Q4 2021 Kontoor Brands Inc Earnings Call
Greetings and welcome to control brands fourth quarter earnings Conference 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 I would now like to turn the conference over to your host Eric Tracy Vice President of corporate Finance and Investor Relations.
And over to you Sir.
Thank you operator, and welcome to contour brands fourth quarter and fiscal 2021 earnings conference call.
Participants on today's call we 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.
Adjustments during the fourth quarter and fiscal years 2021, and 2020, primarily represent costs associated with the company's global ERP implementation and information technology infrastructure build out.
Adjustments during the fourth quarter and fiscal year of 2019, primarily represent restructuring and separation costs, a noncash impairment charge related to our rock <unk> Republic trademark and other adjustments.
A reconciliation 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 stated growth rates are in constant currency compared to the fourth quarter of 2020.
Also given the impacts of COVID-19 had on our prior year results. We will provide select references to the same period in 2019 for additional context where appropriate.
Joining me on today's call are contour Brands', President Chief Executive Officer, and chair of the Board, Scott Baxter and Chief Financial Officer Rustin Welton.
In addition, we will also be joined by Tom Waldron Global brand President of Wrangler, and Chris Waldeck Global brand President of Li.
Following our prepared remarks, we will open the call for questions. We anticipate this call will last about an hour Scott.
Thanks, Eric and thank you all for joining us today.
Eric mentioned, our global brand President, Tom Waldron, and Chris Waldeck will be joining us for this year end review. We believe these year end calls provide a great opportunity to have them share insights from the past year.
As well as go forward strategies for each of their respective brands Youll hear more from them in a bit.
Let me first provide some thoughts at a contour level as I'm pleased to share our strong results for the fourth quarter and full year and I'm, even more excited to discuss the building momentum of our brands and how our horizon. Two strategy begins to take hold which gives me great confidence in what lies ahead.
Our solid fundamental performance during 2021 was driven by the incredible spirit perseverance and effort of our teams around the world I want to thank each and everyone of our comp where colleagues, whose resilience and dedication to excellence.
<unk> us to not only deliver near term results. Despite the ongoing macroeconomic challenges, but also set the foundation for a brighter future ahead.
<unk> is not immune to the obstacles facing companies and individuals around the world, but I wouldn't want to face these tests with any other team.
At <unk>, we truly do win together.
I said this on our last call and I have even greater confidence today contour and our wrangler and Lee brands are now uniquely positioned to win in the marketplace to drive more sustainable and profitable long term growth and to create future value for all of our stakeholders.
What gives me confidence.
The proof points from our fourth quarter and full year 'twenty one performance.
If you look at our results relative to our initial 'twenty one guidance, we delivered significant upside for the year on all fundamental metrics revs.
Revenue of $2 48 billion represented roughly $150 million or seven points of upside to our original guidance, even while supply chain challenges weighed on the top line gross margin of 44, 6% came in almost 200 basis points ahead of our original guidance.
Despite incurring higher transitory freight costs as we chased strong demand as a result, our EPS of $4 28 for fiscal 'twenty one was 73.
21% above our initial guidance.
And what I Love is that this outperformance was reasonably broad based and accelerated from the first half to the second half of the year compared to 2019 total contour reported revenue increased 6% for the full year and 13% in Q4, excluding the impacts of our proactive.
Active strategic actions taken with our DSO and India businesses late last year <unk>.
Investments in innovation demand creation and elevated design helped to drive significant share gains in both the wrangler and Lee brands versus 2019 with increasing AUR is domestically. This is a tremendous sign that our strategies to enhance our core U S. Wholesale business are working allowing us to <unk>.
<unk> brand equity mixing into higher price points, and having greater permission to take incremental price.
To augment this core we continue to extend our reach into new accretive channels of distribution, including premium specialty outdoor sporting goods and the rapid evolution of our digital platform.
Compared to 2019, our digital wholesale business grew 85% and our own dot com grew 74% here again too.
Our gains our powerful story of increasing brand health experiencing low double digit growth over 19 in U S. One dot com.
At year end, our own dot com reached 6% penetration nearly doubling from just two years ago and is well on track to hit our Investor day target of 10% penetration.
The evolution of our digital ecosystem is a direct function of the incredible talent, we've added to the organization and enhanced demand creation for our brands.
Further diversifying our product portfolio new category expansion continues to play a huge role in Catalyzing topline growth again, it's really important to understand the breadth of category strength beyond our core across outdoor with our performance Atg line work tops in Ts as well as female.
In Western just an incredible range of product momentum.
With respect to our western business, Tom will provide more detailed insights but.
But we believe this is more than just a trend similar to our view on denim not just being a cycle, but part of a larger casuals Asian movement, we see our western business not just participate again, but driving a movement towards freedom of expression authenticity and connection to the outdoors.
A critical piece of our Catalyzing growth playbook extensions into new categories is well ahead of schedule in delivering outsized incremental business for contour.
And while we love the strong U S performance, we are seeing geographic expansion propels, new diversified and accretive growth as well Europe saw further wholesale improvement in the quarter as countries opened up which supported the gains from our evolving digital platform in the region.
<unk> 2019, Europe was up 12% for the quarter in China. Despite the much discussed uneven market conditions. We once again experienced nice growth in the region with Q4 reported revenue up 25% compared to 2019 or 13% in constant currency.
