Q3 2021 Kontoor Brands Inc Earnings Call
Greetings and welcome to contour brands Q3 earnings Conference call. At this time all participants are in a listen only mode. A brief 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 I would now like to turn this conference over to your host Mr. Eric Tracy Vice President corporate Finance and Investor Relations. Thank you. Sir you may begin your presentation.
Thank you operator, and welcome to contour brands third 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.
These 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.
Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning.
Adjusted amounts exclude the impact of restructuring and separation costs noncash impairment related to our rock <unk> Republic trademark and other adjustments.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website at <unk> Dot com.
These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Unless otherwise noted amounts referred to on this call will be on a constant currency, which exclude the translation impact of changes in foreign currency exchange rates.
Constant currency amounts are intended to help investors better understand the underlying operational performance of our business, excluding the impacts of shifts in currency exchange rates over the period.
Also given the impact COVID-19 had on prior year results, we will provide select references to the same quarter in 2019 for additional context where appropriate.
Joining me on today's call are contour brands Chair, President and Chief Executive Officer, Scott Baxter, and Chief Financial Officer Rustin Welton.
Following our prepared remarks, we will open the call for your questions. We anticipate the call will last about an hour Scott.
Eric and Hello to everyone joining us today, if you take one thing away from today's call, let it be this contour and our wrangler and Lee brands are in a meaningfully different and advantageous place compared to our past. We are now uniquely positioned to win in the marketplace and to create future value for all our stakeholders.
This was evident in our third quarter results and it's even more evident and the confidence we have in raising our guidance for fiscal 'twenty, one and the momentum we see in the holiday in fiscal 'twenty two.
More on this in a bit but simply put our strategies are working our investments are yielding superior returns through the elevation of our brands increasing permission to price and accelerating growth.
No doubt the current macro environment is placing significant challenges on companies and people and as we've stated contura is not immune but we are keenly focused on controlling the controllable and on the execution of our strategic playbook that has consistently proven itself and setting our foundation during Hawaii horizon, one and now in the horizon.
Isn't too, where we will look to catalyze growth.
When we started the <unk> journey, almost three years ago, our top priority and establishing our organizational culture was to take care of each other and while we could not have predicted the obstacles we would face in the ensuing years, we believe that this core tenants and the great experience of our team could help us not only navigate difficult times, but thrive through them.
And I believe we have done just that so I want to thank our colleagues around the world for the ongoing collaboration teamwork and resiliency and continuing to take care and support one another.
So how are our strategy is driving near term results. Let me provide some proof points from the third quarter that showcase our strategic emphasis on catalyzing growth across four key areas first elevating and accelerating our core U S business.
Channel expansion, primarily in our DTC and digital ecosystem third diversifying our product mix through category extensions, including outdoor workwear and T shirts, and fourth expanding the brands geographically with a focus on China.
Overall global contour reported a revenue increase of 12% compared to last year and 2% to 2019 importantly, this included a negative high single digit impact from strategic quality of sales actions within our VSO and India businesses. Excluding these actions global com.
<unk> reported revenue would have been up 11% over 2019 are outpacing the market.
Our U S business during the third quarter increased 8% not only to 2020, but also 8% to 2019 again. This includes the impact of our proactive measures within our VSO operations. So excluding these actions the U S business would have been up high teens in the third quarter compared to pre pandemic too.
19 levels and what's crucial is that this growth is healthy balanced and broad based across brands categories channels. The U S was once again led by our rapidly evolving digital platforms with U S owned dotcom, increasing 118% and digital wholesale increasing 200.
Third 37% compared to 202019 U.
U S wholesale increased 15% during the quarter with outsized performance within our western business augmented by emerging new programs and outdoor atg workwear in female.
And demonstrating the health of the Lee and Wrangler brands are elevated position in the marketplace and increasing ability to take price. Our digital <unk> are up high single digits in the U S year to date.
Turning next to our global digital business.
Our results in the quarter highlight how our strategic investments are unlocking significant value and connecting us closer to our consumer more than ever before Q3 saw great growth over last year, but was even more impressive compared with 2019 with reported global own dot com and digital wholesale increasing <unk>.
88% and 182% versus pre pandemic levels.
And the runway for future growth remains significant as we are still highly under indexed in this accretive channel relative to our peers, our new ERP platform will enhance our digital efforts as we globalize. Our operations, we will continue to lean in on investments to achieve our goal of 10% digital penetration over.
The next three years.
Meanwhile, our channel with digital evolution has been extraordinary we are equally excited by the performance of our tremendous expansion of new categories beyond denim, including outdoor <unk>.
Workwear T shirts, western and female while our foundation lies in denim we are rapidly developing a more diversified portfolio that augment and enhances our core offering.
With an outdoor and our Atg line, we are leveraging great performance innovations to drive incremental penetration of existing retail partnerships, while also expanding into new points of distribution across the outdoor specialty and sporting goods channels, both domestically and abroad. During the third quarter, our U S outdoor business of <unk>.
50% growth compared to 2019, our test of Atg with Academy sports here in the U S and inter sport in Europe are going very well and.
And we are excited about the opportunities for further expansion in these brand elevating points of additional distribution for Hawaii.
Our workwear business is also seeing great momentum.
