Q3 2022 Kontoor Brands Inc Earnings Call
Greetings and welcome to the contour brands third quarter 2022 earnings call at.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
What should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now I'd like to turn the call over to Eric Tracy Vice President Corporate Finance and Investor Relations. Thank you you may begin.
Thank you operator, and welcome to contour brands third quarter 2022 earnings Conference call.
On today's call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ.
These uncertainties are detailed in documents filed with the SEC.
We urge you to read our risk factors cautionary language and other disclosures contained in those reports.
Select comparisons to 2021 results will be on an adjusted dollar basis and in certain cases, we will make comparisons to 2019 adjusted results, which we clearly defined in the news release that was issued earlier. This morning and is available on our website the contour 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.
Harrisons 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.
Chief Financial Officer Rustin well.
We anticipate this call will last about an hour Scott.
Thanks, Eric and thanks for joining US today, we continue to operate in unprecedented times. So it's really important for me to start my comments today by thanking our contour teams around the world I'm, So grateful to partner with them each and every day I'm proud of how our colleagues remain agile resilient X.
Cute on our strategies, even in the face of ongoing macroeconomic challenges.
We have a lot to cover so let's get to it there are three primary topics I want to address.
First as I know it is on everyone's mind I'd like to offer some thoughts on the macro environment from our perspective, specifically acknowledging four key factors that are having the biggest near term impact on our business of contour second I'll take you through key highlights from our third quarter and provide some select proof points.
Of how our strategic investments and brand enhancement initiatives are paying off and finally I'll touch on our outlook, including what we're doing to address the implications of the broader trends and how our strategies will continue to help improve the model going forward I.
I started my comments on our second quarter call with a sobering description of the macro backdrop and we continue to see a dynamic landscape during the third quarter as I said, we think about four areas that are impacting us in varying degrees.
Clearly the first challenge we are seeing is the impact of inflation on underlying consumer demand and input costs in the U S. Consumers are experiencing inflation levels that hasn't been seen in nearly half a century with elevated prices on everything from food to housing to apparel and in Europe consumers are faced.
Similar inflationary pressures, including severe energy crisis, as we begin to move into the winter months.
Second factor is the ongoing lockdowns in China with zero co Covid policy has weighed on consumer traffic in the world's second largest economy and candidly the pace of reopening has been slower than we expected.
Third, while we anticipated significant inventory rebalancing across.
U S retailers would inversely impact shipments as open to buy dollars were restricted this dynamic had a bit more of an impact on our third quarter revenue and subsequent inventory bill.
Finally, the global supply chain challenges that have plagued the industry for the last year plus have begun to show signs of moderating from historic highs specifically, we have seen lead times from Asia, moving closer to pre pandemic levels and ocean freight while still well above historic levels has begun to moderate.
As we've stated consistently contura is not immune to these factors and we attempt to accurately reflect these impacts into our outlook, which I will cover in a bit.
But I also know our company is better positioned than we have ever been to continue to drive competitive separation and I am extremely proud of the organization's overall ability to once again deliver profitability and earnings above our internal expectations. While also positioning the company for more sustained profitable.
<unk> long term growth.
So let me now turn to addressing some of the key takeaways from our third quarter results.
We anticipated third quarter revenue, particularly within our U S wholesale business would be challenged by reduced shipments at key retail partners as they aggressively rebalanced their inventory positioning and this played out as I said a bit more than we planned with overall revenue down 5% in constant currency as U S wholesale declined 9%.
When combined with elevated product design and enhanced demand creation <unk>.
Lee and Wrangler brands are increasingly showing up in premium specialty western sporting goods and outdoor specialty further diversifying from the core distribution.
And as we drive closer connections with our consumers. There's no more important channel then the continued evolution of R. O D to see and digital platforms. As you. All know we remain in the early days here well below our competition in terms of penetration with a digital global one dotcom increased 14% over 21.
And 111% over 2019, while R. U S. One dotcom experienced mid teens year over year growth in the quarter, great proof point that our investments, including digital demand creation and this highly accretive broke channel are paying off.
And within our brick and mortar stores, we have some exciting developments to sure first in Europe . We recently opened up to Lee Wrangler branded premium retail concept in Berlin, which plans to Opportunistically Lola the format and select markets across the European region. The expertly crafted retail destinations will offer consumers a unique immersive.
Experience with products from both France.
Stores will maintain separate <unk> for each brand unified by a design concept underscores the branch combined 200 plus years of denim expertise.
I actually just spent time with the team in Europe last week, including a trip to Antwerp and my first visit to our new Mayor headquarters in Geneva. It was fantastic to see folks in our new environment and I was able to commend them on their really strong quarter as Europe revenue increased 27% year over year, but we also spent a.
Great deal of time on the go forward strategy understanding that the near term will be confronted by the inflationary pressures I discussed earlier I have no doubt that our teams will come together to support one another through these challenging times, while positioning are great brands for long term success.