We will continue to monitor macro complexities fort.
Seeking to optimize productivity in the region near term, while positioning both brands to capture the significant market opportunities long term.
Before I turn it over to Tom and Chris Let me close with this <unk> is increasingly well positioned to win this is demonstrated by our fourth quarter and 2021 results and even more by our building momentum as evidenced by our fiscal 'twenty, two guidance and which we.
<unk> high single digit top line growth.
Rustin will provide further details, but this guidance assumes prolonged macro headwinds continue into 'twenty two.
Said another way our solid outlook would have been even stronger if not for expected ongoing transitory impacts from demand outstripping supply and inflationary pressures.
These accelerating fundamentals include 22 revenue of around $2 7 billion.
Which as a reminder, was our fiscal year 'twenty three targets established at Investor Day. So we expect to achieve this goal a full year ahead of our initial plan even as we assumed continued macro challenges where we are in fact catalyzing growth and we're doing this by investing in critical growth enablers.
Including demand creation, ESG innovation and an increasingly purpose led consumer centric organizational mindset all of which are incrementally different from how these brands was previously run.
Importantly, this future growth should be more profitable driven by enhanced AUR and mix shifts to accretive areas such as digital and international.
This improving operating model when combined with our increasing cash flow optionality should allow us to continue to deliver superior returns to all of our stakeholders.
Before I turn it over to Tom.
On behalf of all of us at contour, we want to acknowledge the deeply saddening events that have unfolded in Ukraine over the last week and sincerely hope that you and your families around the globe are safe and healthy.
Tom Thanks, Scott, it's great to have the opportunity to speak with you all today I've got a lot to cover so let's get into it.
This time last year I stated the wrangler brand was positioned better than it ever has been and that was true, but it's even more accurate today.
As we begin our 75th anniversary year demand for the brand has never been stronger it would be easy to assume that recent strength has been driven by fiscal stimulus supporting consumer spending and no doubt the health of the U S. Consumer has contributed but that would significantly underestimate what is new and incremental to our business.
And it would certainly underestimate the breadth of our product portfolio, whether compared to five years ago or one year ago. The evolution of our brand has been tremendous and we are just beginning stages of harnessing strategic investment to catalyze future growth.
As evidence that our investments are yielding superior returns, let me take you through some highlights of our fourth quarter and full year for fiscal 'twenty, one wrangler global revenue increased 4% versus 2019, but excluding our strategic actions, we even saw stronger up 8% and our business only.
Accelerated in the fourth quarter versus the year to date trends with global revenues up 10% versus 19, excluding our strategic actions and.
In Q4, Pos outpaced shipments as well in North America across planned accounts worth approximately 60% of our shipments.
Pos increased 11% versus 19.
Further demonstrating strength in our core U S wholesale business during 'twenty, one the wrangler brand in men's bottoms drove over 100 points of share gains compared to 2019.
<unk> mentioned, our core denim bottoms business, we are seeing broad strength with category channel and geographic growth.
First within category expansion Wrangler is rapidly evolving the product assortment, becoming much more of a lifestyle brand our atg outdoor line using highly differentiated performance innovation.
Diversifies our portfolio, both from a product and distribution standpoint.
Compared to 19 revenue in our outdoor business in U S increased 45% during 'twenty one.
A great proof point of our building momentum in the category are recent Atg test and Academy sports was extremely successful affording us additional door expansion in 'twenty two.
<unk> is driving incremental penetration of the sporting goods and outdoor specialty channels, allowing us to extend the wrangler brand to new consumers domestically and internationally in fact globally Atg is now selling through nearly 900 retailers within just three years since the line launched.
Within work, we are seeing great sell through with our recently launched programs at a key U S retail partner and we expect to build with new styles and expand into more doors during 2022.
Looking at our female category elevated design and marketing continues to have tremendous halo effect. The cascades across the brand, but is also scaling with long term opportunities for much greater volume in fiscal 'twenty, one our female business in the U S grew 84% over last year as.
<unk> of this recent success female achieved the number one style on <unk> dot com for the fourth quarter. The first time in history female represented the top spot. This is a great reflection on how the team is elevating design and enhancing demand creation.
Within Western let me Echo what Scott said earlier, we truly believe what we're seeing is much bigger than category trend, but a larger movement centered on authentic freedom of expression and adventurous spirit as the premier Western apparel brand. We are unequivocally leading this movement during 'twenty, one our U S western business.
<unk> grew 30% compared to 2019 and this momentum has continued with our strong fall 'twenty two order book.
We are also catalyzing growth for the Wrangler brand through channel diversification. In addition to the sporting goods and outdoor specialty channels, we are driving significant growth across premium and western specialty.
But perhaps most importantly, we continue to drive a greater connection with our consumer through the evolution of Wrangler Dot com during Q4, our U S owned Dot Com grew 45% over last year and was up 128% versus Q4 of <unk> 19.
The evolution of our site has been transformative with gains across traffic conversion and <unk> and we are just getting started in creating and building a more consumer centric digital ecosystem that is accretive to our model and.
And finally from a geographic perspective, the Wrangler brand continues to push into new frontiers with full year international revenue up 22% versus 2020 as.