As reflected in the third quarter results with more than 60% growth in the U S compared to 2019 as we discussed on our last call we more than doubled our door count to over 3000 stores for fall 'twenty, one compared to spring.
With one of our key domestic retail partners and we are really excited about the future opportunities. This program affords us in the quarters to come.
And the development of our T shirt category is building momentum with significant new programs set for spring 'twenty two in.
In addition to these new outdoor workwear and T shirt categories, our wrangler modern female and western businesses in the U S are performing exceptionally well with substantial year over year growth during the quarter up more than 100% and 50% respectively.
The broad based third quarter performance across categories is a direct function of how investments are generating incremental business development opportunities for our brands.
And finally, we continue to catalyze growth geographically with solid results in the quarter, Despite an uneven COVID-19 environment across the globe.
Even with ERP go live in July our European business saw a nice year over year improvements up 19% in constant currency compared with 2020, driven by digital brick and mortar reopening and new business development and in China, our ongoing strategic investments continue to yield strong results.
<unk> third quarter revenue, increasing 22% and up 14% in constant currency.
You have heard from some regarding a broader slowdown in China, and while we haven't seen impacts to our business. We are obviously monitoring. This closely however, our brands are in distinctly advantaged positions in the market.
Lee has over two decades of experience in the region and is uniquely connected with the Chinese culture. While Wrangler is just getting started in China with significant white space ahead, affording us the opportunity to grow in the most productive manner.
To fuel this growth across core channels categories and geographies, you've heard us talk quite a bit about investing behind key enablers. These pillars in support of growth include enhancing and amplifying demand creation platforms scaling product and manufacturing innovation with sustainability and ESG.
As our guiding tenet.
Unlocking efficiency and productivity gains for the implementation of global ERP supply chain and digital infrastructure and last leveraging our world class talent to build a purpose led high performance and increasingly growth minded culture.
I'm going to focus my comments today on our manned creation efforts, while rustin will provide greater insights with respect to our ERP implementation and supply chain.
The reason I want to highlight our investments in demand creation is pretty straightforward we are.
We're doing things with both the Wrangler and Lee brands that we've simply never done before.
This is reflected in the brands recently launched marketing campaigns for.
First with Lee if you haven't had a chance to see our newly original campaign that launched October I would encourage you to go to lead dot com to check it out.
Hearing me talk about simply doesn't do it justice I promise you will be impressed at how this modern elevated brand expression brings to lead transformation to life and just how differently. The brand is showing up in the marketplace.
<unk> in collaboration with preeminent photographer and creative director, Mark Seliger and set to the title track struck by Lenny Kravitz, the work celebrates and encourages those who pushed boundaries through creativity ingenuity and hard work are.
Cost of original reflects the multifaceted and diverse Lee consumer from climate Warrior and fashion icon Quantitation horse to Venice Beach Skateboarding legend Hayden Mckenna.
The unique character and personality of each cast member reflects what has always made Lee original stories behind those where that.
The campaign went live in North America in October and includes most all media platforms with a heavy lean towards digital that will run on streaming services, such as Disney's Hulu as well as high impact display and key social media platforms, including the brands launch on tick tock.
And for those of you in New York. We've also introduced Lee original on the streets of the city, where originality and creativity thrive via strategic out of home media and Soho Bushwick in Williamsburg, The global campaign will be supported by existing and new collaborations and partnerships with key influencers.
We are excited about these recent launch and newest partnerships with iconic brand Pendleton.
This limited edition just dropped this week and re imagines essentials from the brands combined 200 plus years in American apparel. Each pair of jeans has made in the U S. With some of the last remaining salvage denim from cone Denims White Oak mill in Greensboro, North Carolina.
And this is just the beginning of lease new brand messaging and repositioning we couldnt be more excited to share what's on the horizon in the quarters to come.
Turning to the wrangler demand creation platform the brand's newest global AD campaign for the ride of life debuted in September in North America with live coverage on the NFL network. The campaign will also run on retail digital and social media platforms across North America and Europe.
And our collaborations with the Wrangler brand just keep building we had the initial launch of our billable and Wrangler co lab in August with our second drop in September timed perfectly for back to school. The partnership helped drive significant brand awareness with $1 7 million videos created on Tictoc using our summer mash ups.
Cash tag.
And beginning this fall wrangler is officially partnering with Yellowstone for much of the anticipated new season of the highly acclaimed most watched series on cable TV Wrangler will always be a symbol of authentic western fashion. The wrangler in Yellowstone collaboration came to fruition after much of the denim apparel was organically seen on the <unk>.
Jos beloved characters collaborating with Paramount networks, Yellowstone brings to lifestyle, we've been body for decades into the spotlight allows us to reach a new audience that is now learning what it means to us both the cowboy spirit.
We're thrilled to be able to add a layer of authenticity to the closets of Yellowstone fans as appreciation for the western lifestyle continues to surge in popularity and mainstream culture and fashion.
Augmenting our collapsed the brand continues to partner with key Influencers that reach a younger more diverse consumer base for spring 'twenty, two Georgia May Jagger will continue her role as lead brand ambassador and the female face of Wrangler and we are thrilled to announce our partnership with RMB Grammy.
Musician Leon bridges, the two season collaboration will launch in spring of 'twenty, two with Leon as the face of Wranglers Mens global product line, followed by a fall limited edition collaboration of key denim and western styles inspired by iconic silhouettes from our archives and Leon's personal style.
