Q1 2022 Kontoor Brands Inc Earnings Call
Greetings and welcome to the contour brands Q1, 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
Please note this conference is being recorded.
I will now turn the conference over to your host Eric Tracy Senior director of Investor Relations. Thank you you may begin.
Thank you operator, and welcome to contour brands first quarter 2022 earnings conference call.
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.
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.
First quarter 2022 results are on a GAAP basis.
Select comparisons the first quarter 2021 results will be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier. This morning and is available on our website at Contura brand's dotcom.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release. These.
These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Pearsons will be in constant currency unless otherwise stated.
Joining me on today's call are contour Brands', President Chief Executive Officer, and Chair, Scott Baxter, and Chief Financial Officer Rustin Welton.
We anticipate this call will last about an hour Scott. Thanks, Eric We appreciate all of you joining us on today's call before I speak to our first quarter results I'd like to acknowledge the ongoing crisis in Ukraine. The tragic events that have unfolded in the last few months are having a profound impact on the world our priority continues.
<unk> to focus on supporting the health and safety of our team and community in the European region from humanitarian aid donations to organically driven initiatives from our European leaders to simplifying organizational movements in the region. We will continue to do our part and hope for a fast and peaceful.
Resolution to this unspeakable crisis.
And beyond the war in Ukraine, We also recognize the many ongoing global macro economic challenges the mandatory COVID-19 lockdowns in China, inflationary pressures and supply chain disruptions all weighing on the global operating environment.
As we have consistently stated contour is not immune to these macro pressures. However, we rigorously pressure test our assumptions from inflationary pressures on input costs, like cotton and oil or China lockdowns in attempting to best capture how these macro factors could impact our outlook to be clear.
Our confidence comes from what we control with our contour specific strategies and superior execution, driving first quarter outperformance and supporting our raised guidance here today.
Our first quarter results are a direct function of the incredible efforts of our colleagues around the world their resiliency and passion for excellence allowed us to navigate the challenging environment to deliver strong Q1 performance.
Turning now to our first quarter results. We once again saw broad fundamental strength across our portfolio with performance coming in above our expectations and guidance for both revenue and earnings.
Global revenue came in above our plan growing 5% over last year. These gains continue to be supported by investments in elevated design demand creation and innovation.
All of which enhance our core business, both wrangler and Lee experienced positive global performance in the quarter and as you can see from our Q2 and full year guidance, we expect both brands to accelerate off the strong Q1 results.
To augment.
At our core we continue to diversify our range of distribution into accretive new channels, such as outdoor sporting goods work and premium specialty as well as scaling our digital ecosystem.
During the quarter, our global and U S. Digital wholesale business continued its great momentum up 25, and 37%, respectively and our branded digital platform was even more impressive with global and U S own dot com up 38, and 43% versus last year.
Our digital platforms are significantly reshaping our model driving deeper connections to both existing and importantly, new consumers like never before.
Helping drive this new channel expansion, we continue to broaden our product portfolio into new categories.
As we've stated in the past, it's really important to understand the breadth of category strength beyond our core denim business across outdoor with our performance Atg line work tops and T shirts, western and female to give you. Some perspective on this dynamic our core denim long bottoms business was up.
8% reported in Q1, while additional categories, such as workwear increased nearly 40% and T shirts were up over 70%.
What we love is our strategies and investments are creating a virtuous cycle of topline strength with solid share gains and AUR increases in our court increasingly bolstered by the scaling of new categories.
Most of which remain in the very early days of their growth.
Outside the U S. Despite the macro headwinds, we were able to outperform expectations.
Europe was up 19% driven by continued strength in digital and DTC, while we're on the topic of Europe I want to reiterate that we shared in early March we work with a small distributor in the region and do not operate directly in Russia and.
And as stated the business is de Minimis to our overall contour portfolio.
We chose to suspend operations with this distributor during the first quarter.
In China, even with Covid Lockdowns, we were able to deliver gains during Q1 with revenue up 3% reported and 1% in constant currency.
Rustin will take you through some of the specific building blocks, but our updated guidance reflects our expectations for continued macro challenges in Europe , and mandatory lockdowns, having a significant near term impact in China, particularly in Q2, we will seek to optimize productivity and both of these key.
Markets near term, while investing in and positioning our brands to capture the significant market opportunities long term.
I mentioned at the beginning that we have confidence in what we control confidence in our strategies and confidence that our investments will continue to support accelerating sustainable and more profitable topline growth in the future.
So while we expect macro obstacles will persist we intend to continue to amplify investments in critical growth enablers, such as Digitization demand creation and talent all of which we believe will help drive competitive separation both in the short and long run let.
Let me touch a bit more on these key areas.
First with respect to digital as you've seen with the really strong results not only in the quarter, but over the last year plus our investments in digital are yielding great success of <unk>.
Perfect example of how these investments take form is our recently launched virtual stores for both the Lee and Wrangler brands on each of the brand sites or new platforms allow the consumer to navigate within an interactive three dimensional retail space browsing items in a store and setting before seamlessly adding them to their shop.
And card.