Scott mentioned earlier Europe continues to improve as countries and retailers open back up which combined with our digital strength is a really positive sign and.
And in China, we continue to build on our successful digital launch into the region with the addition of a new premium brick and mortar store opening.
As we stated at our Investor Day, we will be measured in our approach to growth in the region looking to build and scale over the next few years.
The strength of this broad based performance during 'twenty, one and the momentum we see in 'twenty. Two is absolutely. The result of significant incremental investment. The Wrangler brand has made in key strategic areas, including demand creation digital innovation and talent.
As you can imagine our 70 <unk> anniversary celebration. This year, we are dialing up the wrangler demand creation efforts even more.
Our for the ride of life campaign is truly global in nature supported by partnerships with brand ambassadors, such as Georgia May Jagger and the recent signing of Leon bridges that allow the wrangler brand to reach new younger and more diverse consumers and we couldnt be more excited about how our collaborations with other iconic brands like billabong.
Yellowstone and most recently vendor authentically take wrangler to new Heights, and speaking of New Heights, we are thrilled to be dipping our toe into the meta versus designing our first ever NFC with Leon bridges, ensuring that wrangler plays at the speed of culture. These critical investments in demand creation and the broad based nature.
Our growth give me great confidence in wranglers unique position of strength, even as we continue to operate within an uneven macro backdrop.
As a testament to these investments we expect our most mature market the U S to lead our growth in fiscal 'twenty, two driven by both units and AUR gains we expect the core strength to be augmented by an increasingly diverse portfolio extending into new categories channels and geographies as a result, we expect <unk>.
<unk> revenue to surpass our topline growth targets, we laid out at our Investor Day, Chris.
Thanks, Tom and it's great to speak with you all today, let me start with stating how incredibly proud I am of our team and what they've accomplished this past year, we've embarked on a significant repositioning of the Lee brand and have now successfully established a healthy foundation for more sustained profitable growth globally demand for the leap.
Brand has never been stronger and I am confident we are well positioned to meet or exceed the targets, we set during investor day.
Through investments in quality of sales enhanced design and elevated demand creation, all in support of better mix and higher AUR.
We have significantly improved <unk> operating model globally over the last two years, we've exited a significant portion of margin dilutive wholesale business and a more than offset this with growth oriented margin accretive volume.
As evidence of this our core U S bottoms business has grown share since 2018, even while exiting underperforming points of distribution with the AUR in the category expanding over 10%. During this time. This is a testament to our laser focus on CSR.
And the impact on our global profitability has been meaningful.
From 19% to 21, we grew gross margin by 500 basis points now with the foundation in place and the momentum we have created for the brand I am confident that we will continue to drive more profitable top line growth.
So let me provide some insights as to how this growth has come together over the last year and how we see it evolving in 'twenty two and beyond for.
For fiscal 'twenty, one legal global revenue grew 26% over last year, and we love that we ended the year strong with Q4 revenues up 14% compared to 2000 and up 19% versus Q4 of <unk> 19, excluding the strategic actions.
Within our core U S business, we made significant investments to optimize our distribution, which impacted growth to give you some perspective compared to 19, the Lee U S business grew 1% however.
However, if you were to exclude the impact from strategic actions with VF outlets. The Lee U S business grew 6% versus 19 and again. These gains are even more significant in Q4 growing 21% compared to 19, excluding our proactive actions from a category perspective in fiscal 'twenty one.
Both our U S male and female categories grew over 20% compared to last year.
And our Mayo category elevated design and innovation platforms, such as MVP and extreme motion continues to resonate with consumers and our heritage collection is delivering uncompromising style and comfort leveraging our ultra Lux innovation platform and our female category.
And further diversifying our product portfolio, we have significantly expanded our T shirt distribution, adding over 2000 doors in 2021 with meaningful opportunities to drive growth in the category long term.
And as we look to channel expansion. These very same investments are allowing the Lee brand to play and higher tiers of domestic distribution, including premium specialty more closely aligned with the brand's premium positioning in international markets.
And our digital ecosystem has taken meaningful strides over the last year, our own digital platform. Historically are more transactional in nature is rapidly evolving into more of an experiential pinnacle experience of the brand.
<unk> Dot com was up 68% compared to 19 with AUR is up mid teens.
Beyond the accretive volume of our own digital business brings our domestic site is now having a significant halo effect the cascades across all channels of distribution.
And we continue to see solid performance internationally with geographic expansion a key element of <unk> long term growth algorithm in China. We can definitively say that Lee is now the number one premium denim brand in the region. Despite COVID-19 and other macro pressures, we delivered another strong quarter and our equity campaign <unk>.
<unk> double digit comps in our owned and partner stores and we're really excited about our new premium retail concept, we're calling pioneer we opened seven of these new formats in 'twenty, one and based on our early success, we intend to roll out the concept more aggressively in 'twenty two.
As Scott mentioned, we will look to optimize our China business near term and continued to position the Lee brand for opportunities in the region long term.
Our investments in demand creation over the last year have been a key driver of this broad based top line momentum, we reframed, our 130 <unk> brand through a modern lens without losing sight of who we are our lead original campaign launched late last year is resonating with existing consumers and bringing new young consumers in the funnel.