Within our APEC region, we knew the ongoing Lockdowns in China will continue to challenge results. We did see sequential improvement from cue to China with third quarter revenue down 20%.
Areas that have reopened we have some really great performance.
So while we continue to be cautious with respect to reopening in the region. We continue to build on momentum when conditions normalized and the long term opportunities remain significant.
Similar to Europe , or APEC team is pushing for it despite the near term backdrop to strategically enhance the global K T V model.
This includes the recent launch of a retail excellent initiative a program aimed at transforming contour Asia.
World Class retailer Ah Reformatted store footprint improved P O S technologies and enhanced proud of the shortlist amplify the consumer experience.
Based on the success of early testing, we are rolling out the retail excellent initiatives across the region now it over the next 12 to 18 months, we will look to do so globally the opportunities to leverage our learnings in Asia as we more fully develop our brick and mortar strategy globally are tremendous <unk>.
More to come on this in the coming quarters.
These retail developments in Europe , and Asia will be critical as we seek to navigate the respective challenges in each market are also continuing to build a globalized platform.
And these opportunities for growth across categories channels, and geographies don't happen without the significant investments we continue to make an brando.
Some of you were able to join us during fashion week as our Lee and Wrangler branch took over lower Manhattan, and Brooklyn for a night, we were able to see how these investments in product design innovation and demand creation come to life as our teams collaborate with iconic leaders such as photographer Mark Seliger and brand Embassador Grammy Award winner will be on bridges.
The Leibrand is thrilled to once again partner with the preeminent creative director Sellinger and launching our second global brand equity campaign Lee original.
Inspired by those who don't just stand the test of time, but define it the.
The campaign highlighted new Santa Ynez song Appellee entitled New wave.
Celebration of individuals who approached small and big moments of their lives with one part boldness two parts optimism.
From the newly original his campaign to sponsoring this year's Bonnaroo Festival to the innovative excellent collaboration with seven up in China for Brooklyn Circus here in the U S. Leibrand continues to embark com amplified demand creation efforts in support of its enhanced global brand repositioning.
And similarly, the Wrangler brand continued to drive greater connection with consumers during Q3, and its 75th anniversary using creative brand activation events, Nico labs, and authentic brand partnerships to extend its reached a younger more diverse consumers.
In addition to the launch of the Leon Bridges collection I mentioned earlier Wrangler continues to build a world class partnerships with cultural influences and iconic brands.
Certainly these partnerships are highly authentic to the branch western details while organically, taking the brand new heights.
Collapsed such as our college program with Coliseum brings the Wrangler branch University ambassadors, all across the South and Midwest.
Teaming up with the iconic can't brand, we were able to bring our cowboy culture to fashion forward signature pieces of staying true to our roots in a totally during my trip to Europe I saw firsthand how this collaboration with shirts selling for over 900 euros supports the premium is nation of the Wrangler brand and <unk>.
<unk> are ongoing partnership with Yellowstone continues this fall with the much anticipated fifth season premiere hitting in a few weeks expect wrangler to show up in a big way.
A multitude of these great demand creation initiatives, when coupled with ongoing investments and talent innovation and supply chain hopefully demonstrates our commitment even with the challenging macro environment.
District, <unk> invest behind our branch in powerful ways that support our improved longterm position.
Which takes me to my final comments as it relates to the Gulf War.
As you've seen we tweaked our revenue and earnings guidance down a bit here today with incremental currency headwinds impacting top line by about appointment as well as our acknowledgement of the four challenges I touched on earlier.
From a high level, while we don't have a crystal ball on the macro as I stated earlier, we are assuming that inflation and subsequent tighten monetary policy based on demand, resulting economic conditions remaining challenged over the near term.
So given that assumption why are we planning revenue.
<unk> accelerated in queue for a few points here first we based our outlook on the combination of still strong domestic P. O S share gains a new business development second while certain you ask retailer inventory levels remain challenge the significant rebalancing efforts from select retailers as materially improved.
Aggressive actions taken early for many of our queue retail partners with open to buy dollars opening back up and accelerating into Q4.
Just on the second point, our quarter today us orders and shipments have been strong, but we want to be prudently can service given the uncertainty in the current environment.
With respect to our own inventory rusted will take you through more detail in a bit but let's be clear, we exited Q3 heavier than we would have ideally want it but we haven't have and will continue to protectively address.
Actually in utilizing plant capacity downtime in our plans. This downtime coupled with the fact that roughly 90 per cent of our current inventory is at four o'clock.
Significantly mitigate smartphone or brand health risks facing any of our competitors.
Most of our key customers have some meaningful adjustments to count for specific inventory is self whoever brands has outpaced shipments affording us a relatively advantageous position navigate through the holidays even into next year.
And regarding full you're 23 I know all of you would like some color. While we are not going to guide specifically rest assured that we are well into our planning process alrighty.
Stated, we assume ongoing challenges on the macro front operational headwinds to be more pronounced in the first half on both the top and bottom line and the opportunity to accelerate fundamentals in the second half of 23 as inflationary pressures of a demand and input costs are more likely to begin to ease.