Finally, as we look to 2022, our demand creation efforts only build in support of commemorating the Wrangler brand 70, <unk> anniversary. We are a year long celebration planned to honor Wranglers historic presence in music and fashion, while also highlighting the courage optimism and triumph of Western <unk>.
Sure.
Let me close with this as you can see there was a lot to be excited about with many proof points that our strategies and investments are fueling broad based strength across our business we.
We will continue to amplify these strategic investments, particularly in demand creation and digital during the fourth quarter in support of our planned accelerating topline growth algorithm.
And while we are extremely proud of how we've navigated the last few years and establishing a solid foundation of which to build despite the turbulent macro environment I wanted to share a few thoughts on why we are even more confident about what lies ahead.
Rustin will provide more details, but a few items based on our current views that support this confidence as we look to 2022.
First we expect fiscal 'twenty two revenue to accelerate above the long term target of mid single digits. We established at our recent Investor day with particular strength in the first half up low double digits and second despite macro inflationary pressures, we anticipate 22 gross margins to be at or above 20.
<unk> levels.
We possess a powerful combination of accelerating fundamental drivers and increasing capital allocation optionality that afford us the opportunity to deliver consistent near term results, while continuing to invest in our business and fund shareholder friendly actions, including our recent dividend increase of 15% as well as <unk>.
Opportunistic share repurchases during the third quarter.
As I said to start contour is in a unique position of strength in the marketplace and we look forward to executing and delivering superior future GSR for all of our stakeholders Rustin.
Scott and thank you all for joining us on today's call.
Scott outlined we are very pleased with our third quarter results and the momentum of the business as we head into holiday in 2022 simply put our brands are as healthy as they have ever been with the investments made and solid foundation that has been established since the spin.
Before turning to the quarterly review I want to address a couple of topics that I know are top of mind.
Macro economic inflation and supply chain challenges as well as the status of the ERP implementation.
With respect to the widely discussed industry supply chain disruptions cotton pricing and inflationary pressures I want to emphasize the following points that we have repeatedly stressed.
First while we are not immune to these issues, we continue to leverage the agility of our best in class supply chain to navigate the environment.
And second we remain focused on what we can control and are steadfastly executing our strategic playbook.
In terms of the supply chain.
We believe we are relatively advantaged in our position.
Our diversified global supply chain operations are differentiated.
With over one third of our global production coming from our internal manufacturing facilities in the Western hemisphere.
With the balance being sourced from over 20 countries and approximately 225 facilities around the world.
No single supplier makes up more than 10% of our cost of goods sold.
Internal manufacturing combined with contracting in the Western Hemisphere gives us greater flexibility shorter lead times and allows for enhanced inventory management in the North American market.
Our significant footprint in the Western Hemisphere has provided several advantages over the past few years, including being able to rapidly alter production to align with changing demand signals.
Minimizing access in distressed inventory.
And mitigating exposure to congested coastal ports with extended lead times.
In terms of sourcing I know there are questions around China, and Vietnam exposure. So I wanted to address each quickly less.
Less than 3% of our product comes from China, and is mostly China for China product and less than 1% of our product comes from Vietnam.
Finally, although we believe our global diversified supply chain is relatively advantaged, we have incurred elevated transitory costs as we anticipated and reflected in our revised outlook last quarter.
These transitory costs were largely driven by air freight as we chase production to meet the accelerated strong demand that Scott highlighted earlier.
In terms of inflation and cotton experienced roughly a decade ago, we want to be very clear.
Our model and our brands are significantly better positioned now to offset pressures.
What gives us confidence to make this statement let.
Let me provide the following specific reasons.
<unk>.
Our investments into our brands from design to innovation to.
To demand creation are substantially elevated to support higher price points in <unk>.
For illustration of how we are distorting investments, we anticipate our full year demand creation spend in 2021 to be up approximately 40% versus 2020, increasing approximately a 100 basis points as a percentage of revenue and up approximately 20%.
Versus 2019.
Second our product assortment and composition has evolved with the emergence of new categories like Wrangler Atg.
Distorted growth in categories like outdoor channels like digital and geographies like international are allowing us to mix up to higher AUR.
Third our cotton composition as a percentage of cost of goods sold mid teens today as diversified into more synthetic fabrications in denim bottoms as well as outdoor performance atg and tops.
Fourth our domestic.
Stick distribution continues to evolve into healthier channels and retailers.
A decade ago, our first quality sales were predominantly in the wholesale channel and had much greater exposure to challenged mass and mid tier retailers, such as Sears Kmart and shopko.
Day, with our segmented offering our brands have amplified their tiers of distribution and wholesale particularly in areas such as western and digital and begun to historic growth in our own dot com platforms.
Fifth structural mix shifts to accretive channels, such as digital and international have and should continue to support gross margin.
Particularly as we remain underpenetrated relative to the market in these areas.
Finally, given ongoing negotiations, we won't dimensionalize, our inflation and pricing assumptions for 2022.
But I will say, we have good visibility into the first half and are confident in the back half given current market conditions.
But I want to reiterate what Scott stated earlier, the combination of executing pricing actions higher AUR and structurally accretive mix shifts support our view based on current market conditions that full year 22, gross margins will be at or above full year 'twenty one levels.