With over 127 million digital media impressions across social and live streaming platforms targeting the key 18 to 24 year old demographic, we are reaching a new younger consumer like never before.
Our increasing ability to partner with other Influencer brands like recent collaborations with Pendleton in the U S and forbidden city internationally further enhanced our positioning with a more diverse consumer base.
Before I hand, it over to Rustin, let me summarize with this the Lee brand has truly transformed and is in a better position than it has ever been we've established an incredibly healthy and sound foundation of which to grow and I see broad strength across categories channels and geographies, our marketing is resonating with consumers.
And demand for our products has never been stronger.
Our strategy and investments are delivering and Lee is on track to meet or exceed the targets of low teens growth, we established at our Investor Day Ruston.
Thank you Chris and thank you all for joining us on today's call.
As you have heard from the rest of the team. We are extremely proud of the results. We delivered in 2021 and are entering the new year with incredible momentum our.
Our global strategies are working and not just against a challenging macro backdrop, but in transforming the fundamentals of the business I.
I will touch on the progress we are making against our long term catalyzing growth strategy towards the end, but as Scott mentioned, we are well ahead of where we expect it to be just 10 months ago.
I will start with a review of the quarter as a reminder, comparisons will be in constant currency unless otherwise stated.
My comments will focus on key highlights and I will refer you refer you to this mornings release for additional detail on the quarter and full year results.
Beginning with revenue.
Global revenue increased 3% or 8%, excluding the impact of the 50 <unk> week.
Compared to revenue in the fourth quarter of 2019 global revenue increased 4%.
Excluding the combined impacts of the previously announced strategic actions related to BMO store closures.
Discontinuation of the sale of third party branded merchandise in all domestic stores.
In the India business model changes.
Mobile revenue increased 7% compared to 2020 and 12% compared to 2019.
On a regional basis for the quarter U S revenues increased 1% or up 6%, excluding the 50 <unk> week from last year, reflecting strong demand that exceeded supply as we navigate through global supply chain disruptions.
The demand we're seeing is broad based.
With strength in key categories and channels, such as outdoor western and workwear.
In our digital business U S owned dot com delivered its highest ever quarterly revenue.
Increasing 39% compared to 2020, and 108% compared to 2019 fueled by increased traffic and rising <unk>.
This result is a testament to the investments we have made and continue to make that are supporting a healthier business and driving our digital evolution.
International revenues increased 12%, we saw strength across most markets and channels, including continued growth in Europe , and China as well as in our digital business.
Compared to 2019, our European business grew 12% and China grew 13%.
Turning to our brands.
Global revenue of our Wrangler brand decreased 1% compared with 2020 and increased 6% compared to 2019.
Excluding the 50 <unk> week revenue increased 4% compared to the prior year.
As Scott mentioned, we are seeing strong demand that is outstripping supply. This is particularly true in the U S where our planned point of sale increased double digits versus 2020, and 2019, driven by outdoor western and workwear modern and female.
In addition, we saw continued momentum in Wranglers digital business with domestic one dot com, increasing 45% and 128% compared with 2020 and 2019, respectively.
We are extremely encouraged by the strong pull market. We are seeing in the U S and are working to align supply to meet accelerating demand as we move through 2022.
Wrangler International revenue increased 9% driven by new business development wins and strength in digital.
And in China building on the success of our Tmall launch in late 2020 Wrangler opened its first retail store in the fourth quarter as expected.
We remain excited about the long term opportunity for wrangler in the China market.
Turning to lead global revenue increased 14% compared to not only last year, but 2019 as well.
As discussed last quarter Lee was impacted by select transitory factors in the third quarter, but returned to strong growth in Q4 as expected.
Lee U S revenue increased 13% driven by wholesale new distribution wins, and our digital business with U S owned dot com, increasing 22% and 66%.
Paired with 2020 and 2019, respectively.
As Chris highlighted we are encouraged by overall demand, which similar to wrangler continues to exceed supply.
Lee International revenue increased 14%.
Driven by 23% growth in Europe .
In addition, despite macro challenges in the region lead grew 7% in China.
Strength in both regions was supported by amplified investments in digital and the ongoing recovery in our brick and mortar business.
And finally from a channel perspective, we saw continued broad based strength compared to the same quarter in 2020.
U S wholesale increased 3%.
Non U S wholesale grew 13% and global own Dot com increased 28%.
Now on to gross margin.
Adjusted gross margin decreased 60 basis points to 42, 6% of revenue.
We continue to see benefits from structural margin enhancements, including favorable customer and product mix and business model changes.
<unk> are improving gross margin algorithm.
These items drove approximately 80 basis points of net improvement in the fourth quarter, which more than offset inflation inventory adjustments and higher distress sales.
In support of strong demand and as you would expect we have also seen higher transitory expenses such as air freight as we move through Q4 that negatively impacted gross margin by 140 basis points in the quarter.
I will touch on these factors and our expectations for 2022 shortly.
Adjusted SG&A increased $31 million versus last year to $218 million.
Higher demand creation digital investments distribution expenses and compensation costs drove the increase.
Prior year comparisons were also impacted by reduced spending in 2020 in light of Covid uncertainty.
As we have discussed amplifying investments in strategic areas, such as digital and demand creation are important drivers of our catalyzing growth strategy and are expected to support strong demand in 2022.