We also recognize the need to be more flexible and the student environment and will accordingly look to tightened discretionary expenses as we did in the third quarter.
Further the substantial actions we've taken over the last several years to bolster our balance sheet and enhance our capital structure provide us increased jewelry to navigate the uneven landscape. This.
This is evidenced in the recent four per cent increase in our quarterly dividend, reflecting the confidence of our board that are fundamental improvements coupled with our proven strong cash flow generation, Steven and challenging times support our unique competitive position in the marketplace and ability to continue to drive industry, leading returns for all our stay calm.
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Thank you Scott and thank you all for joining us today <unk>.
Scott stated fees are clearly unprecedented macroeconomic times inflation consumer spending and confidence interest rates inventory rebalancing and global geopolitical events are creating a cross current of factors.
But as we have discussed the springs and positioning of our brands and resiliency of our operating model is a competitive advantage during times of uncertainty.
One that is allowing us to drive competitive a separation in the marketplace.
For the balance of the call I'm going to cover a number of these topics and how we are thinking about their impact on our business more broadly and.
And what actions, we are taking to best position contour for success.
Not only over the near term, but longterm as we execute on our horizon two strategies to deliver superior T. S. R.
Finally, I will provide an update on our full year guidance in light of these considerations before opening up the call to your questions.
But first let me start with a review of our third quarter results beginning with revenue.
Global revenue decreased 5% compared to the prior year <unk>.
Growth in our global direct to consumer business was offset by U S retailer rebalancing an ongoing lockdowns in China.
On a regional basis U S revenues decreased 8% driven by reduced shipments as retailers to significant broad based actions to reduce inventory in the quarter.
Partially offsetting the softness in wholesale was ongoing springs, and our own digital business, which increased 14%.
We are also encouraged by the progress we are making in key non dnm categories, such as workwear N Ts, which delivered solid growth in the quarter.
International revenues increased 7%.
Covid related Lockdowns in China continue to weigh on the region, while <unk> increased 27% driven by strength in digital and timing related to the E. R. P implementation in 2021.
Turning to our brands global revenue of our Wrangler brand decreased 2% <unk>.
The U S was down 5% significantly impacted by App or mentioned retailer inventory rebalancing during the quarter.
That said, we continue to drive growth in categories, such as western and female which each posted double digit increases.
<unk> momentum was even more pronounced with a triple digit increase during the quarter.
And in our own digital channel revenue increased 16% driven by increases across traffic.
Conversion.
Oh V and Aur's, reflecting the strong returns we're seeing from the investments we have made in our digital platform.
Wrangler International revenue increased 15% driven by gains in China, and Europe , as well as timing shifts related to the 2021 ERP implementation.
Turning to Lee global revenue decreased 9%.
Lee U S revenue decreased 19%.
Driven by the retailer inventory rebalancing actions, partially offset by a 10% increase in digital.
Lee International revenue increased 3%.
In China, Covid related Lockdowns had a significant impact on the quarter with the region decreasing 20%.
That said, we did see a sequential improvement from the second quarter of Scott discussed.
And then R E Commerce business revenue grew 11% building a great momentum into the all important 11 11 shopping holiday.
Moving to Amir revenue increased 34% with one dotcom growing 27% fueled by brand investments three yielding great results.
Wholesale channel was also helped by the after mentioned prior your timing shifts related to the E. R. P implementation.
And finally from a channel perspective U S wholesale decreased 9% now.
Non U S wholesale increased 8%.
And global one dotcom increased 14%.
Now on to gross margin.
Gross margin decreased 60 basis points compared to adjusted gross margin last year.
As we discussed last quarter inflation pressures elevated ocean freight and foreign currency pressures weighed on margin rates.
Somewhat offsetting these headwinds we saw sequential improvement in transitory impacts.
<unk> Airfreight in addition to ongoing structural benefits to accretive channels and pricing.
Channel and product mix contributed approximately 70 basis points of benefit in the quarter.
Adjusted SG&A expense was $174 million or a 12 million dollar decrease versus third quarter of 2021 adjusted SG&A.
Discretionary expense controls as well as lower compensation costs were somewhat offset by higher distribution expenses.
As well as continued strategic investments in digital N I T.
As a percent of revenue S. G N E D leveraged by 20 basis points in the quarter.
I gestured earnings per share was $1.11 compared to $1.28 in the same period in the prior year.
Now turning to our balance sheet.
Third quarter inventories increased 66% compared to last year and increased 24% compared to 2019.
I'll touch more on inventory and a bit.
We finished the third quarter with net debt or longterm that less cache of $774 million and $58 million in cash and equivalents are.
Net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA at the end of the third quarter was two times within our targeted range of one to two times.
It has previously announced our board of directors declared a regular quarterly cash dividend of 48 cents per share a 4% increase.
Scott mentioned the increase reflects our confidence in the business and are resilient operating model, even in a challenging macro environment and our commitment to deliver superior cash returns to our shareholders.
