Q2 2022 Kontoor Brands Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Comscore brands Q2, 2022 earnings call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star.
Zero on your telephone keypad for me to live operator at this time. It is my pleasure to turn the floor over to your host Eric Tracy Vice President of corporate Finance and Investor Relations. Sir the floor is yours. Thank you operator, and welcome to contour Brands' second quarter 2022 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.
Second quarter 2022 results are on a GAAP basis select comparisons to 2021 results will be on an adjusted dollar basis and in certain cases, we will make comparisons to 2019 results.
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 tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Comparisons will be in constant currency unless otherwise stated.
Joining me on today's call are contour brands, Chief Executive Officer, and sure Scott Baxter and Chief Financial Officer Rustin Welton, We anticipate this call will last about an hour.
Hi.
Thanks, Eric and thanks to everyone for joining us today I want to start today's call by sincerely thanking our colleagues around the world I had been greatly humbled by our team's agility collaboration and resolve to not only persevere through these dynamic times, but deliver on our near term operational results and drive industry leading.
<unk> CSR since our spin all while continuing to position contura for greater long term success.
And let's be clear to say the macro economic environment has been dynamic simply isn't enough let's call. It like it is it's been downright difficult from the Covid pandemic and Lockdowns. So the war to supply chain disruptions to inflation pressures that companies consumers and people around.
The World had and continue to face are unprecedented.
As we've discussed on many of our recent quarterly calls contour has not been immune to these obstacles.
In addition to and in the face of these challenging times, we have contour has executed a spinoff stood up an independent company implemented a new global ERP system and set the foundation for our Catalyzing growth strategy and as you'll hear more about today. We are further globalizing our operating model.
Including relocating our European headquarters.
We're really excited about these initiatives as they better position us to attract world class talent in the region unlock significant benefits for our organization and further support the transition to a growth oriented model.
We knew our journey would not be easy we knew it wouldn't be linear, but as we sit here today and even with near term macro challenges our strategies to further strengthen our brands operating model and organization over the last three years has been tremendous.
But they can't and don't transform our business and some of the legacy challenges overnight. This requires time and sustained execution I will provide greater insights on how we intend to do this in a bit but first let me touch on our second quarter results.
Despite the uneven operating environment, we were able to expand share Pos and AUR to drive top line strength in our core U S business, and we're still able to deliver on our profitability goals with operating income up over 50% year over year earnings up 57% coming in at the <unk>.
Midpoint of our guidance range now this bottom line strength didn't come without some incremental headwinds, including inflationary pressures and the much discussed retailer inventory rebalancing that caused the supply demand pendulum too aggressively swing as the second quarter progressed well.
While we had anticipated these factors with more fully weigh on second half results a somewhat tempered our strong underlying brand momentum impacting our top line sooner than we expected.
That said global growth was still strong up 27% in constant currency the expected declines in our international business, owing to China Lockdowns in timing shifts impacted comparison in Europe .
More than offset by strength in the U S with both the Wrangler and Lee brands at least 40% domestically.
These gains in our largest market were supported by the breadth and development of our product portfolio Q2 highlights and wrangler included the women's modern collection.
Mended by the workwear in western categories in fact, western summer seasonal bookings were up double digits.
In addition, the brand's product evolution once again saw strength in outdoor atg and growing momentum of its fishing sports specialty line Wrangler, England.
At Lee men's saw really strong performance within core denim casuals and seasonal with the brand driving share gains across all <unk> categories in the quarter.
Women's too experienced solid double digit growth as innovation platforms flex motion and ultra Lux supported the games.
Stepping back a bit from just our second quarter results versus last year I think it's important perspective to look at the first half performance compared to pre pandemic first half 2019, providing a more normalized assessment of the business. It also gives us a better indication of how we believe our strategies.
Have and should continue to drive diversified accretive growth across our core channels categories and geographies.
Compared to the first half of 2019 first half 'twenty two global revenue increased 5%, but more importantly increased 13%, excluding our proactive actions taken with DSO in India.
In terms of our core U S business, Wrangler, and Lee increased 19% and 14% respectively.
First half 2019 levels.
In our largest market both brands have driven significant share gains in the core mens denim casual bottoms business over first half 19, with wrangler up 80 points and Lee up 60 points.
Would be even greater if not for our proactive quality of sales actions to exit certain points of distribution.
Importantly, aur's driven by mix have also increased over this time period up double digits in the U S for both brands supported by innovation digital and expansion of the brands to more premium points of distribution.