Drawing from an extensive portfolio of products available online and in stores. The virtual stores feature of the brand's latest innovative design.
Top selling items in current seasonal styles.
Digital evolution is a critical component of our growth strategy as we enhance the overall omnichannel consumer experience.
Through these new virtual stores, we are offering consumers a more immersive experience with our core products and the opportunity to engage with our brands and a curated store experience that brings to life. The unique characteristics of each of our brands. This.
This is just one example of our ongoing digital evolution, leveraging a consumer centric approach to engaging existing customers and.
And acquire new younger audiences.
The second key growth enabler I want to touch on is demand creation last year, you heard us talk about ramping investments in advertising to support not only second half 'twenty one growth, but the 22 top line as well and the returns from these investments are evident in accelerating revenue growth anticipated to be up mid.
Teens in the first half of 'twenty, two and roughly 10% for the year. This again, despite the difficult operating environment.
The <unk> original equity campaign that launched late last year continues to build globally, having a tremendous halo effect on our core business, while also generating new business and more elevated premium points of distribution beyond our equity campaign Lee is partnering with key influencers that sparked heightened brand awareness.
From Soho to London to Shanghai, and these partnerships extend the brand relevant collaborations, including our most recent with the iconic Smiley brand to celebrate the 15th anniversary of Smiley Lee has joined hands with the renowned brand on our new global lifestyle collection.
Bringing to life the original Smiley campaign take the time to smile.
Curated capsule blends iconic lease silhouettes and Smiley positivity for a much needed feeling of hope and optimism that is perfectly positioned for spring 2022.
And finally, we are really excited to announce that lead will be sponsoring the Bonnaroo Music Festival. This June reinforcing the brand's long standing relationship with music culture and original expression.
With wrangler and the brand's 75th anniversary celebration. This year, we are enhancing demand creation efforts through our for the ride of life campaign, and elevated social media platforms, allowing the brand to reach new consumers like never before.
Our brand ambassadors, including Georgia May Jagger, and female and Leon bridges in mens further support this enhanced reach to younger and more diverse consumers.
And the authentic collaborations such as our recent partnership with the iconic music brand vendor highlights how the Wrangler Blaring brand plays at the heart of cultural influence with a focus on freedom.
Self expression and independence.
I know some of you will be joining us in a few weeks out in Texas, and we're really excited to share how these brands investments come to life, including in our Fort worth Stockyards Wrangler store. This full price concept or showcases the pinnacle expression of the brand in a really elegant way and serves as a bit of a tech.
<unk> lab in blueprint for how we think about the beginning to layer, a brick and mortar stores within our D to C strategy.
The third critical growth enabler I want to touch on is talent.
As you saw us make some significant organizational announcements during the first quarter. We feel that this is exactly the right time to further invest in our people and we did just that in promoting Tom Waldron and Chris Waldeck to co COO.
<unk> their existing responsibilities as global brand presidents, we understand the natural questions around why <unk>. So let me provide some insight to our rationale.
With the completion of our ERP implementation, we now have the tools and processes in place to amplify the globalization of our operating model now is precisely the right time to elevate and broadened Chris and Tom's rules.
This is taking on more leadership for go to market strategies in all international markets as well as global DTC.
Tom has greater oversight of certain operational aspects of the business, including supply chain product development innovation and procurement.
And importantly, I look forward to partnering with them in the years to come to help drive. This next phase of the journey.
This also afforded us the opportunity to elevate other key members of our senior team rewarding them for their incredible leadership and execution over the last few years, while ensuring our gulfport organizational mindset continues to pivot towards growth.
These incremental investments in growth enablers, not only digital demand creation and talent, but also in supply chain innovation, ESG and enhanced product design capabilities.
All support our brand's health and importantly improved pricing power, we've talked about this in the past, but I think it's really crucial that folks understand how these investments have positioned the Lee and wrangler brands differently than in prior years.
Especially relevant given today's inflationary environment, the combination of our quality of sales efforts in cleaning up distribution and amplified brand investments.
Has and will continue to drive a mixing up of Aur's, while also supporting a greater ability to strategically price.
Before I turn it over to Rustin, let me close with this the operating environment remains challenging, but I would note that since we became an independent company nearly three years ago, we have yet to operate in anything but a challenging environment.
Even with the macro obstacles and even with our proactive actions to exit over $200 million of revenue and implement a new global ERP platform.
Our 'twenty two guidance implies revenue growth in the high single digit range and EPS growth of greater than 20% over 2019 levels.
And despite the macro since the start of 2020, we've generated over $600 million in operating cash flow, allowing us to materially delever the balance sheet, while simultaneously paying our superior dividend and initiating a share repurchase program returning $274 million to shareholders over.
The same period.
Accelerating fundamentals and improving capital allocation Optionality are a testament to our team's incredible execution through this period.
This ability to navigate through difficult times, while still investing for the future is powerful and it gives me great confidence that contour is on an excellent path rustin.
Rustin.
Thank you Scott and thank you all for joining us on today's call.
Scott mentioned, we are very pleased with our first quarter results results that came in above expectations, driven by a catalyzing growth strategies.