Adjusted earnings per share was <unk> 88, compared to $1 23 in the same period in the prior year and compared to <unk> 97 in the fourth quarter of 2019.
Now turning to our balance sheet.
Fourth quarter inventories increased 7% compared to last year we.
We finished the fourth quarter with net debt or long term debt less cash of $606 million and $185 million in cash and equivalents.
Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the fourth quarter was one six times within our targeted range of one to two times.
Finally during the quarter, we repurchased $65 million in common stock at.
At the end of the fourth quarter, we had $125 million remaining under our current share repurchase authorization.
When combined with the strong dividend, we returned a total of $171 million to shareholders in 2021.
Our reflection of our increasing and powerful capital allocation Optionality that allows us to return cash to shareholders as market conditions warrant.
While investing in our business to support future growth.
Before getting to our outlook and as a reminder, 2021 was affected by various factors, including ERP timing shifts as well as temporary COVID-19 shutdowns and supply chain disruptions that resulted in quarter to quarter volatility.
As we turn to 2022. These factors will have an impact on a year over year comparisons on a quarterly basis, but are not expected to impact the full year.
And now onto our 2022 outlook.
Revenue is expected to increase in the high single digit range to approximately $2 7 billion.
Based on strong momentum we are carrying into 2022, we expect first half revenues to increase in the low teens range up from low double digits, we indicated last quarter.
Gross margin is expected to be consistent with 2021 adjusted gross margin of 44, 6%.
I know there is considerable interest in many of the individual elements, including inflation pricing and transitory costs, but let me simplify by saying.
We expect improvements in structural gains to be relatively offset by higher transitory costs in 2022.
In terms of structural gains, we anticipate strategic pricing actions continued mix improvements from distorted growth and accretive channels and geographies and cost savings initiatives to more than offset inflationary pressures.
<unk> with our gross margin algorithm, we outlined at our Investor Day, we expect up to 100 basis points of improvement from structural margin gains on a full year basis.
In terms of transitory costs, we expect to incur higher expenses almost exclusively a first half weighted as we chase demand given our accelerating top line.
Again on a full year basis, we expect up to 100 basis points of headwind from higher transitory costs.
SG&A investments will continue to be made in our brands and capabilities.
In support of the strong demand we are seeing in the marketplace, we expect to make incremental SG&A investments in demand creation digital and international.
From a phasing perspective compared to adjusted SG&A in 2021, we expect SG&A growth to be relatively consistent with revenue growth for the full year.
Second half investments stronger than in the first half.
EPS is expected to be in the range of $4 65.
The $4 75 per share.
This EPS guidance does not assume the benefit of any future share repurchases.
Finally, I would like to close with additional perspective on the progress we have made against our horizon, two and Catalyzing growth strategies.
<unk> with revenue.
As indicated we anticipate 2022 revenue of approximately $2 7 billion.
Well ahead of our Investor day algorithm and as Scott mentioned at our 2023 target a full one year ahead of schedule.
And as we have highlighted on today's call. There is no one single driver of this outperformance, but rather the combination of our growth catalysts driving broad based sustainable strength from both brands across the globe.
On margins since 2019 gross margins have expanded 380 basis points driven by structural gains of 520 basis points. While we have absorbed 140 basis points of transitory headwinds due to global supply chain disruptions.
Excluding the impact of these transitory costs.
We are approaching our 46% long term target two years ahead of plan.
Stepping back our strategies have fueled our virtuous cycle.
The ability to invest behind the top line momentum, we are seeing while improving operating margins by 190 basis points.
So where are the investments going and are they working.
As a percentage of revenues since 2019, we have increased our investments in digital by nearly 140 basis points.
And in demand creation by nearly 70 basis points.
Since 2019, digital wholesale and own dot com have increased 85% and 74% respectively.
We plan to continue investing in strategic areas, while leveraging top line growth and efficiency in non strategic areas.
And finally on our strong cash flow and powerful Optionality in 2021, our net income increased 15% over 2019 levels and helped drive cash generation.
Despite the pandemic, we have generated over 525 million in operating cash flow since 2019.
And have returned $225 million to shareholders through dividends and share repurchases.
Decreased our net debt by $200 million.
And completed a major investment in our global ERP initiative.
I am extremely proud of the results, we have been able to generate in a dynamic environment, a true Testament to the power of our model and the strategies we are executing.
While we remain in the early days of our horizon two transformation. It is clear we are well on our way to deliver against our long term targets and I look forward to sharing more on our progress over the coming quarters.
This concludes our prepared remarks, and I will now turn the call back to our operator operator.
Thank you.
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One moment, please while we poll for questions.
Thank you. The first question comes from the line of Jay sole with.
UBS.
Please go ahead.
Great. Thank you so much.
Question is.
Is it possible to elaborate a little bit on what gives you confidence in your raised 22 topline guidance, especially in light of some of the concerns that sort of priced into stocks right now around inflation and lapping stimulus and.
Just some of the other macro headwinds that are out there.
Thank you.
Hey, good morning, Thanks for joining us today, and I'm happy to do that.
US Jay when you think about 'twenty, one and then our Q4 results.
Our proof points.
In our business relative to the investments that we're making our brand how are we going to working and how our people are thinking about going forward I think for me though.
