Kontoor Brands Inc. Q1 2023 Earnings Call
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A question and answer session will follow the formal presentation.
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Now I'd like to turn the call over to Eric Tracy Vice President of corporate Finance and Investor Relations. Thank you you may begin thank.
Thank you operator, and welcome to contour brands first quarter 2023 earnings conference call.
Participants on today's call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ.
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.
On today's call, we will make comparisons to prior year results comparisons will be in constant currency unless otherwise stated.
Joining me on today's call are contour Brands', President Chief Executive Officer Chair, Scott Baxter, and Chief Financial Officer Rustin will.
Following our prepared remarks, we will open the call for questions. We anticipate this call will last about an hour Scott Thanks, Eric and thanks for all those joining us on today's call I'm going to focus my comments today on three areas first.
Walk through a few select Q1 highlights, including our continued strength in pls ongoing share gains and momentum D to C, which we believe most accurately reflect our brand health and relative performance in the marketplace.
Second I'd like to provide an update on how our strategic investments in key enablers, including demand creation should support more diversified and accretive growth across categories channels and geographies over time.
And finally before I turn it over to Rustin and I'll share some thoughts on why I'm confident about the gulfport foot contour, despite the uneven macro backdrop, allowing us to reaffirm our 2023 guidance here today.
Turning to the first quarter I'm pleased to share that we delivered Q1 results consistent with both our expectations and commentary we provided on our fourth quarter call.
<unk> revenue decreased 1% in line with our prior outlook as increases domestically were tempered by expected softness internationally, particularly in the China region.
Within the U S market, we continue to see strong Pos outpaced shipments as retailers remain working through various inventory rebalancing efforts.
Domestic wholesale and topline upside for the quarter, but let me be clear.
Wrangler and Lee brands are winning and driving competitive separation in a challenging macro backdrop as evidenced by the solid momentum in P. O S as well as share gains and robust DTC performance. During Q1. So let me further dimensionalize the great positives around share gains in DTC, both within the U S and international markets that reflect improving.
Rand equity on a global basis from.
From a share perspective, according to NPD, which focuses on the U S. Total measured market both of language and Lee brands continued to outpace the market and largest competitor.
<unk> brand specific highlights on a 12 month basis Tos, the wrangler and Lee men's bottoms have grown 10, and 8% respectively significantly, beating the market of 1% growth and in denim bottoms language in Lee men's outperformed our largest competitor by over 300 and 190 basis.
Since respectively.
In womens on a 12 month basis, Wrangler, and Lee denim long bottoms have outpaced the largest competitor by over 90% and 70 basis points respectively.
I think one overarching datapoint captures how contour is winning in the marketplace for the core U S long bottoms fitness, so denim and casual pants contour combined men's and women have taken a significant share from our largest competitor on a three months six months and 12 months basis in fact over.
Last year <unk> has gained roughly 100 basis points of share while our largest competitor has lost 150 points. So in approximate 250 basis point Delta.
Unequivocally driving competitive separation in the market as we enhance our core through investments and innovation elevated design and demand creation.
Augmenting these core share gains category extensions continued to diversify our product portfolio.
Taking our brands to new points of distribution.
Globally, non denim long bottoms grew 15% in the quarter, while outdoor in workwear, each increased 17% over last year.
Further demonstrating that our brands are resonating with consumers, our DTC business delivered broad based strength in the quarter.
Globally contoured D to C increased 15% with own dot com and owned retail both growing double digits in the U S. <unk> grew 13%.
Balanced across brands with Wanger, DTC, increasing 16% and Lee up 8% versus last year.
And D to C strength wasn't just confined to the U S with contour International DTC up 17% once again seeing great growth across both brands as Wrangler and Lee International DTC increased 22, and 15% respectively compared to Q1 'twenty two.
These first quarter results indeed, as we provide great proof points, not only brand health, but that our investments in building a world class Omnichannel ecosystem are paying off and what I Love is we remain in the early innings.
<unk> journey and significantly underpenetrated relative to our competition.
As we distort growth in this accretive channel, we diversify beyond wholesale while also driving enhanced connections with our consumer.
As you know demand creation has and will be a critical piece of the brand elevating investments.
Category expansion I spoke to earlier focused on Casuals Asian comfort and outdoor activities is only matched by our investments in demand creation that puts our consumers first.
With both brands focusing on freedom.
Freedom for our consumers to express themselves, how they want and where they want so.
So let me now share some examples from the first quarter as well as upcoming highlights from our robust demand creation pipeline.
First with the Lee brand during the quarter, we continued to drive momentum through strategic partnerships and targeted digital campaigns.
Reinforced brand equity and category leadership reintroducing one of our most iconic and original products elite lighter jacket.