Finally at the end of the third quarter, we had $62 million remaining under our share repurchase authorization.
Before we begin review the specifics of our updated outlook at the onset I mentioned key factors impacting the global operating environment and how we have incorporated these elements into our updated guidance I'd.
I'd like to step through these now starting with the top line.
S. Scott discussed in his remarks, there are several themes impacting the global demand environment.
Namely U S retailer inventory rebalancing consumer spending and confidence in the face of inflation in China Lockdowns.
Starting with the inventory rebalancing.
Following an extended period of supply chain disruptions and chasing demand channel inventories across a wide range of consumer products in categories became elevated in the marketplace.
The subsequent retailer rebalancing actions <unk>.
Buying with cost inflation and improved lead times on source goods.
<unk> third quarter inventory levels heavier than we would want.
Let's be clear we are taking action.
A couple of points I want to emphasize first the quality of our inventory is good with approximately 90% in core styles is Scott mentioned.
Furthermore.
While we expect a relatively more promotional environment broadly over the near term, we will be thoughtful and balance in light of this fact ajar.
Jesting, our internal manufacturing as well as adjusting receipts on source goods to right size, our inventory position in a manner that is profitable and more brand appropriate than many of our competitors.
This will continue over the next few quarters, but we anticipate more normalised inventory levels by mid 2023.
And second while we expect the fourth quarter to be impacted by the uncertain consumer backdrop, an inflationary environment. We are encouraged by the healthy underlying demand for our brands.
With the investments and strong value, we delivered to the consumer resonating in the current environment.
In fact, despite the impact on shipments we saw in the third quarter, we continued to gain share in the U S with healthy point of sale.
When combined with the improving contours specific inventory position, we are already seeing signs of progress.
Is a great proof point after a slower start in July and August a revenue trends have accelerated meaningfully in September and quarter today with both September and October U S shipments growing versus 2021.
Regarding China, we continue to take a longterm for you on the region for both brands S. Scott stated the reopening has been slower than anticipated and we are accordingly, reflecting in our outlook is I will cover shortly.
And while this also has an impact on our gross margins. We believe it is prudent in light of the current uncertainty.
Moving to gross margin inflate.
Inflationary and supply chain impacts on commodities wages and ocean freight where the largest contributor to the year over year decline in the quarter and more than offset the benefits, we are seeing from strategic price product and category mix.
While input costs, such as cotton and freight remain elevated relative to historical levels. We are seeing sequential improvement in commodity prices and moderating lead times.
And although we expect these headwinds to continue in the near term when combined with the aforementioned inventory actions. The longterm structural margin drivers are still very much in place.
Mix shifts to accretive channels categories, and geographies that will support gross margin expansion over time.
And finally on SG&A, we have made significant progress in improving the health and position of our brands over the last three years.
That will continue as we prioritize investments to support both longterm momentum and the greatest T. S. R a potential.
Investments in areas such as digital in the I T. For example that leverage our global ERP platform and set the foundation for a more data and insight driven organization.
That said as you saw on the third quarter, we have a strong culture for costs discipline.
Over the near term and in light of the current Macroenvironment, we will be prudent for.
Particularly on non strategic span and have adjusted or for your SG&A guidance to reflect our queue three performance and updated plan.
Now onto our outlook additional details can be found in today's release, but this summarise.
Revenue is now expected to increase approximately 4% on a reported basis and approximately 6% in constant currency compared to 2021.
The updated revenue guidance includes an incremental one point negative impact from foreign currency.
Gross margin is now anticipated to approximate 43% <unk>.
Compared to adjusted gross margin of 44.6% achieved in 2021.
The updated gross margin guidance includes the incremental impacts from capacity downtime.
Geographic mix in foreign currency.
The benefits from continued structural mix shifts to accretive channels such as digital.
Ongoing cost savings initiatives and strategic pricing are expected to help offset these higher costs.
Adjusted SG&A, excluding an estimated one time charge of $16 million associated with our globalization efforts and European headquarter relocation is expected to increase at a low single digit rate compared to adjusted SG&A in 2021.
And adjusted EPS, excluding an estimated one time charge of 23 cents per share associated with our globalization efforts and European headquarter relocation.
Is anticipated to be in the range of $4.35 to $4.40 per share compared to prior guidance of $4.40 to $4.50 per share.
To close as I discussed earlier, we are clearly operating in a dynamic environment.
But we couldn't be more proud of the steadfast execution and agility of our global team and remain confident in the resiliency of our business to drive competitive separation, while delivering superior returns for all stakeholders.
This concludes our prepared remarks, and I will now turn the call back to your operator operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Our first question is coming from the line of fire durable with Guggenheim. Please proceed with your questions.
Hi, guys good morning.
<unk> <unk>.
More questions.
I guess the the first one really you know when when you talk about the acceleration and.
And trends that you're expecting in the fourth quarter. You know you you talked a little bit about it can you just <unk>.