We look at it holistic.
It's broad based top line growth. So it is not just happening in a specific category or channel or what have you it's happening in the U S.
So what's.
What's happening in China, that's happening Europe , what's happening in our categories.
Turning in atg happening in work Ts, but things that we have taken a standard decided to invest it's really working and then what makes me feel really good going into the coming years, we have strong visibility for the first half, obviously and taken our guidance up from mid single to low teens relative to what we see in our business.
Real catalyst relative to all the great things for our people are doing.
So.
I think as we think about our incremental investments, how we're making those power and how we're making those work for our business. That's what gives me great confidence and I'll leave you with this.
For 'twenty to be stronger if it works for some of these transitory things that we're going through right now. So that's what gives me confidence in 'twenty two the escalation.
Just one last quick comment how we guided ourselves.
Thanks Jay.
Got it thank you so much.
Thank you.
The next question comes from the line of.
Roche with Goldman Sachs. Please go ahead.
Good morning, and thank you so much for taking our question I'd like to follow up a little bit on Jason's question and ask a little bit about how you're thinking about the revenue strength that you anticipate in the first half in particular.
Brands and channels any sense of what proportion of this momentum is driven by new program wins across.
Across the portfolio relative to comp growth.
Existing distribution.
Yes, good morning Brook addressed and thanks for the question and thanks for joining so I think if you step back and you look at the back half of 'twenty.
'twenty one both brands were up double digits in the second half of 'twenty, one so approaching 22 with significant momentum.
As we talked about in our prepared remarks, we do see low teen growth in the first half.
22, and it's really broad based across our growth catalyst and both brands as Scott talked about we're seeing that momentum really across the entire business.
As you step back and you think about new distribution and comp growth.
Dominic driven by by growth within the existing accounts, including category expense.
So one of the drivers for us in the back half of 2021 and you heard in our prepared remarks, just really broad strength across outdoor ACG workwear female.
And just really proud of those accomplishments and that momentum will continue and carry forward into the first half.
Thank you and then just a quick follow up on the gross margin expectations for the year. Thanks for all the color that you've provided so far but I would love to hear about how youre thinking about the benefit of higher pricing across the portfolio relative to the higher cotton and raw material input costs that the industry is seeing how do those factor.
Into the 100 best structural margin gains relative to the 100 bps of transitory cost that youre expecting for the year.
Yes, great growth.
So let me step back again, you hit it exactly right. We expect 100 basis points of structural margin gain being offset by 100 basis points of transitory headwinds again on a full.
Full year basis.
So for competitive reasons I won't itemize the individual elements.
Let's talk about kind of how we are assuming inflation transitory expenses and then those offset that you will pricing mix cost savings.
And how we expect those to all through 2022.
So as we look at inflationary pressures with product costs, obviously being the biggest driver, yes that really began to emerge in the second half of 'twenty one for us when you expect that to accelerate in the first half of 'twenty, two and then really peak in the second half of <unk>.
'twenty two.
As we talked about on last quarter's call.
As cotton moves in input cost move it takes a few quarters for it to come through the P&L and we see the inflationary impact.
Stronger in the second half.
Transitory expenses as we said in our prepared remarks.
They really kind of accelerated in the second half of 'twenty. One we expect those to peak in the first half of 'twenty two as we chase demand as we said.
And then we anticipate those to moderate and steeper.
Modestly in the second half of 2000.
And then as you think about pricing mix and cost savings, we think about those in one broad bucket yes.
Those are offset inflation and the incremental transitory expenses.
Those benefits are expected really began accelerating in the first half of 2002 with significant accelerating acceleration in the back half of 2002.
So hopefully that lays out a little bit more about the gross margin margin H C. R. We project.
And again I just want to highlight relative to our Investor day algorithm. Those structural gross margins are on track with up to 100 basis points.
In 2022.
Thanks, So much Roxanne and then just as a final follow up.
With our global ERP initiative in the rearview mirror and significant debt Paydown completed in 2021 can you provide an update on your capital allocation strategy from here. Thank you.
Yes, and then I can take that how are you doing Adrian.
Oh I'm sorry.
Okay.
So for us it's the.
Capital efficient nature of our model right, we've talked a lot about how we're thinking about that we've created creating a $1 billion from 'twenty one to 'twenty three paid down debt, we feel really good about where we are we've increased our dividends as you know last quarter, which was significant for us for us to talk about our share repurchase and we will think about M&A, but it's got to fit.
Gotta be complementary.
Consumer focused leverage our model so all of those things, but right now we feel really good about the optionality that we have and how quickly we got there as a company cash that we're generating as a company.
I think Scott hit the high points.
Just again draw you back to the prepared remarks of the cash we generated in how we deploy that.
Again net income has increased 15% 2019 and generated over $525 million in operating cash flow returning a large portion of that 225 million to shareholders decreased debt.
<unk> completed the ERP investments so that optionality only increases as we continue to move forward here in horizon. Two was set up that the debt reduction we've done it in the completion of the ERP.
Thanks, So much I'll pass it on.
Thanks, Bert Thanks, Brett.
Thank you. The next question comes from the line of Adrienne <unk> with Barclays. Please go ahead.
Thank you very much good morning to the team and well done I mean this is it's very rare we're seeing people.