I will start with a review of the quarter before providing additional context on our outlook for the balance of the year.
As a reminder, comparisons will be in constant currency unless otherwise stated. Additionally, my discussion of 2020 to first quarter results are on a GAAP basis and will be compared with adjusted results from 2021, which we believe is the most relevant and accurate method for investors.
Comments will focus on key highlights and I will refer you to this mornings release for additional detail on the quarter.
Beginning with revenue global revenue increased 5% compared to the prior year growth was broad based across brands categories channels and geographies, reflecting the progress we are making against our initiatives.
We saw particular strength in our digital businesses as well as strategic growth categories, including the incredible performance in Ts in workwear that Scott highlighted earlier.
In addition, the growth we are seeing is healthy as we continue to chase demand in the marketplace.
On a regional basis U S revenues increased 4% driven by continued momentum in key channels and categories. It.
It is important to note domestic revenue and corresponding profitability results were significantly tempered by year over year comparisons associated with timing shifts in advance of the North American ERP implementation in the first quarter last year.
In our digital business U S own dot com increased 43% compared to the prior year supported by continued AUR increases across both brands.
Our investments in our digital platforms are also helping to drive growth with new consumers.
During the quarter female had the number one selling style on wrangler dot com and the female business on Lee Dot Com saw similar success.
International revenues increased 9%, we saw strength across most markets and channels, including 19% growth in EMEA and 18% growth in international D to C.
Turning to our brands global.
Revenue of our Wrangler brand increased 4%.
Growth was driven by continued strength in western and workwear as well as healthy contributions from Ts and female.
In addition, we saw sustained momentum in Wranglers digital business with U S own dot com, increasing 57% in the quarter.
Wrangler International revenue increased 20% driven by digital in China revenues grew nearly 30% as we continue to make progress scaling the brand across e-commerce and brick and mortar.
Despite our expectations that mandatory lockdowns in key China markets will impact near term results are excellent progress with the wrangler launch gives us tremendous confidence for the brand when conditions normalize in the region.
In EMEA revenues grew 26% with growth in nearly all markets as Scott mentioned.
And earlier, Russia, and Ukraine are de Minimis to our overall revenue and we do not own or operate direct business in these countries.
Turning to Lee <unk>.
Global revenue increased 7%.
Lee U S revenue increased 9% driven by continued demand at wholesale new distribution wins, and our digital business with U S own dot com increasing 17%.
Lee International revenue increased 4% driven by 13% growth in EMEA, partially offset by moderating trends in China.
As a result of Covid related lockdown starting in March.
I will touch on our expectations for China later in my remarks, but we remain very confident in the long term opportunities for the Lee brand in the region.
And finally from a channel perspective U S wholesale increased 3% non.
Non U S wholesale grew 7% and global own Dot com increased 38%.
Now on to gross margin.
Gross margin decreased 140 basis points compared to adjusted gross margin last year.
As you would expect there are a number of structural and transitory dynamics impacting gross margin. So let me expand on this a bit.
As we have discussed we continue to see benefits from structural margin enhancements, such as channel geographic and product mix as well as ongoing supply chain initiatives.
These structural drivers combined with strategic pricing contributed a positive 70 basis point.
Net margin improvement in the quarter and more than offset the impacts from inflation, including cotton Ocean freight and labor.
However, as you would expect we are also seeing elevated transitory cost such as air freight as we expedite shipments due to current supply chain constraints and as we chase demand.
These factors resulted in a 210 basis point headwind in the quarter.
We continue to have confidence in our ability to drive long term gross margin expansion from our structural initiatives, while working through these near term transitory headwinds.
I will provide additional color on our gross margin expectations for the balance of the year and our outlook.
SG&A expense was $196 million or $15 million increase versus first quarter 2021 adjusted SG&A.
Investments in demand creation digital and it investments product development and distribution expenses more than offset fixed cost leverage on improving revenue and lower compensation related expenses.
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 and beyond.
Earnings per share was $1 40, compared to $1 43 in the same period in the prior year on an adjusted basis.
Now turning to our balance sheet.
First quarter inventories increased 24% compared to last year as we have discussed we continue to chase demand with second quarter revenue is expected to increase 30% to 32%.
We're very encouraged by the broad based momentum we are seeing in both wrangler and Lee and anticipate improving inventory stock levels by the end of the second quarter.
We finished the first quarter with net debt or long term debt less cash.
$598 million and $194 million in cash and equivalents.
Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the first quarter was one six times within our targeted range of one to two times.
Finally during the quarter, we repurchased $23 million in common stock.
And at the end of the quarter, we had approximately $100 million remaining under our share repurchase authorization.
When combined with our strong dividend, we returned a total of $49 million to shareholders during Q1.
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.
These factors will primarily have an impact on first half year over year quarterly comparisons, but are not expected to impact the full year.
Given the impact of ERP timing shifts we thought it was important to provide quarterly guidance for the first half, including an update to the second quarter here today we.
We do not intend to provide quarterly guidance moving forward.
And now onto our 2022 outlook, starting with the second quarter.