Elaborate some more in terms of exactly what you're seeing and you know I think <unk>.
Talked about your cue for trends call out. So you know if you could spend a little more time.
On that I think sort of ties together that'd be pretty helpful for us. Thanks.
Sure Bob It's Scott I'll go ahead and take that one you know you saw that we tweak down the top line a little bit here from a currency standpoint, and some of the things that are happening in China. You know the lockdowns have happened they aren't opening as fast as we thought we wanted them to but we are seeing some acceleration in queue for and really what we're seeing it's a it's a multitude of different things.
That we've been working on for a long time, but it's the continued strengthen our P. O S. So we get visibility to that and see that so that gives us a little bit of confidence and then in addition to that the share gets which I know everybody gets a chance to see too, but we've seen nice share gains from both brands. So we're really optimistic about that and we're optimistic because of the work that we're doing from a demand for it.
Nation to tie ourselves back to those share Greens. So what I mean by that is we have confidence that we're gonna hang on to those consumers because we know how to have a conversation with our consumer and talk to them and a really elegant way that seems to be working are folks in our demand creation teams are really dialed in so I'm I'm really pleased with that and then the other pieces are new business development.
<unk>, which continues to go out there and do really really great work and that's because our branch of games such relevance in the marketplace. So we do have some visibility to the new business development.
But I'll tell you. The other thing too is some of our retail partners are much cleaner than they were from an inventory standpoint, so some open to buy dollars or improving so that's been real important to us and you know we're just seeing you know really good strong quarterly trends from that standpoint, and it's within the breath of our business right. So let's with our core you <unk>. It is augmented by you know.
The additional growth across our channels in our geographies and digital of course, but one of the things that I Wanna mentioned, because we've talked about it before is we're seeing it in our categories to specifically some of our new categories like a T G work and T shirts.
We're really pleased with those initiatives that we've had ongoing here for awhile. So I think really it boils down to our brands are really gaining relevance gaining share. The P. O S is nice and the work that our demand creation teams in the work that our design teams have done too is really all synchronising together at this point in time, and we feel real confident as the economy will improve it some.
And time and will be right there with it so thanks a lot. Thanks for the question.
Thanks Scott.
Thank you our next questions come from the line of J Salt with UBS. Please proceed with your questions.
Five in the morning. This is my we have seven up on behalf of gay. So thanks for taking our questions I guess I wanted to ask if you could please.
Talk a little bit more about.
About the Put-and-take banking through two four gross margin Guy then I'm interested in hearing more about impact on capacity downtime and.
And maybe on the U S wholesale side I wanted to hear more about how is the wrangler brand positioning the channel primarily with key partners like target.
Thank you.
Okay for Ethiopia morning, addressed and I'll take the first part and and Scott will take a second if that's okay.
As we look at our queue for gross margin outlook as we indicated in our release. This morning, there's really three primary drivers that are expected to incrementally effect queue for gross margin.
The most significant <unk> will be the impact of downtime in our plans clearly Scott and I. Both spoke about the elevated inventory levels and are prepared remarks and were taken proactive actions here in the quarter.
To begin to work that down to address those elevated inventory levels caused by that retailer inventory rebalancing efforts and softer consumer demand that we spoke up.
In addition, we we anticipate seeing an adverse geographic makes impact.
Caused by lower sales in China due to the Covid related lockdowns.
And then you know obviously the the last point softer salesman and a may I do to the inflationary impacts on consumer demand that we've talked about the final sort of impact I think marie's here that we're seeing in in the fourth quarter is is the F X impact that's gonna continue to be a headwind.
For us on our margins, but again those are the three primary drivers that are incremental to what we've seen to date.
With downtime being the most pronounced.
Scott.
Primary seal how are you. Thanks for the question I'll go ahead and take that you know is it.
As a general practice, we don't really talk about our individual customers, but what I will tell you is unless it's material and this is not material to us we have an experienced any issues that we need to discuss but since there's some commentary in the marketplace. You know target is one of our top accounts.
Great partner for contour and the Wrangler Brandon like we do with all of our accounts will continue to optimize our denim assortment. There continue to work with their teams we have a great relationship and while will strive to perform without size growth, but will also work to go ahead and enhance the other categories that we have there are two outdoor work in T. So it's a big complimentary pick.
Sure and will also continue to drive our own D to see in our international expansion also at the same time so thanks.
Thanks <unk>.
Thanks, so much and good luck.
Thank you. Our next question comes from the line of well Gartner with Wells Fargo. Please proceed with your questions.
Hey, Hey, guys. Thanks, Thanks for taking my question, maybe maybe we start with you know the cost controls that we've been pretty impressive.
Taken down S.
<unk> from high single digits now low single digit guidance, maybe just sort of discuss what what's come out of that.
Cost you know your strategic was nonstrategic spam.
Yeah, Good morning, well addressed and I'll go ahead and take that you know as as we indicated on the second quarter call will we really expected tighter experienced controlling the second half of 22, certainly we were seeing a softer macro backdrop and we wanted to make sure that we were taken a look at it at.