Turning to our channel diversification with a focus on digital or first half 'twenty two global own dot com increased 111% and our U S owned dot com increased 140% compared to 2019.
However, we've been able to deliver this performance despite the multitude of macro challenges by making the long overdue investments to support these brands like never before in key growth enablers, such as talent demand creation and innovation.
From a demand creation perspective, both Lee and Wrangler continued amplify brand heat in Q2 and have exciting plans for the balance of the year.
First with Lee the team continues to haunt enhanced marketing efforts to elevate brand positioning, particularly within digital spend integrated seasonal demand creation, including the streaming summer campaign free your originality by Lee original drove holistic digital experiences across consumer touch points supporting <unk>.
$61 million digital media impressions, and a 103% year over year increase in social media traffic during the quarter.
Fantastic brand bright partnerships also remains key and lease premium position strategies, including the second drop of the highly successful KOL app with one hundreds that launched in May.
Yeah.
And perhaps the most exciting moment in Q2 and reflective of how different the brand is showing up in the market compared to years past, we sponsored the Bonnaroo Music Festival engine celebrating American culture, and the spirit of originality brand activation events were highlighted by the original vitry not only a one of a kind piece of art.
900 square feet of Lee denim scraps, but an interactive brand experience that allows music hours and brand of <unk>.
We knew.
Mark by decorating the tree with additional lease throughout the festival.
It is exactly these types of demand creation investments that have helped support lease elevated brand health.
Collected in Q2 domestic men denim casual bottoms share gains, which increased 50 points over last year in AUR is that increased 22% over 2019 levels.
With wrangler.
The branch 70, <unk> anniversary celebration continued in the second quarter with demand creation efforts to our for the ride of life campaign in elevated social media platforms, allowing the brand to reach new consumers like never before.
Similarly, distorted investments in digital drove meaningful growth.
<unk> $73 million additional media impressions and significant year over year growth in traffic to wrangler Dot com.
Collaborations such as our recent partnership with iconic music brand tender highlights how the Wrangler brand plays heart cultural influence.
Augmenting the vendor co lab Frankfurt has further lean into its brand connection with music to catalyze consumer engagement.
Acting as the exclusive denim sponsor of the two Lollapalooza music festivals in Chicago, and Berlin, as well as Austin City limits and collaboration with these three iconic music festivals celebrating self expression and shared passion for music fashion and culture kicked off with our 75 days of summer.
<unk> offering 75 days of prizes to destination music festivals.
And the Wrangler Booth and interactive customer space brand enthusiasm are able to buy exclusive denim festival merchandize and personalize it with free laser customization specifics to the event.
Complete lineup Lollapalooza by Wrangler apparel, including Tees, and denim is available on wrangler Dot com.
Finally, we are really excited to amplify wranglers 70, <unk> anniversary with an upcoming New York City events, including a preview of our Wrangler Lee Umbrageous collection, followed by our performance by the Grammy Award winner himself I know some of you on this call will be joining us for that event you can't wait to share this with folks.
As you can see we have an incredible amount of brand elevating activation with both brands and we will continue to invest behind these demand creation efforts to drive brand equity consumer reach and topline growth in 'twenty two and beyond.
So let me now close with how we think about the go forward as you've seen we lowered our outlook today not necessarily an indication of the healthy momentum we are experiencing in our own business recall from our initial guide back in March we anticipate that the back half to be more greatly impacted by these factors.
We reflect an even more conservative view of the macro backdrop, particularly retailer inventory rebalancing and ongoing lockdowns in China.
Despite the macro headwinds we remain focused on executing our strategies as we have stated frequently we anticipate that future revenue will be driven by outsized growth in category channel and geographic expansion. This is important as we look to diversify our portfolio beyond U S wholesale.
As I said earlier this doesn't happen overnight.
We are absolutely investing in those accretive areas.
Channel diversification and enhancing our digital platform.
While leveraging our global brick and mortar learnings to further develop a holistic.
Oil price DTC omnichannel experience for our consumers.
While we have established a target of 10% digital penetration by 2023, our opportunities to vertically integrate our DTC model showcase pinnacle product in more directly connect with our consumer are much greater.
And importantly at accretive margins.
From a category perspective, you have already seen the tremendous strides we have made to evolve our product portfolio.
And in bottoms.
We remain in the early days and what we love is the breadth of this category growth across western.
Outdoor workwear Ts female and really importantly, it's authentic natural extensions that leverage each of the brands.
And finally, turning to international expansion, we remain highly under indexed in markets outside of the U S. As most of our peers do nearly 50% of their business internationally. So a significant opportunity for us to nearly double the size of our business over time as.