Consistent with prior guidance Q2 revenue is expected to be in the range of $640 to $650 million.
Increasing 30% to 32% compared to last year.
Momentum and incremental strength in the U S is offsetting headwinds from the Covid related lockdowns in China, resulting in a meaningful shift in revenue composition from prior guidance.
With that given developments in China, a region that I know is top of mind for you let me provide additional color.
Our brands are well positioned and continue to resonate with the consumer and we began the year with February year to date results considerably above prior year and our plans before slowing in March and April as traffic softened and Lockdowns expanded.
We have taken a conservative approach for the quarter and have adopted a more cautious view for the year and our outlook, but remain optimistic about the long term prospects for our brands in the region.
And finally, given geographic shifts and strength in the U S. We anticipate gross margin headwinds in the quarter.
Due to mix on lower China revenues higher transportation inflation and.
And elevated transitory costs to meet consumer demand.
Quarter EPS is now expected to be in the range of $1 five to $1 15 compared to prior guidance of $1 25 to $1 35.
Now turning to our full year outlook.
Revenue is now expected to increase at approximately 10% to more than $2 $7 billion.
From our prior guidance in the high single digit range.
Importantly, this top line guidance assumes a few key factors, including a more cautious outlook in China.
Uncertainty in EMEA.
<unk> consumer demand in light of inflationary pressures and conservative elasticity assumptions around price increases.
We expect these factors will be more than offset by key contour specific drivers, including momentum on both brands driving broad based revenue growth.
Strong unit in AUR growth and strategic price increases in the second half.
Gross margin is still expected to be consistent with 2021 adjusted gross margin of 44, 6%.
As discussed earlier improvements and structural gains are expected to be relatively offset by higher transitory costs.
In terms of structural gains we continue to anticipate the combination of strategic pricing actions.
Ongoing accretive mix improvements to digital and cost savings initiatives to more than offset inflationary pressures.
In fact structural gains for the year are projected to modestly exceed our original estimate of up to 100 basis points of improvement, which has allowed us to absorb mixed pressures from COVID-19 related impacts in China and hold our original guidance for the year.
In terms of transitory costs and similar to my comments on the second quarter. We continue to expect higher expenses as we chase demand to remain through Q2, and then moderate as we move through the second half. These.
These two elements are expected to largely offset for the full year.
SG&A investments, we will continue to be made in our brands and capabilities.
From a phasing perspective compared to adjusted SG&A in 2021, we continue to expect SG&A growth to be relatively consistent with revenue growth for the full year with second half investment and inflation stronger than in the first half.
EPS is now expected to be in the range of $4 75.
To $4 85 per share up from $4 65 to.
To $4 75.
This EPS guidance does not assume the benefit of any future share repurchases.
As I stated in my opening remarks, we are very pleased with the momentum we're seeing in the business without question. The environment remains highly dynamic, but simply put our strategies are working as reflected in our raised guidance for the year.
Moreover, we remain confident in our improving capital allocation optionality.
Which is particularly important in an uncertain environment.
As we have discussed our approach is multifaceted, meaning it does not have to be either or as we consider these options, but as you are seeing will be a combination.
This is allowing us to return cash to shareholders through our superior dividend and increasingly opportunistic buybacks, which combined have returned over $270 million since the start of 2020.
And.
To fortify our balance sheet with over $200 million of net debt reduction over the same period, ending the first quarter in a considerably stronger financial position.
And to invest in our business to support future growth.
Such as the talent and demand creation investments Scott touched on earlier.
And to pursue potential accretive M&A.
The combination of this optionality with improving fundamentals is powerful.
And as Scott mentioned gives us great confidence that contour is on an excellent path.
We look forward to sharing more on these initiatives in 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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Our first question comes from the line of Jay sole with UBS. Please proceed with your question.
Great. Thank you so much.
Scott you talked about your confidence in raising our full year guidance given macro uncertainty maybe you could just elaborate a little bit more on some other aspects that gives you the confidence to.
To raise that full year guidance, especially with some of the challenges on supply chain costs and also if you can tell us a little bit more about your assumptions for global and U S. Consumer demands that are embedded in the guidance. Thank you.
Sure Hey, Jay how are you. Thanks for the question good to hear from you.
It stems from the momentum that we had last year and that momentum carried into the first quarter of this year, which we felt really good about and obviously, we've got a nice view of the second quarter and the rest of the year that gives us confidence in our business, but I got to tell you. The single most important thing is this is not the company. It was four years ago. We've made so many structural changes we were land.
After a few years ago as far as the channels that we're in but now the channel work that our team has done across the globe. The categories that we've expanded into if you think about what's happening now globally as people go back to work and people go back to leisure I think about how we structured the company and how we're set up with people going back to leisure with our outdoor and T shirt line people going back to work with our denim <unk>.
Which has been fantastic because consumers have now gone to casual workwear retire which has been really important for US obviously, China is close right now, but all of us know and all of US have been doing this a long time, China's going to reopen again and there is going to be some pent up demand there and prior to their closing our business was really strong as we've talked about and most importantly.