Non strategic and discretionary items, and really easy cuts, there and tidy expense controls.
To fund it continued investment in strategic areas, such as digital demand creation in I T and I didn't get a really important distinction.
We are going to continue to invest behind our brands and capabilities in the third quarter. I think played out as we expected will we continue to intended to use at T. S. R. Landers, we invent evaluate all investment opportunities.
And as you would expect given some of the challenges around the globe. There are some near term dislocations in the market that of course, you know the softening in consumer demand COVID-19 related lockdowns.
Adversely affecting kind of near term returns on selected investments. So we're re prioritizing accordingly as needed, but I think the key point to really take away again as I indicated in the prepared remarks, you know we have a strong bias for cost control, but you've also seen from us a contour we will.
<unk> you to invest in our brands and capabilities.
And then maybe if I could follow up Uhm, just just another follow up just on the brick and mortar. It sounds like you know, you're making a big pushing that Europe and Asia.
I guess, how many stores do you have in the region now and you know how many stores do you have globally and how are you going to sort of leverage these new stores in Europe and Asia, you know maybe in the U S.
Sure sure well no problem. So yeah, you know we have talked a lot about our strategy and our horizons on the horizon two with one of the things that we talked about as we were gonna lead with digital from the very beginning and we've done that in a really nice inappropriate investments and we've seen really good traction, but from a strategic standpoint, we really think that we need to make sure that it's an omni presence that we have.
And that's also a strong brick and mortar the compliment and have the opportunity for the consumer because we see that you know shopping continuing and being a strong component going forward to complement that with a strong brick and mortar presents so we have a really strong presence says you know in Asia over 700 doors with multiple partners, but it's it's more of a for.
<unk> business that we have there.
But what we've done in Asia, which is really interesting and we're gonna load up around the rest of the country is <unk> excuse me. The globe. We've created this retail excellent initiative and we really like it because it's been an ongoing program. We've tweaked it really nicely. The team has embraced it and more importantly, our partners have really embraced it and we're seeing it really come to life. We think it has real legs and work.
Roll that out you're up here in the United States also just kind of leverage some of the learning is that we've had but we think there's opportunity in Europe too and you heard me talk a little bit about the new concept of rolling out our dual Brandon concept with really great product.
I was just there in Europe and had a chance to visit our stores.
And see that there's a really nice opportunity relative to our branch and specifically because and this is really important or brands have now become much more relevant and the consumer is asking for them. So we're morphing into a much bigger and more dynamic company relative to the power of our two brands and it's pretty significant and when you go to our stores now we all.
Meant that with our T shirt programs are workwear programs are a T. G. So we have a much more broad offering so it really helps for us and it also helps the consumer to be able to see that so we're really pleased with that so look for a little bit more detail here are the future as we royalties out you know across the globe and will share some more detail.
Going forward in my commentary and rest his commentary so that we can make sure that you're aware of some of the things that we have going on but pleased with where we are but a lot more work to do it actually this is kind of fun work too you know we get to see the fruits of our labor pretty quickly and our consumers are responding really nicely. So thanks for the question.
Sure absolutely and maybe if I could to squeeze one and maybe can you just just discussing I know you said you know you're not guiding twenty-three, but just the general puts and takes them how you're thinking about F. X next year, a you see and aur's into into the next year.
Yeah, we'll addressed and we.
As you as you indicated we won't specifically guide I think Scott made some prepared remarks from from the top level perspective, certainly you know as he indicated.
We expect particularly the first half of the year to be pressured a little more pressured on the top and bottom line from inflation and those type of things as we think about gross margin and some of your questions around cost.
Certainly will provide more detail on the queue for call, but maybe a little bit of color about how to think about the first half of twenty-three at least.
Particularly in light of the elevated inventory.
Inventory situation.
We do expect to see that continue to impact of of inflation on input cost in the first half of the year is higher cost in.
In the second half of 22 begin to move through the fee. It out we've talked in the past will as you know about the lag that takes place from when you see spikes in the commodity markets and it takes a couple of quarters to work through the P&L and certainly caught in as a as an input costs spike into.
You too.
Further we expect that manufacturing downtime to continue into the front half of twenty-three as we work to address these elevated inventory levels Uhm thoughtfully I would say from our downtime perspective, it's fair to think about the impacts of downtime being most pronounced in queue for as I already indicated and then Q1 and.
Improving and Q2.
However, the the inflationary downtime will be tempered by lower transitory cost you know driven by airfreight structural makes them pretty much strategic pricing and cost savings initiatives as you've heard us kind of consistently talk about so hopefully that dimensionalize is at least and provides a little more color will as to how we.
Thinking about the the.
The first half of 23.
Okay. Our next question is coming from the lineup Brooke wrote with Goldman Sachs. Please proceed with your questions.
Good morning, and thank you so much for taking our questions.
Scott I was wondering if you can find out what all that more context on the relative outperformance and share game that you've had.