As we've discussed we expect macro pressures to weigh on international, particularly China over the near term, we continue to aggressively invest in positioning ourselves for substantial long term growth.
Both Asia and Europe .
Highlighting this investment to enhance growth I'm excited to announce today that in Q3, we made the decision to further globalize our operating model.
<unk> the relocation of our EMEA headquarters to Geneva, Switzerland.
The implementation of our global ERP infrastructure and foundation now complete.
It's the ideal time for us to further drive global operating efficiencies and accelerate our transition to a growth oriented organization.
The long term benefits. These actions are significant including providing greater capital efficiency, improving go to market capabilities enhancing access to best in class talent and driving SKU rationalization.
The announcement reflects our commitment even when macro conditions remained difficult to continue to strategically invest for long term sustained profitable growth.
We also recognize the need to be agile in this environment, we will accordingly look to tightened non strategic expenses.
Further a significant actions we've taken over the last several years to fortify our balance sheet and optimize our capital structure afford us increased flexibility to navigate the choppy waters. These moves coupled with our proven strong cash flow generation even in periods of macro uncertainty gives me great confidence at Contura.
We'll continue to accelerate our competitive separation.
<unk>.
Thank you Scott and thank you all for joining US today I know you all have questions on a number of macro topics, including consumer demand inflationary pressures and retailer inventory rebalancing.
So I'll begin by discussing some of these key external factors before reviewing our second quarter performance and closing with how both are incorporated in our updated 2022 outlook.
Let's begin in the U S.
As Scott mentioned, many retailers began to rebalance inventory levels during the quarter to better reflect supply and demand signals in the marketplace.
While retail apparel inventory levels have been well chronicled at a macro level I want to dig a little more into specifically our core categories and how our brands performed at point of sale.
Over the past three months the U S total measured market for denim bottoms casual pants and seasonal grew in the low to mid single digits across both mens and womens segments with men's categories, performing a bit better than women's.
And men's bottoms, our largest core segment wrangler and Lee significantly outperformed the market in our key categories of denim and casual pants.
As we have stated previously we believe consumers migrate to trusted brand in times of uncertainty.
With the investments made in product innovation and demand creation that Scott outlined the value proposition of Wrangler and Lee is as high as ever.
And we saw this resonate with consumers during the quarter at point of sale.
And women there was disparity across the portfolio with strength in casual pants and softness in seasonal.
But wrangler and Lee outperformed the market in the majority of categories.
And while market softness in the seasonal category is noteworthy as it is a key rebalancing focus for retailers with discounting taking place prior to end of season, our seasonal business has outperformed the market to date.
On a broader level retail inventory challenges have led to more restrictive open to buy dollars that adversely impacted our second quarter shipments and are expected to continue into the back half.
But stepping back we are very pleased with how wrangler and Lee performed at point of sale in the U S. We are.
Clearly winning on a relative basis, and how consumers continue to embrace our brands and offerings in our core categories.
In the international markets the quarter generally played out as anticipated.
In China, Shanghai reopened in line with our expectations during the quarter, but citywide lockdowns and restrictions on movement in a number of jurisdictions, such as Chengdu Shenzen and most recently Wuhan remain.
These restrictions are impacting consumer behavior, and brick and mortar traffic and are contributing to a more conservative outlook for contour in the back half.
And Europe , FX pressures accelerated in the quarter with the Euro and U S. Dollar at parity for the first time in two decades.
We expect currency headwinds to continue to timber results.
Turning to supply chain.
Inflation on input costs, such as cotton and crude oil, which affects freight surcharges spiked during the quarter to year to date highs before moderating in Q2.
We are not assuming a significant benefit from recent commodity reductions in the second half of 'twenty two.
Given the six to nine month lag time on impacting our P&L on many of these entities.
With this backdrop lets review the second quarter results beginning with revenue.
Global revenue increased 27% compared to the prior year growth was driven by strength in the U S across both the digital and wholesale channels.
On a regional basis U S revenues increased 40% driven by continued broad based momentum.
In addition to strengthen our core we are encouraged by the progress we are making in diversifying the business into new categories, such as outdoor workwear and Ts.
All of which delivered strong growth in the quarter.
And in our digital business U S owned dot com increased 24% compared to the prior year supported by our distorted investments in digital which are driving improved traffic and AUR.
International revenues decreased 11% as expected Covid related lockdowns in China and compares due to the EMEA ERP implementation in 2021 weighed on the quarter.
Turning to our brands global revenue of our Wrangler brand increased 36%.