Have an optimistic outlook, so it's really structural here.
Scott I'll start with you.
<unk>.
Digital penetration doubled from a few years ago sitting at 6%.
After day target, 10% that seems like it's going much faster.
How should we think about sort of the new target and how that flows into the P&L. If you got any color on it.
Out of accretion that we have from that channel. Thank you so much.
So I'll start Adrian and good morning, and thanks for joining US today, we're really really pleased but certainly not happy with where we are we are still working very hard to miss.
Forefront of everything we're doing and I guess to think that as we sit back and think about it. Most is that we made the decision not to be higher great World class talent continue to augment that and then we backed it up with investment right and now we're seeing that investment really work, we're touching the consumer in a really good way and then the demand creation.
Pete we're putting into the model.
So the real significant gains because of that so we are ahead of our investor day targets like you've talked a lot about and.
We will continue to.
Push really hard.
In this area.
And we haven't come out with any new targets, yet that we've shared with anyone but at some point in time in the future. We certainly will do that and update rustin anything to add.
Yes, I would just say that proof points, we talked about adrianne in the prepared remarks, I mean, we have increased the investment in digital.
At this point since 2019.
And again, our own dot com was up 74% since 2019, so obviously, an accretive channel for us for generating returns.
And we're certainly under index, even at that 10% target out in 2023 relative to a lot of the peers.
Okay, great amounts youre going to switch to Tom and Chris.
About demand creation I was wondering how you take the global or the corporate demand creation budget, how you're splitting it between the two and what exactly are the strategies that you are using to drive that brand momentum.
Yes, I agree. This is Tom I'll go first on that from a strategy standpoint, we're really excited to be in our 70 <unk> anniversary year, and we're excited to be investing behind a multifaceted demand creation approach kind of broken into three areas. One is our our equity campaigns are a variety of life is certainly contributing.
Two the broad.
<unk> growth that we're seeing secondly, the partnerships we're doing like the GA may Jagger Leon bridges. If you saw the female growth up 84%. We know that is driving significant growth for us in bringing in new consumers enter.
Or the coal ash that we're doing which is bringing new consumers whether it's Philip.
Yellowstone are vendor, but just couldnt be more excited about the 70 <unk> anniversary year.
Chris Yes.
Peter It's Chris well just look on the lease side, we really had a repositioning of the lead brand that we had to go.
And really drive through with the objective bringing.
Bringing that new younger consumer into our into our lease franchise.
Really excited about the progress we've made we've kicked off in Q4, our equity campaign, we originals and it's really resonating both with our existing consumers, but also with that new younger consumer that we're at.
We think about that into the first part of it we're really focused on driving our core U S wholesale business regions, and we think about that especially for the rebate. We brand. It's it's China that we're after so that's how we think about allocating our marketing and.
And where we are and it's it's again really the pre mutation of these brands and what we're trying to drive.
Fantastic question.
Just a quick one for you.
So your gross margins well ahead of plan I was wondering where you are in kind of the spectrum of reaching new highs in the gross margin how much more opportunity is there. So that's number one number two on inventory. It sounds like you have a really good handle on kind of the inventory what have you done how many more weeks of supply have you.
Got it.
<unk>.
The new organization to avoid some of the supply chain.
Kind of shortages of I'll say for lack of a better term and then my last one.
$100 oil, we hit that today, and so remind us what happened in 2010 to 14.
Yes.
It was part of the FCC at the time with your essential retailers had been to pick up and how much of the inflationary side of it and how much of the potential demand side.
Do you have if any baked into the guidance.
I'm not sure if that they're quick.
Sorry.
Well, Thanks, Adrian let me, let me start and make sure I captured.
Here, so that the gross margin.
Yes, we talked a little bit about it at Investor day, the 2023 target was 46%.
And we really talked about MC CDN too.
Those more accretive channels as we distorted breath and you've seen us distorted investment there and you certainly see sort of growth in those.
Channels like digital and geographies like the international side of the business. So.
Even with those targets as I, just mentioned on the digital side, but the 10% penetration target out in 2023.
<unk> significantly under index. So we're in the early stages of this we think there is opportunity beyond that we are not in any way.
And see that continuing to grow and that's why we're making those strategic investments in those areas.
Because as you know everything we do is on a DSR basis.
From an inventory perspective, if I can shift there.
We finished the year up about 7% in inventory.
Excluding the CFO in India, our inventory was up about 9% from the prior year.
Quality is good.
And as we said in our prepared remarks, we're chasing demand, which implies our results would have been even stronger.
As we think about our 'twenty two revenue outlook, we considered a demand and supply balance.
As we've said many times, we're not immune to the macroeconomic challenges that are out there, but certainly having a third of our global production and this year is an asset as we kind of chase demand.
We do expect inventory to grow during 2022.
We need that projected demand and going forward and that inventory gain or investment. If you will be tempered in part by some of the ongoing SKU rationalization initiatives that we've talked a little bit about it at Investor day.
So again, we will continue to chase and move through the inventory piece, but pleased with how we managed it so far.
And then your last question around elasticity and kind of going back.
2010, 2011 time period now I'll, just remind you that we are in a materially different place.
Today than when we were back then and we talked quite a bit about that on the last call.
