remarks were really pleased with all the programs that we're launching across the board I think it goes back to we win with winters. We've talked about that a lot. We are really pleased with how we placed ourselves in that line of communication and with the big customers that we have across the globe and it's been all part of the strategy from Horizon 1.
When with Winters and go forward Bill great product that the consumer loves to take out will be there and continued to drive that would really good demand creation platforms. So from a strategic standpoint, we are really running our playbook and we're pleased with it right now.
Thank you. Our next question is coming from the line of Jim Jaffe with Stifel. Please proceed with your questions.
Thank you good morning goes great execution, good morning, Jim from giving ERP implementation.
Through.
I want to build on others questions on the gross margins.
Sorry to do so, but Ah just working through the annual guidance looks like it implies roughly a 44 per cent gross margin for the back half of the year.
More than 200 basis points below the run rate in the first half of the year can you just maybe itemize. Some other factors that would cause it to be such a big step down.
And you mentioned pricing in your prepared remarks from curious if you could speak to the.
The balance between pricing and input costs inflation, and how we should think about pricing as a tool to leverage from vitality and manage for margins.
Yeah. So.
Let me go ahead and start here, Jim on the gross margin side.
Absolutely you are correct. It implies kind of our guide Ah 43, 44% gross margin.
In the back half and in a couple of things that I would highlight.
Certainly our first half was around 46 that was <unk>.
Definitely a high watermark for us in the back half of last year, we were more around the 43 range.
So certainly continuing.
Continuing to strength and improve their.
Couple of things as we're thinking about the back half.
Mentioned in our lives here in a couple of times here.
The global supply chain disruptions in and the fact that we're seeing increased demand.
And so from our standpoint.
Do see elevated transitory cost in the second half to meet some of that demand.
And we've certainly reflected that in the gross margin outlook for the second half of the year also Scott mentioned and you heard of stocks numerous times still a lot of uncertainty out there in the marketplace and very very blue.
So we certainly have taken that into consideration as we have guidance gross margin here for back at 12. So.
I'll flip it over to Scott and Scott If you want to take the second part of that with the question around inflation in pricing that'd be great.
Thanks, Jim Jim Good to hear from you, Jim we're being real strategic with our pricing as we go for it we're investing in the brands as you know and we're also investing but we haven't talked a lot about it on this call, but from an innovation standpoint pretty significantly to go ahead and keep our brands first and foremost from the consumer's mind. So we really like what we are 1 of the things that we've talked about that I think is really important.
For our brands is that we offer incredible value already so we have trusted brands and at times like this Jim being a value brands with a great brand behind it being a value play with a great brand behind it with high high quality and innovating and coming into different channels only helps us going forward. So that's the investment that we're making to go for it.
And make sure that we're putting ourselves our brands in our company and a really good place.
Thank you there are no further questions at this time I would like to turn the call back over to Scott Baxter for any closing comments.
Just a quick thank you to everybody for taking the time to spend with US today. It's much appreciated look forward to spending time with you all here some time in the next month or 2 and then obviously look forward to talking to you again in the next quarter, but thanks again for your time. This morning have a great day everybody.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines with this time.
Have a great day.