Growth was driven by continued momentum in the U S, including strong contributions from western outdoor in workwear.
In addition, we saw strong growth in Ts, which increased triple digits compared to the prior year.
In Wranglers digital business U S owned dot com increased 28% in the quarter.
Wrangler International revenue increased 8% with gains in non U S Americas, partially offset by timing shifts related to the 2021 ERP implementation in Europe .
Turning to lead global revenue increased 12%.
Lee U S revenue increased 40% driven by momentum in performance and comfort styles as well as new product platforms.
We also saw strength in digital with U S own dot com, increasing 14% and U S digital wholesale up 97%.
Lee International revenue decreased 22% as discussed Covid related Lockdowns in China had a significant impact on the quarter, particularly in April and May.
We did see a sequential improvement as lockdown, these particularly with our digital business, which saw double digit increases in June .
And finally from a channel perspective U S wholesale increased 44%.
Non U S wholesale decreased 10% and global owned Dot com increased 10%.
Now on to gross margin.
Gross margin decreased 260 basis points compared to adjusted gross margin last year.
As we discussed last quarter, we continue to see elevated transitory costs, including airfreight.
These factors resulted in a 170 basis point headwind in the quarter.
In addition, unfavorable geographic mix shifts, resulting from China, Lockdowns and ERP related timing shifts in Europe .
<unk> and a further 150 basis point decline.
Partially offsetting these headwinds were the benefits from strategic pricing, which more than offset product cost pressures in the quarter.
SG&A expense was $178 million or an $11 million increase versus first quarter 2021, adjusted SG&A as.
As a percentage of revenue SG&A leveraged by 510 basis points in the quarter.
Emmons trading the benefits of our highly efficient model and multiple levers to support profitability, while still investing behind key growth enablers, such as demand creation digital and it.
Earnings per share was $1 nine compared to <unk> 70 in the same period in the prior year on an adjusted basis.
Now turning to our balance sheet.
Second quarter inventory increased 33% compared to last year.
Compared to pre pandemic 2019 levels inventories were flat.
We finished the second quarter with net debt or long term debt less cash of $647 million and $145 million in cash and equivalents.
Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the second quarter was one six times within our targeted range of one to two times.
Finally during the quarter, we repurchased $40 million in common stock and at the end of the quarter, we had approximately $62 million remaining under our share repurchase authorization.
When combined with our strong dividend, we returned a total of $65 million to shareholders.
During Q2.
Before we review key assumptions regarding the outlook for the balance of the year I'd like to take a moment to reflect on our first half results.
In March prior to Covid Lockdowns in China.
Retailer inventory rebalancing efforts in the U S.
Incremental inflationary pressures.
We provided a supplemental breakdown on our first half outlook, given our ERP implementation in 2021.
Specifically, we indicated that we expected global revenue in the first half of 129 to $1 three 1 billion.
A 13% to 15% increase compared to 2021.
Although the quarter's unfolded differently than expected due to macro factors. Our first half revenue grew 14% in constant currency compared to 2021.
Similarly on the Bottomline, we indicated in March that we expected first half GAAP EPS of $2 40 to $2 60 per share.
Or a 13% to 22% increase compared to 2021 adjusted EPS.
We delivered GAAP EPS of $2 49 in the first half.
An 18% increase in constant currency compared to 2021 adjusted EPS.
Despite the many factors we have discussed we were able to deliver top and bottom line results right in the middle of our expectations.
Our agility and focus on execution combined with our brand momentum in the marketplace clearly gives us confidence to navigate future uncertainty.
So.
How are we thinking about the second half in light of everything I just covered.
Let's begin with revenue in.
In our previous outlook from last quarter, we mentioned that we expected the first half global revenue to increase in the mid teens range with full year global revenue to increase at approximately 10% compared to 2021.
This guidance implied a mid single digit increase in the second half.
Notably.
We were already incorporating anticipated consumer demand softening due to inflationary pressures.
Our updated outlook now assumes second half global revenue to be relatively flat compared to 2021, driven by two primary factors.
First we anticipate open to buy dollars to be somewhat restricted as actions to rebalance retailer inventory levels are implemented.
We expect these issues will weigh on our top line more than originally anticipated with the third quarter more pressure than the fourth quarter.
Second.
Given the ongoing COVID-19 restrictions and Lockdowns, we believe China will remain a challenging market and now believe it is prudent to take a more conservative approach to our second half outlook.
In sum.
We delivered global revenue growth in the first half of 14% in constant currency driven by U S growth of 19% compared to 2021.