Emerging categories, which is how to offset some of the pressures from the background. As you think as you look ahead, how much incremental opportunity is there to continue to drive the outsize growth over the course of the next few quarters against the current macro and how long are you thinking about share gains in the U S. In particular, and then maybe it's a <unk>.
<unk> looked at rebalancing inventory. Thanks, so much for that helpful. Color that you provided on downtime at the plants could you provide a little bit more color on your expectations on the cadence of inventory grass that we should expect as you work through that level uhm and any additional color that you can provide on how you're working through that level, whether that's additional clearance or.
Just flour sell through uhm that'd be super helpful. Thank you.
Thanks for the questions <unk> good to hear from you. So I'll start and then rest and we'll go ahead and take a second one obviously, so I I think for us that really important thing is we we embarked upon spin at this company offers that we knew we had two great brands, but they were pretty much landlocked as you've heard us talk about and also specifically kind of category locked and yet we knew.
That we could build upon that like great brands too and we kind of embarked started with the outdoor group and then we went into work with which we already had a little bit of a foothold in and then went into tee shirts, and I think the thing that I come away with every quarter and every time I see the new seasonal products from the teams is how we've evolved that brand those categories overtime and we are really.
Becoming a presence in all three of those so what we've seen broke as we have seen that the consumer and also our customers. So both have gained great confidence in us in those three categories and then we're going to continue to roll more out but the thing for US is are we evolving the product line, yes, Ah regaining new distributions that gives us great confidence.
Yes, and all three of those are receiving acceleration of P. O S and those and yes. The answer is yes to all those and so we're seeing that even in tough times right now with those categories. So it says to me that the consumer is giving us permission and those and so that gave us. The confidence then to go ahead and add wrangler Engler to the next right. So we think that there was a big opportune.
<unk> and that fish category and we're Gonna go ahead and play a little bit in that and think that you know because of the power of the branch in the demand creation platforms that we're putting behind the brands that the consumer has just kind of guiding to us in allowing us to do that now I think it would be really appropriate for me to let you know that one.
The reasons that I think you can certainly the team does too is that we offer a really compelling value in these categories. So if you think about let's just start with outdoor we are positioned from a price standpoint, and a really good place right. So we play under some of the other players that are in that category, but we offer great product with a really good name.
So you know the folks even in tough times are turning to us because it's really good product they really well by a trusted brand, but it's also showing up in places that they shop, which is really important.
It's where they are where they are gonna be and then they can also get it online. So I just have a lot of confidence in how the teams have approached us and I think the most important thing for us as we think about these categories. It will be real thoughtful because we're not done yet there's more in the pipeline that you're gonna hear about in the future, but I think the single most important thing and I and I said, it's a little bit.
<unk> in my commentary about the addressable market and how big It is it's just that we just got a small foothold relative to the T shirt business relative to the outdoor business relatives would work for a business. We have got really big opportunity and expansion in front of US in ahead of us in the teams are pretty excited about it and create some great product.
Go ahead and do that so again, we will continue to bring that up in our meetings, we'd love to share more of that with you as we go ahead and our quarterly calls we will definitely do that I hear you loud and clear that everybody wants to hear more about it maybe the next time I can talk a little bit more and bring a little more color to what we're doing there. So that everybody has an idea and understands kind of where we're goin', but thanks. Thanks for.
Question, and I'll turn it over to rescue.
Great. Good morning, <unk>. Thanks for the question as well and thanks for joining so you know as we step back and think about inventory a little bit we did finish the quarter about $678 million, an inventory that was up about 66% to prior year and 24% of pre pandemic levels.
And so as you heard Scott and I, both discuss in our prepared remarks, and I just wanted to be clear.
You know it is elevated we were chasing demand in the third quarter last year. After R. E. R. P implementation, but there's a lot of drivers for the reasons on the increase including the inflationary impact on consumer demand. The U S retailer inventory rebalancing you're here to spoke to speak about cost inflation.
Nation inventory availability to meet some of these category extension growth drivers is Scott just spoke about and then we are seeing improved lead times on agent source goods as well so so receipts for a little heavier in the third quarter than than originally anticipated.
As you mentioned in your your question Brook, we are taking proactive actions to drive levels down by executing downtime in our plants and adjusting future orders and receipts to bring us back in balance and I think that ability to tape downtime is a real differentiator because it allows us to avoid clear.
Bring product and dilutive channels and better protecting our brand health.
So you know I think as we think about the inventory specifically the quality of the inventories good with 90% of our inventory a core styles.
And so with that we intend to sort of right size, our inventory position over the next several quarters in a manner that is more profitable than brand appropriate given that the goods are much more access than distressed.
You know in terms of the cadence I know you asked about that and your question. You know, we do expect to sequentially improve on our dollar basis and be back to more historic historical levels in inventory by mid 2023.
Thanks bread.
Thank you.
Thank you. Our next question is coming from the line of Paul Kearney with Barclays. Please proceed with your questions.