With some of the investments we've made.
Growth into some of these new categories.
That growth in the premium channels et cetera. So.
Certainly.
We are watching.
The elasticity.
But.
Again I think.
During periods of uncertainty Bruce historically, just gravitate towards brands They trust.
And.
This exacerbated period of rising prices in Brazil.
For those brands that deliver great deal performance and of course value add.
That is absolutely right.
Right.
These brands play and we're really focused on delivering that compelling value, which has benefits received for price charged to that consumer when they walk out of the floor.
Great. Thank you very much great job.
Thanks Adrian.
Yeah.
Thank you. The next question comes from the line of Sam Poser with Williams trading. Please go ahead.
Good morning, everybody. Thanks for taking my questions I've got a few many questions have been answered.
You want them in an order or should I go one at a time, if you want to back you up for.
Oh, that's given to us and we will take them as you gave.
Okay, Lee and Wrangler business, when you think about it for the full year.
<unk>.
Is.
Which one do you think will increase more within your guidance number two.
Part of that is there any sales shift because of the 50 <unk> week.
Changes were there any shift of sales or is are we past that.
And then with the restructuring charges that happened in the fourth quarters could you give us some details there because like I said a lot of those.
Restructuring was pretty much going to be gone. Once you are done with the ERP. So one.
More details there as well as.
And outlook into 'twenty, two if there's any.
Nonrecurring charges on the horizon, but I understand that your guidance is a GAAP guidance and then lastly within the inventory levels.
Can you give us some idea of you're in transit.
This year versus both last year and the prior okay.
Great.
Okay.
Sam I'll take those.
So when we think about Lee and wrangler for full year 'twenty two.
As you know, we don't guide by brands.
Again I'll draw you back to the comments I made here in the second half both brands were up double digits, we've been investing as Chris and Tom talked about in our remarks and in the Q&A here behind both of the brands as you know everything we do is on a CSR basis. So we're continually looking at that and we see.
<unk> growth in both of the brands moving forward.
At or above those investor day targets.
In terms of the sales shift for the 50 <unk> week that is behind US we do not see.
Back Gary and the board are having an impact Sam <unk>.
Restructuring charges.
You had a question there and I think.
That really relates to.
How it's classified probably in the appendix b.
Restructuring charge, if you will that was under their restructuring and other costs was around $5 million I believe in SK and that was the conclusion of the ERP was the main driver of that so again that wrapped up with the implementation in the third quarter, we don't expect that moving forward.
Right now there is no.
Nonrecurring charges for 'twenty two that.
We've talked about which is why the SG&A has been guided on an SG&A basis, and then as you relate to inventory if I got you.
Last question.
Certainly we're in we're in chase mode, as we've talked about quite a bit.
So inventory in transit.
Finished the year, a little bit higher in 'twenty one than in 'twenty.
Certainly to meet the strong demand that we see in the first half with low teen growth.
Believe I hit all of those Sam Thanks for the questions.
Let me just do a two follow ups real fast okay on the in transit could you tell us what the percentage was this year last year in the prior year. So we can have some idea and number two with Lee and Wrangler I understand you're doing on CSR basis, I'm not asking for guidance I'm asking for do you expect the wrangler business today to grow more than we or vice versa.
So for the full year that's it.
Just trying to get a large picture.
Which one.
Higher growth from.
Yes on the inventory Sam on the entry and that I don't have the percentages in my hands, we'll get back to you on that.
As you think about the growth rates.
Again in 'twenty, two we haven't broken it out, but if we go back to the Investor day targets, we had lead growing modestly faster than that wrangler and again, that's over the 'twenty two 'twenty three time period. So.
That helps thanks, Sam alright, thanks, very much continued success.
With that thank you.
The next question comes from Robert <unk> with Google.
<unk>. Please go ahead.
Hi, Good morning. This is our analysts unit for Bob.
I guess can you give us more color into the trends at high end distribution partners and I guess.
Any color on China business.
Thank you.
Yes.
This is Chris and just give you a little background on our China business.
We've made some significant investments behind it both on the lease side of it with our new pioneer store in that format is really resonating well with consumers also on the wrangler side, just with our new store format. We have there and I think what we're really encouraged by with Wrangler in China is just how the brand positioning is resonating with consumers.
We're encouraged there obviously, there's macro issues that we're all dealing with out there and I think for US we will be looking at optimizing the business near term and then continuing to position ourselves for the long term success in China.
And then I believe your second question was about the premium channels for the brand.
Yes.
Yes.
I think Chris and Tom are best answered that yes, no absolutely.
Been working very hard on the permutation of the Wrangler brand.
Evidenced with some of our partnerships with George May Jagger, and as we've moved up channel.
Certainly partnering with specialty.
With our female line.
And really just better retail partners from a premium position standpoint, and creating this halo for the brand and really proud of the progress there.
Sure.
Okay. Thank you so much.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session and I would like to turn the call back to Scott Baxter for closing remarks. Thank you.
Well. Thank you everyone for joining us today I apologize that we didn't get to all the questions today, but certainly appreciate your participation. Thanks for the support and look forward to talking to everybody again next quarter have a great day and week everyone. Thank you again.
Thank you.
Today's conference you may disconnect your lines at this time, thank you for your participation.
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