With our more cautious updated outlook, we now expect second half global revenue to be relatively flat compared to 2021.
In terms of gross margin a few items to call out.
Inflationary pressures that peaked during the second quarter, we will continue to pressure gross margins as will the retailer inventory rebalancing and adverse geographic mix from a more conservative approach to China.
We expect these headwinds will be somewhat offset by lower transitory expenses, such as air freight and continued structural mix shifts to accretive channels and strategic pricing.
<unk> I wanted to spend a moment on SG&A importantly, first and foremost we will continue to make thoughtful strategic investments as Scott highlighted.
Including digital international and the globalization of our operating model to accelerate diversified accretive growth over the long run.
However in light of the uncertain macroeconomic environment, we expect tighter expense controls on non strategic and discretionary items.
Additional details on our outlook can be found in today's earnings release, but to summarize.
Revenue is now expected to increase approximately 6% for the full year with second half relatively flat compared to 2021.
The third quarter is expected to experience greater pressure relative to the fourth quarter.
Gross margin is now expected to approximately 43, 5% compared to adjusted gross margin of 44, 6% achieved in 2021.
We expect gross margin year over year headwinds to moderate in the second half.
With the third quarter experiencing greater pressure relative to the fourth quarter.
Adjusted SG&A, excluding an estimated one time charge of $18 million associated with our globalization efforts and European headquarter relocation is now expected to increase at a mid single digit rate compared to adjusted SG&A in 2021 relatively consistent.
With revenue growth.
Adjusted EPS, excluding an estimated one time charge of 25 per share associated with our globalization efforts and European headquarter relocation is expected to be in the range of $4 40 to $4 50 per share.
Finally, I want to briefly provide some comments regarding inventory cash flow and capital allocation.
Since the spin we have discussed actions to improve our inventory metrics.
Looking back to 2019, our inventory levels are flat despite higher 2022 projected revenues.
Given the U S retail inventory rebalancing efforts during the quarter, our inventory levels did finish higher than expected, but importantly, we feel good about the quality as the majority is in more evergreen styles, and we will be working to sequentially improve from these levels in the second half.
Additionally, Q4 is historically the highest generating quarter from cash from our operating activities and we expect this to continue in 2022.
As we have discussed we remain confident in our capital allocation Optionality, which provides us with tremendous flexibility in times like these.
We're clearly operating in a highly dynamic environment, but I want to be clear.
We remain laser focused on executing our horizon two strategies.
Investing behind profitable growth initiatives to transform the model.
While delivering long term sustainable shareholder returns.
This concludes our prepared remarks, and I will now turn the call back to our operator operator.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time again, ladies and gentlemen, if you would like to ask a question. Please correct.
One on your telephone keypad at this time, please hold while we poll for questions.
Our first question comes from Jay sole with UBS. Please state your question.
Hi, Good morning. This is Marty just starting on behalf of Jay So and thanks for taking our questions.
Just a couple of questions from our side, maybe if you could speak a little bit about.
The confidence that you have on the updated fiscal year 'twenty to outflow.
How do you feel like those numbers are compared.
All of risk that the new procedures and the number of supplier team compared to the previous outlook and maybe if you could speak a little bit more about how you're seeing broad consumer demand, especially in your core U S.
<unk> business.
<unk>.
How about evolved during the quarter and what you've seen so far into Q3. Thank you.
You bet, Hey, Maury. So this is Scott I'll start and then I'll just hand, it over to Rustin and I'll speak a little bit about the consumer in our outlook and then restaurant follow up but in our prepared remarks, we really really understood. The challenges that we all face and we did a very thoughtful review of our business. So that's why we came today with our updated outlook.
Everybody understands the analysis and the thought that went into that.
We are right now really working on controlling what we can from a business standpoint, so as we think about the consumer and think about what's happening out in the marketplace right now all the investments that we've made in our business through the last four years the investments in the product the investments and the design specifically the investments in the brands themselves that hadn't been made before our re.
Really starting to pay off in the marketplace.
And the team feels really strongly about our fundamentals and our strategy right now and I think the thing that when you couple that with a really strong cash flow and the investments that we can continue to make in the business I think that puts us in a really good position going forward and you saw that in the results today right you saw that in the first half you saw that in the first quarter and even in our updated.
Look as we've looked at it and we understand the dynamics of the current marketplace that we're working in but we're going to continue to invest in the core we're checking really well in our core which gives us great confidence, we're going to continue to invest in our channels or geographies and our categories in PS and work in the outdoor space, which really advantage us go.
Going forward I think the thing that I want to leave you with which is really important to us is the.