Turning to the ERP on our Q2 earnings call. We shared that we had gone live on our final regional implementation in EMEA early in the third quarter.
Today I am very pleased to report that we also exited exited the final transition service agreements or <unk> with our former parent company in the third quarter we.
We are very pleased and proud of the team who has worked on this critical initiative for contour as the ERP platform is foundational for the continued globalization of the business.
Now, let's get to our third quarter review I will focus my comments on key highlights and refer you to this mornings release for additional detail on the quarter.
Unless otherwise stated growth rates are in constant currency compared to the third quarter of 2020.
Also given the impact 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 11%.
Strategic actions to rationalize our VF outlet fleet in the U S.
Discontinue the sale of third party branded products in all domestic outlet stores and transition to our new licensed business model in India represented approximately six points of headwind in the quarter compared to 2020.
Compared to revenue in the third quarter of 2019 global revenue increased 1% or 9%, excluding our strategic actions.
On a regional basis for the quarter U S revenues increased 8% compared to the same quarter last year growth was broad based with strength in digital wholesale and western.
Wranglers outdoor and female businesses also saw strong gains in the quarter.
Within our digital business business U S owned dot com in U S digital wholesale increased 52% and 90% respectively compared to the same quarter in 2020.
As Scott mentioned these growth rates were even stronger compared to 2019 with own dot com and digital wholesale increasing 118% in 237% versus pre pandemic levels.
Outpacing the U S International revenues increased 20%.
Growth in the quarter was partially impacted by the previously discussed timing shift into Q2 due to the European ERP go live.
<unk> this shift we saw strength in all channels.
Double digit growth in China and continued strength in our digital businesses.
Turning to our brands glue.
Global revenue of our Wrangler brand increased 21% range.
Wrangler U S revenue increased 20% driven by strength in our workwear and western businesses, new focus areas, such as outdoor and female as well as ongoing gains in digital with digital wholesale and own dot com, increasing 93% and 67% respectively.
Compared to the third quarter of 2019, Wrangler U S own dot com increased 142%.
Wrangler International revenue increased 32%.
Another proof point that our distorted investments in geographic expansion are paying off.
Strength from digital new business development wins, including our Atg program in the sporting goods channel were partially offset by the previously mentioned timing shift in Europe.
Lee brand global revenue increased 4% in.
Adjusted gross margin increased 80 basis points to 44, 1% of revenue favor.
Favorable channel customer and product mix as well as business model changes were the primary drivers of the gains partially offset by increased airfreight.
I will provide more on our gross margin expectations shortly but we continue to see benefits from the structural margin enhancements I previously discussed.
Shifts to highly accretive channels and geographies proactive supply chain initiatives and AUR mix supported by innovation.
Adjusted SG&A increased $36 million versus last year to $186 million.
Higher demand creation digital investments and compensation costs more than offset better fixed cost leverage on improving revenue and restructuring benefits.
Prior year comparisons were affected by reduced spending in 2020 in light of Covid uncertainty.
As we have discussed and as seen in the third quarter. We believe these strategic investments such as in digital and demand creation will continue to unlock our catalyzing growth strategy and support expected demand in the fourth quarter and accelerating top line into 2022.
Adjusted earnings per share was $1 28, compared to $1 33 in the same period in the prior year and compared to <unk> 95 in the third quarter of 2019.
Now turning to our balance sheet.
Third quarter inventories decreased 5% compared to last year. The decline reflects the fourth quarter 2020 actions to reduce the fleet and discontinue the sale of third party branded products in our domestic outlets as well as the business model change in India. Excluding these actions inventory increased approximately four.
Percent compared to the prior year in support of chasing higher projected demand.
We finished the third quarter with net debt or long term debt less cash of $576 million and $215 million in cash and equivalents.
Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the third quarter was one four times within our targeted range of one to two times.
And as previously announced our board of directors declared a regular quarterly cash dividend of <unk> 46 per share.
An increase of 15% a testament to our board's confidence in the strength of improving fundamentals.
Finally during the quarter, we repurchased $10 million in common stock at the end of the third quarter, we had $190 million remaining under our current share repurchase authorization.
When combined with the strong dividend, we've returned a total of $79 million to shareholders through the first three quarters of 2021.
We will continue to use the share repurchase program to offset dilution, while also opportunistically buying shares as market conditions warrant.
These accretive shareholder friendly actions reflect our increasing capital allocation optionality.
Allowing us to continue to invest in our brands and business, while productively, returning excess cash to shareholders.
This is powerful and further highlights how our model is differentiated.
And now on to our outlook.
Based on the strength of the third quarter and demand momentum for our brands. We are raising our fiscal 2021 out outlook revenue gross margin and adjusted EPS.
Revenue is now expected to increase in the high teens range over 2020 to $2 $4 7 billion to $2 $4 8 billion.
As compared to a mid teens range in the prior guidance.
This includes a mid single digit impact from the VF outlet actions in India business model changes.
Unpacking this a bit further and importantly, comparing to pre pandemic 2019 levels.
<unk> third quarter 2021 revenue increased 1% compared to 2019 and was up 9% excluding the impact from the strategic actions in VSO in India.
Our guidance implies fourth quarter revenue will be up 3% to 4% compared with 2019 or up 13%, excluding the impact from the strategic actions in DSO in India.