Our brand is really healthy there and our team is really healthy there. So it gives me really good confidence in the fact that.
Since we've come out as a public company, we have navigated some incredibly difficult waters and we continue to do that that's a testament to the team that we've put together, but I like the work that we've done the investments that we're making in our business we've been conservative in our elasticity assumptions and we put ourselves in a position to win.
From the strategies that we invest in whether it be digital innovation, our people so feel pretty confident there.
A little bit about demand.
Right now relative to the consumer that we see globally and the North American consumer we see really good demand, we see a strong consumer we assess consumer that I mentioned earlier, that's going back to work Thats getting back into the leisure world, that's going the ballgames and picnics and doing those things again, which are all really good for our business, we think that Europe , and China will get healthy again, we think of course the.
China open up so we feel good about that but it's what we can control and thats. The most important thing and what we've controlled as our new business development. The great product that we're putting out there the demand creation. The work that we talked about the wrangler is done the sender the big campaign that we have right now with both of the brands around the globe. The work that we just did with <unk>.
Finally from a collaboration so we're controlling our own destiny and I like how we're doing that and we'll continue to do that going forward.
Thanks, Jeff got it okay. Thank you.
So much.
Our next question comes from the line of Adrienne <unk> with Barclays. Please proceed with your question.
Alright, Thank you very much good morning, and nice job on the first quarter.
I guess Scott.
I'm going to stay on the topic of China for a second can you remind us.
How many of these stores are there in China and what's the proportion of your sales that are sort of the tier one or sandy impacted cities.
What's the expectation for clinical and normalization of our kind of like when do you would see that demand normalized.
And then for western.
Couple of questions here.
Pricing power, how does the order book look for fall holiday.
Any any.
Improvement in sort of like pricing power to your channel partners. My last question is more broadly on transportation spot pricing on intermodal is coming down you don't have a lot of exposure to.
China far east manufacturing, so just wondering if you're embedding that into the back half.
And anyway, Thank you very much.
Thanks, Adrian Adrian I'll go ahead to start in China, and then I'll hand, the ball over to rest and he can go ahead and talk about any other pieces.
But from a China standpoint.
Look at it like this our business there has been extremely healthy we introduced the wrangler brand last year.
During a difficult time to introduce that theyre during the pandemic, but it has caught on with the consumer and they are really now starting to get our network is really stable there as far as our franchisees and our own stores. Our team is really stable, we really like the team we really like the leadership. Most importantly, as I mentioned brand health is exceptional we had a really good last year, we had great momentum going.
And this year were really strong in January and February and then obviously locked out if you think about our business as we've stated before we are really strong on the tier one cities.
Beijing, Shanghai as the Hong Kong and then that's where the opportunity lies so as we build our model out and as China's tier two three and four cities get larger and more metropolitan and sophisticated we have an opportunity to go ahead and build our model out in those cities. So we think that there is really really big green space opportunity goes.
Forward in China, and a pretty significant way and again, it's the top of the line brand with extremely good brand health with a very young consumer and a brand that's very well known we've been there 20 plus years have a really strong leadership position. There so feel really good about China going forward.
Like everything else you know these things happen, but China will open and we will continue to grow there and feel good about the team.
Right yes.
Thanks, and good morning, Adrian It's Rustin and I'll go ahead and talk a little bit about the pricing power order book as well as the intermodal that you mentioned so.
As we think about it.
Certainly every inflationary cycle has its own kind of nuances, but as Scott talked about earlier, our brands are in a meaningfully different place versus the last cycle and we feel like we're really well positioned for several important reasons.
First is the strength of our brands as Scott Scott talked about our efforts around strategic product categories like western like Workwear and brand enhancing collaborations that Scott talked about are really driving that brand strength and that momentum that we see moving into the second half and is providing a great opportunity for us.
Strategically price.
Second the investments in demand creation are just improving the engagement with new and existing customers and we're seeing that in strength in areas like female that we've talked about in our prepared remarks. So we saw that in the first quarter results and it's really helping support our confidence in providing our raised guidance.
But I will dimensionalize this a little bit we want to make sure that we're prudent and you heard us talk about that in our remarks here as well as our prepared remarks.
Feel like we have been prudently cautious on China on EMEA consumer demand as Scott spoke of earlier and then on the elasticity. So we've reflected that in and when you look at our guidance.
Our first half revenues are now expected to be up mid teens versus the low teens that we talked about in the prior guide.
And full year at 10% approximately so that implies a second half of <unk>.
Mid single digit on the revenue side. So we're factoring in those elements, but feel really good about the strength of the brands and the momentum we have.
In terms of your question on intermodal certainly we're watching.
Every day all of the supply chain movements.
On distribution transportation, whether its ocean air and land parcels.
Et cetera, and certainly are blessed to have.
Kind of what we believe is a world class supply chain that is helping us navigate these items you saw in the first quarter, we talked about.
Transitory headwinds near term of 210 basis points, that's really chasing that demand that we're seeing in the market.
So we've factored in the latest thinking around intermodal as well as the other elements of transportation here into the guide.