Alright, we wanted the morning, Thanks for taking my question.
U S wholesale shall we think of it as is.
Q3 was a low point in terms of the right sizing up retailers or we start to improve from here or are you anticipating further pressure can to 23.
Okay.
We think that you know from the standpoint at the pressure was really great and Q2 in the beginning of two three also and we think it's starting to mitigate because I think that our partners have done a great job of addressing their inventory and so they've really figure it out how to do that and these are sophisticated retailers too I mean, just you know folks that are you know top tier. So we think they have done.
A really nice job and then I think the most important part is where you sit in the pyramid with that retailer or where you sit in the pyramid with our customers. So how important are your brands cause their customers to their consumers.
And over the last several years, we've demonstrated why wrangler, Lee and atg have become extremely important and a big part of the vernacular for our customers and why they have to be on the floor and the reason they have to be on the floor is because they turn it because we're gaining sure. So as I stated before pass is trending up it's really good we're happy about that and are.
Share gains are good so we're really happy about that so we work hard every day to make sure that we have a presence in you know continue to keep and grow our presence with our big customers and that puts us in a really good place where the open to buy $1 is there. If you want to go ahead and put it to good use so feel really good about that thanks.
Just a quick follow up to speaking of the pyramid with your customers.
Can you talk about your private label competition, what you're saying with retailers are you seeing any change with retailers, whether they're leaning in more of the price on private label and kind of where you're seeing your pricing position because of the weather it's changed at all over the past year.
Sure No problem, you know from a private label standpoint, we've been competing against the private label for 40 plus year strike. So we've always done a really good job. There are a couple of distinctive factors that are really important tier one we're a national brand. So we create real excitement and energy around our brands with national and global campaigns right. So that's a big.
Differentiator for both our branch and then we've accelerated that conversation in a pretty significant way in the last few years prior to where we were from a spinoff standpoint. So we've put the Ah big differential between ourselves and those private label brands. You know I will say that you know five years ago, we were a little bit closer to them because we didn't have a stronger voice and we weren't you know truly we weren't spending is.
Many dollars as we should've behind the branch from a marketing standpoint. So now we do that in a really sophisticated way, but in addition to that one of the things that you heard me say a couple of questions ago. I believe it was with will or I think it was with will where I talked about and this is really important. The fact that our brands are priced really sharp so we really price our branch really well <unk>.
We fall under you know some of our competitors from a pricing standpoint, so when the consumer comes in they really nowhere brand, they're asking for our branch you're seeing a really good price point. So when they have a choice to pick between a global brand that they really know and that they've gotten to recognize and they have the trust and they go ahead and they migrate to ours, because it's a really good price point with a really good value. So.
We we like our positioning we like where we are it works really well for US we're gonna continue down that strategic path.
And we know that there's a differentiator from a global brand and how are consumers think about that so.
Great. Thank you and thanks for all the screens one more one more in there. This is the last thing on the capital allocation strategy, maybe just comment on.
Your ability to continue the.
Repurchase shares and how you were thinking about that transfer and you just kind of with all with all the macro headwinds. Thanks.
Yeah, Paul addressed and I'll go ahead and take that you know first and foremost <unk> you know we've talked a lot about optionality and with a strong cash generating aspects of our model really creating that optionality, which I think is really critical and an uncertain environment. You know as we talked about and you saw <unk>.
Recently.
The our board of directors approved a 4% increase in our quarterly dividend and I think that's a really important statement about how we feel about the state of the business and and the cash generation moving forward.
Near term priority is going to remain on cash generation and conversion as we work down the inventory levels, we've talked about.
You know you saw in the in the quarter, Paul we did not repurchase any shares during Q3, but we have repurchased $62 million this year and chairs.
And that share repurchase remains an important option in our capital allocation model.
We have approximately $62 million remaining under our share repurchase authorization and as we've talked a little bit about.
We're going to continue to to use a share repurchase to offset dilution, while opportunistically buying shares. This is capital allocation priorities excess cash flows and mark conditions Warren.
First and foremost that we're going to continue to invest in the branch and I think that's the most important thing to take away Paul as you heard Scott lay out the investments we've made a demand creation, that's always gonna be our first option, but I think when you couple that with the fundamental improvement in the business increasing the dividend.
Having the share repurchase option that's out there as well as strategic M&A, we really liked the optionality that our model affords would that cash generation. Thanks.
Thanks, Paul.
Thank you there are no further questions at this time I went out like to turn the call back over to C. E O Scott Baxter Friday closing comments.
Well, thanks, everybody for joining us today I hope you know how much all of US appreciate your interest in our company and your support we certainly enjoy this time that we get to spend together, but I also wanted to because we won't be a chance to chat before the holidays I wanted to wish everybody, a happy and healthy and of course, a safe holiday season, and we look forward to your continued to sport. Thanks again for to.
<unk>.
Have a nice day.
Thank you. This does conclude today's teleconference. We appreciate your participation.
May disconnect your lines at this time enjoy the rest of your day.