At the midpoint of our guidance 2021 revenue is expected to be approximately 6% above 2019 low levels.
Excluding the strategic actions well above most in the industry.
Adjusted gross margin is now expected to increase at the high end of the prior guidance range of $44, 5% to 45% of revenue.
Compared to 41, 2% achieved in 2020.
The increase is expected to be driven by growth in more accretive channels, such as digital and international somewhat tempered by higher transitory airfreight expenses in support of strong demand.
SG&A investments, we will continue to be made in brands and capabilities.
Due to the strengthening revenue and gross margin outlook during the fourth quarter. The company expects to make incremental SG&A investments in demand creation and digital to support expected accelerating revenue growth in 2022.
Specifically compared to our prior guidance, we have chosen to invest an additional $15 million in demand creation and digital during the fourth quarter.
Adjusted EPS is now expected to be in the range of $4 15 to $4 20 per share as compared to $3 90.
So $4 per share in the prior guidance.
This EPS guidance does not assume the benefit of any future share repurchases.
This EPS guidance includes a <unk> <unk> impact from the incremental demand creation and digital investments in the fourth quarter compared to prior guidance.
Somewhat offset by lower interest expense, a lower expected effective tax rate and year to date share repurchases, which in aggregate should benefit EPS by approximately <unk> 19.
Finally in light of the current environment I would like to close with a few additional comments on 2022.
First our Catalyzing growth strategy is working the health of and demand for our brands has never been better.
This is manifesting in accelerating demand going into 2022.
Based on solid visibility, we expect 2022 revenues to increase at a rate above our mid single digit long term algorithm outlined at our Investor day.
We expect first half top line growth to be particularly strong up low double digits.
And second we are not immune to the current inflationary environment. However, assuming current conditions are best in class supply chain combined with increasing permission to price and elevated AUR as well as expected ongoing benefits from structurally accretive mix shifts we anticipate 2022 full year gross.
<unk> to be at or above 2021 levels.
To close I want to reiterate Scott's comments on the momentum of the business as we head into holiday in the first half of 2022.
Our brands are as well positioned as they have ever been.
And we are well on our way to meet and exceed our multiyear targets.
This concludes our prepared remarks, and I will now turn the call back to our operator operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up here.
Handset before pressing the star keys, one moment, while we poll for questions.
First question comes from the line of Adrienne <unk> with Barclays. You May proceed with your question.
Great Good morning, and boy, that's a whole lot of good news.
And congrats really well done.
Thanks Adrian.
Youre welcome.
My first question is on the low double digit first half guidance. There are few companies that are willing to go out and start giving US 22 guide.
Clearly, what you've talked about things that youre seeing and so my question is are you seeing that in the order book and how much confidence do you have there and then the drivers of that Scott I always like to get your opinion on the denim cycle.
How strong is that how long is that and then you mentioned something on average unit retails are you planning on taking initial retails up in spring of next year like many others are and I do have a follow up.
Alright, perfect. Thanks, Adrienne I'll go ahead and start so really proud of the results that we've shown year to date.
That's a real catalyst as we grow this company and I'm really proud of how we've pivoted from horizon, one standing of the company up to horizon, two turning ourselves into a growth company and as you look at all that we've done I think the thing that's really beneficial for us as we head into 'twenty two is that that opportunity for us to go to low double digits is a blanket approach. So all I mean by.
That is it's happening everywhere. So it's not just in one specific area. Its in our channels, it's in our geographies, China and Europe. Its in our categories. We introduced all terrain gear work in T shirts, and they're all working really well. So it gives us really good confidence as we head into 'twenty, two and yes. It is because we have a really good understanding of our biz.
And we know where it's going to be so from an order book standpoint that does give us confidence and as we think about the denim cycle very very early stages and I've said before it's much more than a denim cycle. This is the casuals Asian of what's happening around the world and we are seeing that take hold I mean from one part of the globe to the other part of the globe and it's real.
Exciting to see and denim is a big big part of that but I'll tell you what we've done with T shirts, and all terrain gear in the outdoor category and people coming back to work I think the one thing that as I look at the team how we've pivoted ourselves to go ahead and play in the categories that are really meaningful going forward as an organization I think has been very.
Strategic so thank you.
Alright.
Good morning to your second question about AUR retails.
Certainly we're in we're in active negotiations now so I'm not going to go into specific assumptions as I indicated in the prepared remarks around 20 to cost inflation or pricing assumptions, but I will make a couple of comments.
Certainly as we think about 2022.
We're not immune as we've said from inflationary pressures that are out there. The second half of 2022, we will see stronger inflationary pressures than the first half as you would expect.
And then we're confident given existing conditions that we can offset the cogs inflation through the combination as we talked about of the ongoing <unk> specific actions around structural mix shifts.
<unk> and cost efficiencies, you've heard us talk about for several quarters as well as strategic pricing. So we will get into more details on the fourth quarter.
And specifically around <unk>.
Assumptions.
Great and then Rustin are really quick housekeeping, one if you will.
What percent.
Sales is cotton as you know.
As raw material.
We've been off yes, we said cotton in the prepared remarks, Adrian was approximately mid teens percent of our cost of goods sold.
Okay. Thank you so much sorry, not that great job.
Thanks, Thanks Adrian.