And again holding that full year gross margin at 44, 6% consistent with prior year.
Fantastic Super helpful Best of luck.
Thanks, Ed.
Sorry Adrian.
Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Good morning, and thank you so much for taking our question Theres a lot of moving pieces within the margin profile of the business but.
I heard in the prepared remarks.
You're now anticipating.
Even better sequential improvement in your structural gross margin drivers relative to it to the last call and I was wondering if you could talk to the drivers of that sequential improvement in our structural gross margin gain.
Is it that's driving that improvement and then perhaps on offsetting that can you quantify the pressure that you anticipate in QQ and <unk>.
Second half between China AUC in airfreight. Thank you.
Sure Brett Good morning, Let me go ahead and take those I will say we were pleased our first quarter gross margins came in above our plans.
So certainly that's encouraging we talked.
In our guide about how we expected on an annual basis up to a 100 basis points of transitory headwinds almost exclusively front half affected as we chase demand here, so certainly youre seeing that play out.
And in the first quarter here.
In terms of the full year in our prepared remarks, we said up to 100 basis points previously of structural margin gains.
Given the first quarter given what we're seeing now the fact that we've got.
Raw material input cost.
Really projected to impact the 'twenty two P&L, they're largely finalized.
Said, we saw an opportunity to be modestly above that 100.
Basis points improvement on the structural prior to the mix impact from China. So again that pulls us back into that range of up to 100 basis points on the structural piece and allows us to absorb that unanticipated makes impact coming from China. So that's how the pieces play out a little bit.
Do you think about Q.
Q2, specifically.
Certainly not going to do.
Guide in individual market here in China, but we talked a little bit about taking a more conservative view to Q2 in a cautious view.
On a full year basis to China.
So certainly that's we're fortunate to be able to offset with the strength in the U S that topline impact from China in Q2 and hold our prior guidance of $640 to $6 50 in the second quarter.
But it does create a mix issue.
As you certainly know and so that's putting some pressure.
Q2, gross margins and certainly we've seen some movements on oil.
<unk> et cetera that have continued to move so we factored all of those into our guidance here in Q2.
And Thats whats driving it a little bit of the pressure from a from an EPS perspective in the second quarter, but but again would draw back the first half EPS.
Largely consistent with our prior guide and certainly on a full year basis, raising the EPS given the confidence we have.
Thank you and then maybe just a follow up for Chris.
Scott.
As you look across your network.
The business across the U S can you talk to the areas of the portfolio, where youre seeing the most strength in demand.
And where that demand is really coming through as a result of the increased demand creation spending that you've been putting into that market.
Thank you.
Yes.
Sure can do that broke so if you think about some of the things that we've talked about one of the things is that we have a really strong core denim business as you know and we've seen really good demand. There. It has to do with a couple of things that has to do with the fact that as we've talked about we have really increased our investment in demand creation. So people are much more aware of our brands and then of course from a channel standpoint, we've increased.
But in addition to that you've got a new world, what's happening relative to how people dress and go to work and socialize and Thats that casual world. So we're going to be one of the great benefits.
Playing in that category in that world. So we're pleased with that.
The other day, we're building some really great product too with our teams and that really resonates in a pretty strong fashion and when you go ahead and start at like the top of the pyramid more instruments and places like that and then you have alluded with offering a segmented offering all the way through it really lends to your brand health, which is important for us, but I'll tell you. The other places that we'll really see them.
Strong demand and this is important for our brands is that would you introduce these new categories like T shirts, and outdoor in workwear and you've put some really significant investments behind the meet those engines to work and we've got those engines really firing right now so the consumer loves our outdoor category value on our brands. They love the name in there.
How those products to form outdoors.
T shirts segment of ours that we've talked about has been dynamite really love that.
In addition to that work for a segment I mean, we are a workwear brand ethos of our brands from a long time ago for both brands so being in there in a significant way has really helped us to other things that I would be remiss. If I Didnt mentioned one is the fact that when we started this journey. We said one of the most important things that we would do is we need.
The branch to the point, where it was digitally growing digitally driven brand and you heard some of the results from some of our prepared remarks today on our digital business, how significant it's becoming and how we're way ahead of the curve.
What we laid out in Investor day, and how we put a team together that understands the consumer how the consumer is now migrating to us online and how that helps us to average up and our mixed up so really pleased with that but we're going to continue to grow that and continue to push that hard and I'll leave you with this there is a very strong momentum from the web.
<unk> business around North America right now.
I think people are wanting to be outside wanted to be in the great outdoors wanted to be in the big spaces and there seems to be this is going to be long lasting in my opinion and as you know wrangler was born as a western business and is benefiting from being in that big strong category. So we really like our positioning in the western <unk>.
Also I hope that helps.
Thank you so much I'll pass it on.
Our next question comes from the line of Bob durable with Guggenheim Securities. Please proceed with your question Hi, Good morning, just a couple of questions on first on the European sort of performance <unk> outlook can you can you give us a little bit more color by country, what youre seeing and.
And I guess just.
Have you moderated your plans around the expectations in the back half of the year, just I'm just trying to understand exactly how youre looking at it by market and if you've seen any major changes.