Partnering with World Class media platforms, we reintroduced the rider jackets to a brand new generation with celebrities like Chris Stapleton organically showcasing the nexgen product as he performs around the world.
During the quarter, we also saw Channing Tatum outfitted and Lee overall, and Vanity Fair and Pedro Pascal in our iconic lighter genes Esquire.
Simply put cultural influences are seeking the brand like never before.
Lee continues to fuel its digital business through increasingly seamless connections expanding the brand's audience and engaging newer younger brand loyalists are social community grew 255% year over year in Q1, and our strategies drove 62% growth in social traffic to our own dot com during the quarter.
And we are continuing to reinforce Lee's leadership and legacy across the globe launching two powerful collaborations in our APAC region was busy and we're excited to bring compelling alliances took China region, driving newness and authenticity with consumers both online and at our elevated retail stores. These co labs.
The brand leading position in the market.
Lee is just getting started.
'twenty three we will see more incredible collaborations with global and culturally relevant brands such as recently launched Dragon Ball Z.
Partnerships with bare brick and elevated storytelling with partners like <unk> and sponsorship of music events, such as the block bells, all propelling the brand heat that support sustained longer term growth.
Similarly, the wrangler demand creation platform is only gaining momentum as we start 2023 in the first quarter language partnered with the iconic guitar brands Thunder with the second drop of this highly successful collaborations hitting the market in Q1.
Product collection skewed more female with key styles globally selling out in the first week. Additionally, select products, such as unique guitar accessories, including shoulder straps picks and denim Qatar cases sold on Wrangler Dot com and a national retailer guitar center across the U S.
And just two days ago, we formally announced <unk> was new women's brand ambassador with assigning a reigning CMA emailed logos for the year most nominated female at the 2023 ACM Awards in Yellowstone actress Lena Wilson.
As the most recognized female artist in recent country music history, and a leading voice in the Western movement. We're thrilled to have her represent language is our first female country music endorsee leaning to choose our legacy of partnering with authentic brand ambassadors and embraced the core while simultaneously broadening and enhancing wrangles reached.
All new audience.
The brand will deepen its focus on the music scene in 2023 by continuing to activate unique brand partnerships.
We're excited to announce today that wrangler has been named the official denim sponsor of the Academy of country Music Awards as well as the academy of country music.
The ACM Award show will air on May 11, and the Wrangler brand will have unique onsite program and leading up to and during the show, including having our own Wrangler network team on the Red carpet interviews with the biggest names in country music Wranglers connection to country music has never been stronger our artists are nominated.
Multiple awards, including album and song of the year, We will continue our partnership wide nation throughout the year, our key summer festivals across the U S.
And looking forward language upcoming 2023 pipeline of collaborations and partnerships is more robust than any time in history alliances with premium brands, such as new KC, Poland. There in Buffalo trace all the natural extensions that continue to elevate wranglers positioning and reach with new consumers.
As you can see the current breadth and depth of our demand creation efforts for both brands are tremendous just one of the reasons that gives me confidence in the <unk> story.
So let me close with some thoughts on the go forward, while we expect macroeconomic pressures to remain prevalent our Q1 results, particularly in brand relevant areas such as share gains in DTC provide us with solid evidence that when we execute on our strategy, we increasingly strengthening our position regardless of the environment.
Rustin will give more detail on our reaffirmed full year 'twenty three guidance in a bit but continued execution of these strategies will be key in support of this year's performance.
Even if we assume macro challenges will weigh on consumer demand throughout 2023, and we want to prudently account for this in our full year guide I'm excited domestic Pos.
Share in AUR gains continued in the first quarter.
As I stated earlier, we've seen some lag in wholesale shipments relative to the solid sell through as retailers normalize their order patterns.
We have factored that into our plans accordingly, and we are amplifying our actions with our own inventory managing our internal production with plans to have year over year growth in line with revenue growth during the third quarter.
So while U S wholesale maybe a bit more tempered near term as demand and supply find equilibrium. We will continue to focus on what we can control and driving Pos in diversifying our growth in DTC and international.
And within international we are seeing great signs in Q2, China is recovering at a faster pace.
Previously expected and we now anticipate significant gains in the second quarter with momentum carrying into the second half these actions.
Proving fundamentals when coupled with our fortified balance sheet and strong cash generation afford us great flexibility to deliver in the face of uneven conditions.
A solid start to the year is a direct function of our team's amazing efforts day in and day out I want to thank all of our people around the world for their resilience adaptability and commitment to executing our strategies both in managing through the near term, but also in building the foundation for our future success.
Unwavering dedication to excellent with what gives me confidence that we can continue to yield superior returns all <unk> stakeholders and we look forward to sharing the next evolution of our long term strategic vision at our next Investor day stay tune for details in the coming months.
<unk>.
Thank you Scott and thank you all for joining us today.