Big advancements we've made in our brands and that's giving us real pricing power that we've never had before and these brands and it's given us a real conversation to way with the end consumer.
Do you think about some of the comments that I made in my prepared remarks, we've invested in the Bonnaroo Festival something like that would have never happened before with Lee and the investment that we've made and lollapalooza with wrangler wrangler, 75th anniversary and some of our different collabs that we've had with like the hundreds. So pleased not happy we will continue to work real hard and then I'll flip it over to.
<unk> go ahead and talk a little bit about the outlook. Thanks for the questions.
Thanks, Scott Good morning, Mauricio. Thanks for the question first I'll start with a comment as Scott mentioned I think the investments that he talked about that we're making in the brands, particularly in product and demand creation are really important it's really driving that value proposition we offer consumers in that.
Is as high as it has ever been and Youre seeing that in this in our strong sell throughs that we talked about in the prepared remarks in the second quarter and the double digit increases on our own U S.
Dot com.
So additionally, maybe a little bit more context, many of the price increases have already been put in place at retail and I'd remind everyone. We were strategic with our price increases.
While it's still early we are seeing a favorable response as seen in the strong Pos that said as we talked about we do expect to open to buy dollars to be more restricted.
Until the broader inventory levels are rebalanced, and we're certainly taking a more conservative view on China and this updated outlook. We've incorporated this into our updated guide and just may be closing more ACO with one point, we expect the second half revenues to be relatively flat compared to 2021 as we said.
Versus the first half, where we were up 14% globally in constant currency. So hopefully that gives you a little perspective between Scotts comments and mine on how we're thinking about revenue.
Do you.
Thank you very much.
Thanks Mauricio.
Okay. Our next question comes from.
Bob <unk> with Guggenheim Securities. Please state your question.
Hi, Good morning, just a couple of questions from me.
Further on the gross margin expectations.
Expectations of Q3 into Q4.
How much visibility do you have on.
A little bit on support of the retailers as they continue to work down the inventory levels and what your commitments are around the brands and then the second question I have is just on the inventory.
Tori levels at retail.
No.
Where do you think we are in terms of the readjustments.
You think it is.
Three month readjustment and how are you.
Really adjusting your own manufacturing plans over the next few quarters. Thanks.
Hey, Bob how are you. Thanks for the questions hope Youre doing well.
I'll go ahead and start a little bit on the support.
<unk> talked a lot about and put a lot of emphasis on making sure that we understand the business going forward and feel really confident where we are from an outlook standpoint, our product at retail has checked really well, which is the thing that we're really really happy about but I think the key here is and I'll just kind of touch on it before I hand, it over to rest and for the other two is that.
We've been real thoughtful about the investments that we've made behind the brands, we've been real thoughtful about the design and the direction of the brands and winning with winners so for us from the standpoint of the rebalancing that's been going on our position is strong and continues to be very strong going forward. So pleased with the work that our teams have done globally in that respect.
Do you want to go ahead and take the rest.
Yes, Thanks, Scott Good morning, Bob.
Go ahead and start with the gross margin question you had again, we updated the outlook. This morning, Bob as you are well aware, we now expect gross margins to be approximately 43, 5% for full year 'twenty two.
As compared to about 44 six in 'twenty one.
And obviously our prior guide was consistent with 21 as you indicated in your question. We do expect Q3 to be more pressure than Q4 and that really is taking into consideration.
The two factors, we talked about on the revenue side.
Impacting the back half outlook.
Specifically at a more conservative view in China, and then the retailer rebalancing efforts.
The guide for the second half Bob does imply about a 42, 8% gross margin.
That is down about 50 bps versus the back half of 'twenty one.
Maybe just breaking down a little bit where we see some of those puts and takes on the headwind side.
In the prepared remarks talked a little bit about inflationary pressures on input costs. They continue certainly spiked in the second quarter and at a moderated somewhat off of the recent peaks that but we're not assuming benefit as it takes as we've talked about in the past you know a few.
A few quarters to flow through our P&L.
The second sort of major headwind Thats out there is certainly the unfavorable geographic mix shifts from the more conservative view on China I just mentioned.
There are some tailwind as well in those numbers certainly the structural mix shifts to accretive channels, you've seen us deliver over a number of quarters here will continue as we are distorting investment there strategic pricing.
As we've talked about previously on the calls have been very thoughtful about how we've taken pricing.
Particularly.
In the front and back half of the year, and then air freight should get incrementally better than H, two but still will be a net headwind for the year.
Maybe if I shift over to inventory a little bit.