Over the last few months I think the second question is just back on the gross margin when you when you consider the airfreight that you have.
I just want to make sure are you done with significant air freight for the year in your gross margin expectations and then my third question would just be just you could give us a little more updates on capital allocation, specifically around the share price and the levels of the shares where we are today that would be great share repurchase program.
Okay. Thanks, I'll go ahead and start off Bob and take the questions on Europe in gross margin and in past Scott for the for the capital allocation.
If you step back and you look at our European business.
As you know Bob we are predominantly western European focused in our business.
We certainly talked in the prepared remarks about.
Russia, and Ukraine being de Minimis to your overall business.
Did see a strong first quarter here up 19%.
In constant currency again in Europe .
Certainly I think it will be a little bit soft tooth as we go through the year.
In Q2, Youll recall that Europe actually went live on their ERP implementation at the beginning of Q3 so.
Certainly some timing shifts associated with Europe , as well Q2 in Europe will be a little more pressured.
Given the timing shifts in 'twenty, one in that market.
Whereas Q3, we anticipate will be stronger certainly comping. The go live from the prior year. So wanted to Dimensionalize that certainly are much less magnitude as you know Europe relative to our U S business, that's out there, but again focusing on what we can control in that market and again.
<unk>.
Certainly we saw great strength as we mentioned in our wrangler business in almost all markets in Europe , but predominantly western European focused.
As you think about airfreight, Bob we said up to 100 basis points of transitory.
Incremental transitory cost here in 2022, almost exclusively front half loaded.
So certainly if you go back to the back half of 'twenty one.
Certainly the supply chain disruptions really starting to began in Q3 and Q4 of last year. So we had incremental transitory costs there.
But again the additional transitory we expect really in the front half here as we chase demand and anticipate being in a stronger inventory position at the end of the second quarter.
Hey, Bob how are you.
Got it thank you.
Good. Thanks, I would say for US really you think about capital allocation and how we think about it we paid our debt back much quicker than we thought because we create so much cash that we put ourselves in a really great position. So if you think about how we kind of positioned ourselves I think.
Back to last year, we increased our dividend, we already had a very strong dividend and increased 15% on top of that so the yield today with a very attractive stock prices really significant obviously because of that increase in the dividend and what was already there. In addition to that creating a $1 billion of cash over a three year period. It puts us in a position where if we wanted to pay back some.
That although we feel like we're in really good position there we could we've been buying back shares as you know we bought back last year and we bought back this quarter, we still have dollars available in our share repurchase program. That's out there right now so we still have a big incremental piece that we can do we do like the stock at the prices is now obviously, we were buying back in the <unk>.
First quarter, but we're also still thinking about M&A too, but M&A has got to be right. Its got to be the right price that's got to be the right fit it's got to work with our company and our brand and we have to be able to add value to it and really be able to show the investor World why and how and make sure. It has value, but I think most importantly is that we're going to continue to create.
This craft cash and we don't have to do just one thing that is probably the most important thing we're creating so much cash that we could do everything I, just said and still be in really good shape and execute on all of them quite frankly as you know we're executing on a few of them right now as we speak and still generating aggressive cash so.
We're going to we're going to continue to be aggressive in our share buyback going forward, we're going to continue to do everything we can to make sure. We're running a really good business and investing back in the business and investing back into brands and the people. So.
Hopefully that answers your question, but I really like where we sit right now.
Thank you Scott.
Thanks, Bob.
Our next question comes from the line of Sam Poser with Williams trading. Please proceed with your question.
Thank you for taking my question.
I have a handful here.
Number one on China, you mentioned that it was strong.
January and February can you give us some little more specific on what you were seeing them.
So we can sort of.
And what it sort of turn to.
Or what you are anticipating it will be for the second quarter relative to the strong started the year.
Yes.
Yes, Sam good morning, it's rustin.
Go ahead and take that one.
We mentioned in our prepared remarks, we we did see strength at the start of the year.
Significantly above.
Prior year and our plans February year to date, certainly we saw softness start in March and April as the Lockdowns.
Spreads so we're very confident that it's.
The softness that we saw was not a result of our strategies are our brands in any way it's the traffic.
Been affected.
We're continuing to monitor the situation there we've taken a conservative approach to our Q2 outlook.
Relative to China, given the current situation, but as you know it's very fluid. So hopefully that helps provide a little context.
I mean, you said that all before I'm wondering sort of what is significantly being where you're up 20% going in and then it fell to a low single digit negative.
I'm trying to just sort of get some.
Context to sort of the definition of significantly.
Yes understand Sam I'm, not going to break out an individual numbers by market, but certainly you know that our China growth rate.
Is out there on a long term basis.
We're investing heavily in the region and so certainly have.
With expectations that are out there in that double digit range longer term as we've talked about so.
Certainly we are taking a more conservative look on Q2, and a cautious look on the full year, but not going to provide specific numbers.
Okay, and then you mentioned this investment and the demand creation sort of across the board and that was.
It was working can you give us some idea of in the first quarter, if you sort of.