Our next question comes from the line of Bob <unk> with Guggenheim Securities. You May proceed with your question.
Hey, guys. Good morning, Scott Congratulations on the chairman title.
Well, thank you Bob I appreciate that.
I guess couple of questions when.
When you look at the digital acceleration.
It was just quite impressive so when you look at your capabilities in terms of your ability to continue to meet that high demand.
Do you think that the 10% number appears to low when you look at it over a longer period of time, because it just seems like it's it's really taken off and then the second question is when you look at the returns youre getting on the demand creation and just how do you think about that longer term I guess, when you think about 'twenty one into 'twenty two.
Well, just more thoughts around the levels and sort of how you're spending that.
It seems like you are getting great returns.
Yes, Thanks, Bob I'll take the first one and rest and I will take the second from a digital standpoint, when we spun we had a huge opportunity here and I think it's really a real tribute to the leadership that we've developed within that category for our company, but really great folks that we've hired the investment that we're making within that category relative to the <unk>.
That is very accretive and the fact that a couple of things have all come together for us. So we rolled out a new ERP system. So we have new platforms across the globe, we're creating much better products, what's driving higher AUR in that category much.
Much better demand creation, so people are driving to our sites and as you can see 118% up for the quarter and our own dot com is all there, but I think your question is great because it's a challenge that I have up to the team that we can do better than 10%. That's our goal, but we have to do better for our shareholders and we are going to work really hard to do that and I have.
A lot of faith in our group that we can do that but I'll tell you Bob we're going to continue to make investments there too because we see it is really really important.
From a demand creation standpoint, it's part of our virtuous cycle of growth right. When we spun we knew these brands needed Big time investment and we also had to have smart investments. So we hired two exceptional leaders.
From a marketing standpoint, and they've really helped US and you heard me talk about these two new big global campaigns that we've never done anything like that before and the reception has been from the community amazing. So as we continue to do that and as we continue to grow our gross margin, we're creating at oxygen and that fuel to invest back in these brands in a really smart way.
Which I'm most encouraged about what the team so really focused on that investment maybe a few comments about second half.
Good morning, Bob So so to Scott's point I I.
Thank you.
We're seeing those returns Bob that you mentioned earlier, and Thats whats, causing us to lean in and invest again, an additional $15 million or 20.
Into accelerating that digital and demand creation in the fourth quarter and it's because we're seeing those strong returns from the investments and certainly you called it out in the Q3 results.
As you think about sort of getting to the guide of $4 15 to $4 20, Bob that's partially offset with again in our prepared remarks, we talked a little bit about 19 cents of benefit from <unk>.
Below the line items like tax and lower interest and year to date share repurchases, but.
Feel really good about that combined raise in revenue.
And gross margin guide, that's really netting us to that $4 15, and $4 20 from an operational perspective.
Just seeing those returns.
And then really playing out and so that plays into 2022 as well so.
Just one other point just to call out Bob as a reminder.
With this updated guide if we go back to the Investor Day, we talked about a 15% plus operating margin by 23 with triple digit expansion in 'twenty one.
And as you can see we remain well on track with our raised full year guidance. So so very confident in the investments we're making.
Thanks, Bob.
Our next question comes from the line of Mark <unk> with UBS. You May proceed with your question.
Yeah.
Great Good morning, and.
And thanks for taking my question.
Just a couple of questions first on inventory and can you tell us a little bit more about where you stand on inventory I know you mentioned you're up 4% excluding.
This is the model changes, but I just want to understand if theirs.
Insurance component, there and you know.
Just to make sure do you have enough to support growth and what are your what youre doing in terms of air freight and logistics and secondly on the capital allocation Optionality.
It also repurchased $125 million in shares so how should we think about that.
Going forward in terms of could that be like a quarterly number or like.
On an annualized basis.
Could we see like a triple digits in terms of agreement from dollars of.
Oh capital returns to shareholders based on just our share.
Share repurchases. Thank you.
Thanks Maria ACO. This is rest and I'll start with the first one around inventory and air freight and Scott can jump in on capital allocation will kind of tag team that one so.
And in terms of your question around inventory as we indicated in our prepared remarks, we continue to chase demand.
Based on the momentum of the business and retail inventories remain lean as everyone knows we are projecting kind of year end inventory due increased double digits year over year to support this momentum not just in the fourth quarter, but obviously heading into the first half of 'twenty two we.
We do expect as you as you think rolling forward here that inventory is going to grow slower than revenue due to those lean retail inventory. So as we're getting product and we're shipping it out.
And then certainly we've got some internal initiatives as well around SKU rat activities as we talked about a little bit at Investor day, So we're going to lean into inventory where appropriate.
Given some of the inflationary pressures and again the strong demand signal that we're seeing.
In terms of air freight I mentioned last quarter, and we reflected it in our outlook that that we were not immune and expected some transitory airfreight costs, which you saw certainly in the third quarter here with 180 basis points of headwind from air freight.
We believe that will continue.
We certainly utilized in the third quarter, we will continue to utilize.
Airfreight, where possible and appropriate to meet that strong demand.
I believe that elevated airfreight is transitory as we talked about but likely more ACO to continue into 2022 and may be just to dimensionalize. It a little bit for you in Q3, our gross margins were 44, one with 180 basis points of headwind from air freight.