Our inventory did finish it at just under $540 million that was up about 33% to prior year. As you heard me comment Bob on the prepared remarks, I think it's really telling and important to highlight that that was flat relative to 2019 on full year 2002 revenue that's expected to be up.
Versus 19.
So Scott mentioned it we're really seeing strong Pos on a relative basis in both mens and womens.
On the retail side, certainly seasonal as I talked about in my prepared remarks have been an area of softness which retailers are working through.
But our seasonal and outperformed the market to date.
And then certainly the broad retail inventory imbalances have had an impact on the open to buy dollars and the shipments that are affected inventory as well. So we're working to sequentially improve inventory positions as we go through the year, but I think it's really important that the quality of our inventory is healthy as it is mostly in core evergreen styles in.
Of how we're modifying and managing that Bob I would just say as we've talked about in previous calls we try and stay very very close to our retail trade partners on.
It trends that they're seeing.
Certainly have the agility to modify and react quickly.
To changes that they see in the demand signals, including the retail inventory rebalancing efforts with our ongoing so hopefully that provides a little more clarity. Thanks for the question Bob.
Great. Thank you Bob.
Okay. Our next question comes from.
Paul Kearney with Barclays. Please state your question.
Yes.
Hi, everybody. Thanks for taking my question I guess my.
My question is on your long term target from your Investor day, the $5 plus <unk> 46, plus on the gross margin how should we think about the achieve ability of those and maybe potential timeline for those or whether it's still on track.
Russ do you want to go ahead.
Yeah, Thanks, Scott I'll take that good morning, Paul.
Since we hosted our Investor day back in May of 'twenty, one we've seen a lot of what's happened in the market certainly hyperinflation.
Or retail inventory rebalancing, yet I think it's really important to stress that the underlying strategies that we laid out at our investor day are deriving diversified accretive growth and they remain intact as you heard us talk about today in Scott's remarks.
About channel about geographic about category extensions. So obviously, we won't guide 23 today, but maybe if we step back and look at it on a broader scale 21 was ahead of our plans on our revenue and EPS basis and for 'twenty two with the updated.
Outlook, we laid out today.
We are targeting revenue of greater than $2 6 billion with $4 $44 50 in EPS. So.
Structurally feel really positive about the strategy that we have and certainly as we get later into the fall, we will talk a little bit more about timing and how it relates to 'twenty three.
Thanks, Paul Thanks, just one more for me if I may.
Just curious on kind of the pricing actions.
It's just less of a concern.
Consumer pressure inflationary pressure in inventories of closer retail partners, how do you see the future.
Pricing increases.
And for the back half and then what are you seeing.
In terms of the consumer response on your strategic.
I'll go ahead, and take that Paul and for US and wants to chime in he can Paul we look at it like this at the end of the day, we need to make great products that our consumers really love and that they want to take out we are seeing that right now across our businesses, we're seeing it across the globe, we're seeing it across different channels and geographies.
The investment that we've made and the design teams here for both Wrangler and Lee that we hadn't had before in key is the investments that we're making behind the brands I would tell you for the first time I've been involved with this business for 15 years for the first time here. These last two years and it's accelerating we are seeing our ability to.
Take price and have pricing power and to have that stick. Our brands are really really resonating with the consumer and we're seeing it in social media, we're seeing at a different age groups, which is extremely important to us and we're seeing it from different locations different places different geographies. So we will continue to work really hard at that but I.
Do want to make it very clear that we do have pricing power. Our brands are strong they are resonating.
We're going to continue to make those investments because our cash flow as you know is very strong and even in difficult times, we're able to do that and we will do that.
Okay.
Perfect.
Good morning, Paul I would if I go ahead.
I was just going to add Paul I think the investment Scott's talking about really allow us to mix up in <unk> as well as you've heard us talk about in those prepared remarks in that that combination of mixing up in AUR that strategic pricing we're taking.
As well as cost savings initiatives that we've had as you've heard us talk about in the last couple of quarters really important the combination of those offsetting some of the inflationary pressures that we're seeing from a from a margin perspective.
Thanks, a quick one.
What is the timing of the EMEA.
Shift.
So Paul that timing is now, but let me go ahead and step back and just take everybody through kind of our process and our thought process. When we spun off three years ago and when we little over three years ago and when we made the decision to do this actually four years ago. Now we had a very fractured business. So what I mean by that and I know you've all heard me talk about that as well.
We built product in five different locations around the world and did not communicate with each other so Lee was building product in U S. South America, Mexico, China, and the teams Werent talking building working together same thing with Wrangler, our systems didn't combined and we embarked upon to really fundamental projects for this business.