Had a number like coke.
Like an expectation of what you would drive from that demand creation versus what you actually drove it doesn't need sort of like.
That demand creation drive, 10% more than what you originally anticipated or.
What can you attribute what kind of what part of the beat in the first quarter can you attribute to the demand creation.
Yes, when we think about demand creation as you know Sam every everything we do we take a total shareholder return lens to it so and we don't measure it on a quarter by quarter basis, I mean, we do but we don't set expectations and plans on a quarter by quarter basis, we look at it on a program basis. So when we accelerated.
Soon demand creation in the fourth quarter.
Last year as we've talked about before that was intended not only to support holiday, but to support the front half of 2022 as well. So we're certainly in the middle of that now Scott talked a little bit about the campaigns, we feel really good about the campaigns again that mid single or mid teen growth in the front half.
Demand creation is certainly a key element of that and keeping the brand strong.
But not going to split out any specific return numbers today, yes, and Sam. This is the first time, our consumer in the last three years since we've taken over the business has seen a consistent pulse of us from an advertising standpoint before years ago, we would come in and do something something and it would be quick it would be a quick hitter, we'd move on we'd move out and we didn't have the budgets to go ahead and do.
Something consistent and long term, but now our consumer is seeing us two different exciting things and we're testing things and we're doing things digitally but doing things like we haven't done before so but it's a consistent message and I think that's been really helped.
Hopeful and I think it's been beneficial with the consumer globally, too, which is really the key component.
Thanks, and then one last one.
When you updated your.
First half guidance on March eight.
You.
A lot of the numbers change like for instance, a lot of the combined estimates on the street, we're pretty close to where you ended up in Q1 and the estimates for Q2 were fairly close to what the guidance is for Q2. So can you can you define like can you give us some.
As to.
What drove.
The results in the last three weeks of March.
You beat that number and why and what change to lower.
Q2.
Yeah.
Somebody mentioned the saw tooth it feels like a little soft too for us so.
If you could help us or just give us some context, so that that would be great.
Absolutely Sam so in the first quarter again, we provided a revenue guidance on March eight as you indicated $6 50 to 660.
We've talked for several quarters were chasing demand and were chasing product and managing through global supply chain challenges that.
Certainly are very fluid Sam So we've said that the demand is out there for our products and if we have the product availability.
That certainly we feel like demand is there and you saw that in the first quarter. So as we were able to expedite product and you saw 210 basis points of transitory cost in the first quarter expediting that product and we were able to ship out and exceed the $650 to $6 60 range.
That we had previously provided.
As for the second quarter. It is very simple as to what changed in the second quarter and that's China.
Certainly we saw some.
Oil prices continue to move a little bit but for the most part it was China and we held the top line because of that strength that we're seeing.
The demand with with the product availability that we have Sam the demand creation, we talked about the category as Scott talked about we were able to absorb and offset the China softness.
Given the Lockdowns that were there, but from a profitability perspective, we wanted to make sure that we were reflecting the mix impact of shifting between.
<unk> in the U S as well as some of the inflationary pressures in the guide so hopefully that explains.
The change from the March eight thanks for the questions I appreciate it Sam.
Thanks Sam.
Our final question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Hey, guys. This is Peter Mcgoldrick on for Jim Thanks for taking my question.
I was just curious on the brand outlook into second quarter and the rest of the year. We obviously is impacted by outside China exposure, but how do you think are the building blocks to your updated guidance what has changed over the last few months on our brand growth perspective.
Yes.
Peter Thanks for the question addressed and I'll go ahead and take that with the outlook.
Certainly first quarter and as we've talked about we see strength in both brands moving forward.
As we laid out at our Investor day, So feel really good about both brands Youre correct that certainly.
China today is much larger in Lea than it is in wrangler.
So we will have a little bit more of an impact from that perspective, but again the strength you saw in the first quarter here.
With the brands being up mid single digits to high single digits, depending upon the brand.
We see strength and momentum moving forward with both brands, but Lee will be more impacted by China.
Okay, and then finally, just looking at the embedded assumptions for <unk> and unit costs and their influence our gross margin for the balance of the year.
What's your capacity to adjust for the rest of the year on the pricing side of the equation and.
How should we expect that to progress quarterly.
Yes, certainly we've.
Past strategic price and we've reflected that in our outlook here, Peter we're going to continue to monitor the situation as everyone is doing.
And certainly we will adjust accordingly.
Feel good about.
Kind of the price the combination of that strategic pricing mix.
Mix improvement the cost savings, we talked about that the ability of that combination of those three to be able to offset inflation that we see today.
And that's what's reflected in our guidance certainly we will continue to monitor.
The environment as we do every day thanks Peter.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Scott Baxter for closing remarks.
I just wanted to thank everybody for joining us on the call today I know these are difficult times globally right now, but obviously you can see we hear contour all of our employees globally are doing everything we can to control our environment and to have great outcomes for our shareholders going forward and hopefully you've seen the leadership that our team is providing across the.
To do that to do just that for all of US. Thanks, again, and we'll look forward to touching base with you again next quarter.
Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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