And at the midpoint of our outlook. We provided here implied margins are around 43 for the fourth quarter again elevated airfreight will continue to be a headwind as we chase that strong demand. So so certainly aggressively going after the demand signals that we see.
Scott you want to take a capital allocation. Thanks, Mauricio for the question. So ratio I just want to remind everybody. If you go back to how quickly we paid down our debt. It's a really proud moment for us as an organization during a really difficult time, we paid our debt down quickly in horizon. One as we said we would you know meeting our promises and we talk.
A lot about in this this means a lot we talked a lot about the Optionality. We said you know.
Dividend increases, we said share buybacks, we said M&A, we said that we have the optionality to do that after we paid down the debt and I think what Youre seeing right now is you're seeing the execution of that so in a very short period of time. This quarter, we've increased the dividend, 15% superior dividend, which is important to our CSR and in addition to that we started our stock.
Repurchase program. So we started doing what we said we would do and we're generating $1 billion over this three year period. So we still have a lot of action Optionality just because we've done those two things we still have a lot more powder that we can use going forward as we see as the best thing to do for our shareholders Rustin anything to add yes, I would just sort of.
On a same or easier the multifaceted approach that Scott just laid out really speaks to the power of our operating cash flow.
That we can pursue a multi faceted optionality concurrently I think thats really important to take away.
Certainly this quarter, we talked about the share repo beginning.
Just as a reminder, as the guide that we gave this morning, raising our guide is all organic.
So you should think about any future share repurchases at as incremental so just wanted to highlight those points, but thanks Mauricio for the question.
Our next question comes from the line of Erinn Murphy with Piper Sandler You May proceed with your question.
Great. Thanks, Good morning, and let me add my congratulations I am personally very comes out your yellow satin collaboration as well so very good.
Yeah.
I will start on Sunday Night era.
I know it's on my calendar.
All right.
For me that haven't been asked yet at first on China Atlantic you could share a little bit more about what youre seeing with the wrangler business on Tmall now that youre starting to fully annualize that relationship and then for both brands. How are you positioned into 11 11, and then secondly could you just remind us how your consumer was impacted by U S stimulus last.
Year, and then what have you taken into consideration with that low double digit first half guide for stimulus.
Sure Aaron I'll go ahead and take those as Scott So from a China standpoint, we are really and I've talked about this a little bit on my prepared remarks, we're really pleased with how we're interacting with the Chinese consumer right now that dates back to the fact that we've been in the market since $19 95 and have a really loyal following there. In addition to the fact that we have really strong.
Leadership throughout that region. So I'm really pleased with that so the Lee brand continues to do well from the Wrangler brand kickoff standpoint, yes. It has been about a year now coming up on a year actually and it continues to meet the targets that we've set for it from the standpoint of how we're rolling it out how the brand is being received I think the one thing that will be exciting for us is youre going to see some more demand.
Creation on the Wrangler brand here really soon in China. So that's really exciting and then from a stimulus standpoint, the consumer for us.
We play in all markets. So for US that's really important we play at the highest market that we play in the mass market. So we have a wide ranging consumer in addition to the fact that we have picked up multiple different programs, which is really important for us and it's broad based so it's not just here in Europe. It's in China, It's not just in our core but I do.
I want to make mention of that our core business is really important to us. It's really strong we're really pleased but we're continuing to do more and we're not stopping from a sustainability and innovation standpoint demand creation, we're pushing the envelope hiring great people gearing up for a really good horizon to turn this into a.
Real growth vehicle going forward. So thanks for the questions really appreciate it.
Our next question comes from the line of Brooke Roach with Goldman Sachs. You May proceed with your question.
Hi, good morning, and thank you so much for taking our question.
But wondering if you could talk a little bit about the recent success of your new distribution wins that you have achieved over the course of the past year, it's great to see how many wins you've seen a craft partners and channels and sub segments of the brand, but I was wondering if you could talk a little.
But about how those programs are performing with each of your partners are they comping positively as the anniversary of the first year and how important are some of the new realized distribution wins to the strong one H revenue outlook into 'twenty totaled two thank you.
Okay. Thanks Brook. This is Scott I'll take that.
Let's start with Lee so a year ago, we kicked off a new program with a major customer one of our win with the winter customers and that has gone really well. The POS has continued to improve in addition to that it has gone so well in the consumer takeout and the acceptance has been good we're really pleased with the products. We've won some additional programs on the Lee brand.
That customer so really important to us.
T shirt category, which we entered and we talked a lot about it's $100 billion category. Just accessorized is so well with our bottomed and we've got a couple of really big wins, there talk about 1700 doors and again, we're really pleased with the initial take out in the Pos.
<unk> is another example of this year 3300, new doors a category, that's really really important and then I think about things like outdoor so a couple of years ago. We introduced this line and it has grown significantly it's really important to our business. It has given us confidence as a company that we can do things outside of our core.
And we've got multiple multiple points of distribution that are working but specific to your question.
Testing right now for instance, here in the U S and also in Europe with inter sport and we're testing here with Academy and both of those tests are going very well and the Pos is going very well and the consumer takeout is really good they love the product. So I'm feeling really confident from a new business development standpoint from a new category standpoint for our team.
Theres going to be more that we're going to come out within the future, which is really exciting but for those specific instances feel really good about the first half relative to that and about what we're building going forward in the future. Thanks Brook.