We went ahead and implemented an ERP system I know everybody on this call knows the difficulty of that so that our teams could work cohesively together around the globe.
Have one system, we pulled out of another company that didn't have one system because their businesses will run from a geography standpoint, and then the other pieces we embarked upon globalizing. This business. So when you pull those two big strategies together globalizing the model across across the World and then having an ERP system that can support that globalization.
<unk>.
We know we're moving to one location and that fundamentally is going to really help us for a lot of reasons. I mean, if you think about what it's going to do for US. It is going to help us from a capital efficiency standpoint, like I talked about it's going to improve our go to market capabilities significantly from a product people and customer standpoint, and then in addition to that.
US access to a real apparel market in Switzerland. It gives us access to a really good talent and then helps us from the standpoint of how we think about our skus from a rationalization standpoint across the globe. So lots of advantages lots of reasons to do it lots of thought that went into that and that's happening right now.
You for the question Paul I appreciate that thank.
Thank you.
Okay.
Okay. Our next question comes from Brooke Roach with Goldman Sachs. Please state your question.
Good morning, and thank you for taking the question.
Scott My question is on marketing investments, which have been a big focus for contour. This year, but I think I heard in the prepared remarks, the contoured looking to tighten up expense controls as a result of some of these macro headwinds can.
Can you clarify your plans for demand creation into the second half any big innovations or campaigns or launches that we should be on the lookout for and then where are the areas in SG&A that you can really flex down your spend as a result of this tighter background.
Yes, Scott I'll go ahead and take the first part and then I'll hand over to restaurant for the second part.
As you know we've outlined our cash flow and our strong optionality. So we have the ability to do multiple things in the marketplace at the same time one of the things that we've made.
<unk> on here book is that we're going to continue to invest behind the brands in a pretty significant way one of the things that we don't want to do is we don't want to stop the momentum that we had we have created really good momentum. We've got this really good machine working right now in that we're globalizing the product line, we're creating really good product that's taking out really well you heard us talk about our Pos is checking extremely well.
In addition to that we've got really good talented people that are creating great designs that are consumer really likes and then behind that we're doing.
Can talk about some of the most recent steps. So this weekend was the bomb excuse me the Lollapalooza Festival in Chicago, and we had our first ever store there and it was an incredible story that we got really good feedback from that we had a ton of product that we just finished bonnaroo and we've got Austin city limits coming up we've got Lollapalooza coming up in Berlin, and we're not backing.
Off of those investments the 70 <unk> anniversary Wrangler, we're just not doing it we are going to continue with our demand.
Product and how we think about it and it's going to accelerate as 22 goes on into 'twenty. Three so focus focus focus on these brands because they haven't had it before and the single most important thing I would tell you.
And we come back to this all the time as we have put energy and money and really good thoughtful campaigns behind these two big big powerful brands and its worked the consumer has accepted them in a really significant way Russ do you want to talk about some of the other the other piece of that.
Yeah. Thanks, Scott Good morning, Greg.
Certainly Scott hit we're going to invest behind the brand strategically broke you need to be sure of that as you saw US do this morning with the globalization and the.
European headquarter move, but we are in an uncertainty certainly looking at tightening discretionary and non strategic spend.
That certainly is involving scrutinizing spending.
Across all categories.
As we have open positions that become available we're certainly going to take a fresh lens at those type of positions and make sure that they are needed.
Same goes for whether it's travel or its training or or other factors like that so we're going to look at every spend that's out there and be very wise with it as you would as you would expect us to be in this type of environment, while continuing to invest in the business I think that's the key takeaway. Thanks Brett.
Thanks, Brett.
And if I could just ask one follow up on China, and the more conservative view that you're taking there rosslyn can you help us understand the proportion.
Second half sales and gross margin guidance reduction.
Attributable to the weaker China outlook versus the headwinds that youre seeing in the macro in the United States.
Yes, I think.
Certainly I'm not going to guide on a particular country as you would expect but I think if you step back and you look at China. The quarter largely played out as expected as you heard us talk about a little bit on our prepared remarks, certainly the Shanghai reopening was in line with our expectations.
And we saw sequential improvement as the quarter progressed.
<unk>, both in our brick and mortar doors, and our E com, which saw double digit growth in June for Lee.
<unk> marketplace, I think that's going to differentiate a lot of companies here as we go forward and we really look forward to talking to you about how in that process. In Q3. So look forward to the next time, we get together. Thank you for the support and thank you again for today have a great day everybody.
Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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Yes.
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