Thank you.
Our next.
Question comes from the line of Sam Poser with William Trading you May proceed with your question.
Hi, Thanks for taking my questions guys.
One the guidance for the fourth quarter, the implied guidance for the fourth quarter, but how should we think about Lee and wrangler business.
Are you constrained by inventory at all in Q4 from a revenue perspective, given its implying a fairly good deceleration.
And.
Just based on what I'm looking at I mean, it's.
So a fairly good acceleration and it looks like your momentum is a little bit stronger than what you're giving us.
Yeah, Sam Good morning interested I'll go ahead and take our take that piece you know as we think about the fourth quarter.
Certainly Scott laid out all of the things that.
We're confident confident about moving into holiday as well as.
Into 2022.
Tried to take into consideration the chasing on the demand and the inventory side and reflecting that guidance in split out sort of commentary by brand, but we did talk a little bit about the fourth quarter for Lee.
Returning to strong growth and so we wanted to on the <unk> piece.
What we're seeing there is really strong Pos.
That's really pulling from consumers and that's supported by some increased air freight to meet that demand you know Lee tends to be Sam a little bit more of a source business than wrangler, and we're seeing strong momentum from a Pos perspective, seeing strong momentum on the digital side as well and then there are some additional business development.
Wins, including our holiday program on the lead piece. So so that's driving it I think the point I would really bring home on the fourth quarter Sam.
Because certainly as you recall last year, there was a 50 <unk> week et cetera is going back to 2019, and if you exclude those actions around <unk> in India.
Fourth quarter projection on it.
<unk> is scheduled to be up 3% to 4%. If you exclude those actions, it's 13%. So again it speaks to the momentum of the business and really the investments and to Scott's point earlier, the broad based support we're seeing across channels categories and geographies.
That's giving us that confidence.
Okay. Thanks, and then on the.
On the on the SG&A I mean, I'm, just sort of backing into.
I'm sort of just backing into numbers, but it looks like I mean, it looks like youre going to spend.
Over.
Over.
No.
A lot of money on SG&A, and even was even before like on the old numbers. It looked like it was going to be a large number.
I mean as SG&A going to be up you know.
$35 million $45 million from Q3.
I mean is that correct.
Yeah, a couple of things to comment on as you think about comparisons Sam to prior year, particularly.
Particularly Q3, there were some some COVID-19.
Related sort of expense reductions given the uncertainty around COVID-19 last year. So so that distorts the comparison to prior year a little bit.
As you think about Q4 and the investments I'd draw you back to the prepared remarks with the Wrangler and Lee campaigns, just now dropping.
So certainly we want to get out and support those campaigns were very excited about it as you heard us talk about on the call and the opportunities that are there and based upon the returns that we've seen.
Thats whats, giving us that confidence that we want to dial up that $15 million.
Of incremental investment into digital on demand creation, and again, that's going to be a <unk> <unk> headwind on EPS, but we think that is the right move for the investment on the brands not just in 'twenty, one, but in 'twenty two and beyond.
And in my prepared remarks, you saw how we're inflicting there Sam you know, we're going to be up and advertising projected to be up in expected 40%.
Compared to last year's numbers, and that's about 100 basis points.
And 20% over.
2019 numbers as well so again very pleased with the investments and that's what's giving us the confidence to distort and make sure. The brands are healthy for the long run.
Our last question comes from the line of Jim Duffy with Stifel. You May proceed with your question.
Hi, This is Peter Mcgoldrick on for Jim Good morning.
It seems like.
Hi, guys. It seems like you've got a lot of momentum in the marketing messaging for both brands can you provide any insight to demand creation priorities between them, where what are the biggest dollar opportunities for investment and then looking into 2022 are there any.
Marketing opportunities that might not have been there at the beginning of 2021.
Yeah, Peter I'll take that this is Scott we feel really good about both brands and about the opportunities to invest in both France and I think that you heard me talk a little bit earlier about these new global AD campaigns that we kicked off in Bolton fairly.
Inefficient for us Peter because that Hasnt been done in these brands before.
And it's something that's going to set us apart. It's also something that I think is a springboard for the organization to build upon as we go forward and we think about the power of these brands, we're going to learn a lot from both of those two and I think that's really important but I think if there's anything I want you to take from it I want you to take from the fact that there's a ton of opportunity left here demand creation is.
Huge opportunity for us, we're going to continue to invest in it and we're starting to invest at a level that our competition has been investing in for a very long time and it feels good to get to that point that we need to so that we can go ahead and continue to grow these brands globally much more to come going forward really excited about the Georgia may Jagger Leon bridges.
Is all the different things and the collaborations with Pendleton that Lee is doing there's just so many things that we haven't done before but it's all in a logical sequence that'll play out over the next couple of years and our big Global AD campaigns, we're exactly where we wanted to put that when we wanted to put them because we hit our playbook metrics. So thank you Peter.
Ladies and gentlemen, we have reached the end of today's question answer session I would like to turn this call back over to Mr. Scott Baxter for closing remarks.
Yes.
Thanks, everyone really really appreciate the time that you afforded us today, thanks for being here with us on the journey and I want to wish all of you a SaaS safe happy holiday season, and we'll look forward to talking to you again next year. So thanks, everybody have a great day.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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Okay.
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