As you saw in this mornings release, we delivered Q1 results consistent with our commentary from last quarter.
While the macro environment remains uneven as you just heard we have a tremendous number of contour specific drivers supporting our brands in the marketplace.
For the balance of the call I'm going to cover three areas.
First I will discuss key financial highlights from the first quarter.
Second I will provide an update to our full year outlook, including near term and back half drivers and finally I'll close with what gives us confidence to reiterate our full year expectations and the resiliency of our operating model.
Uncertain environment.
Starting with the first quarter.
Global revenue decreased 1% compared to the prior year and consistent with the expectations previously provided.
Growth in U S and international DTC as well as gains in U S. Wholesale were offset by softness in greater China wholesale due to impacts from Covid policy changes.
On a regional basis U S revenues increased 2% driven by continued momentum in DTC and own dot com, which increased 13 and 15% respectively.
In wholesale we continue to see sell through outpaced shipments, resulting in a modest revenue increase in the quarter.
International revenues decreased 9% driven by the previously mentioned impacts in China more than offsetting 17% growth in DTC.
A few additional points on China.
First our retail partners made meaningful progress improving inventories in the quarter.
While this had a near term impact on revenue. We believe this best positions our brands for long term success.
Furthermore, consistent with our expectations from last quarter, we continue to anticipate Q1 to mark the most significant year over year declines with.
With trends significantly improving in the second quarter, and notably stronger than we previously anticipated.
In EMEA revenues decreased 1% with double digit growth in direct to consumer offset by wholesale.
Brand momentum remains healthy as evidenced by strong DTC gains, including 26% growth in brick and mortar.
However, ongoing macro and inflationary headwinds as well as tight retailer inventory controls continue to weigh on the region.
Turning to our brands.
Mobile revenue of our Wrangler brand increased 3% driven by strength in DTC and strategic category extensions.
Non denim continues to increase in penetration fueled by our diversification initiatives grow.
Going double digits in Q1, and now accounts for 46% of global Wrangler revenue.
In the U S revenues increased 3% driven by double digit gains in outdoor work and pes as well as 16% growth indirect to consumer.
Wrangler International revenue increased 5% driven by gains across both wholesale and DTC.
Turning to lead global revenue decreased 7%.
Lee U S revenue was flat driven by double digit growth in own dot com.
Lee International revenue decreased 16% as.
As discussed continued impacts of Covid policy changes in China had a significant impact on lease China wholesale business.
More than offsetting 11% growth in DTC.
In EMEA revenues increased 3% fueled by double digit growth in DTC.
Excluding China Li Global revenues were flat.
And finally from a channel perspective U S wholesale increased 1%.
Non U S wholesale decreased 15%.
And global direct to consumer increased 15%, including an 11% increase in our own dot com.
Now on to gross margin.
Gross margin decreased 180 basis points to 43%.
Consistent with our comments last quarter.
Inflationary pressures on input cost.
Diana mix.
And proactive actions in managing internal production, including downtime weighed on margin rates.
Somewhat offsetting these headwinds were strategic pricing and relief and transitory costs such as air freight.
SG&A expense was $192 million or a $5 million decrease versus the prior year.
As a percent of revenue SG&A decreased 20 basis points to 28, 7%.
Lower compensation expense and tight expense controls were partially offset by investments in D. C.
Earnings per share was $1 16, compared to $1 40 in the same period in the prior year.
Now turning to our balance sheet.
First quarter inventory increased 52% compared to last year and sequentially improved from the fourth quarter.
Compared to 2019 inventories increased 27%.
We continue to feel good about the quality of our inventory with nearly 90% in core styles.
And while lags between domestic shipments and Pos combined with improved lead times on source goods has placed upward pressure on inventory balances we are being proactive.
Leveraging internal production actions and adjusting receipts to prudently worked down levels.
We anticipate this to result in sequential year over year progress over the next couple of quarters.
I will discuss inventory and margin expectations in our outlook.
But based on current visibility, we expect inventory levels to be in line with revenue growth.
End of the third quarter.
Do you think from 2019 and I'm Gonna Dimensionalize. This for you to pretty specific way since 2019, <unk> non denna assortment and target has grown nearly 25% annually and in 2022. It started to represent the overwhelming park and the majority of our business now I'm not going to comment on the specific strategies, but I'm going to share.
Not a data point, but a specific point with you that I think is really relevant to how we're discussing and how we're thinking about the future consumer and how we work with our wholesale partners are real estate. So the amount of real estate that we have on the pad at target will not change of twenty-three compared to <unk> wasn't 22, but it will look different.
And I mentioned it in my pre repair marks of Yellowstone and also her recordings and then we have strategic partnerships, so and I didn't talk about this that much but with whalebone with Lee and with Yellowstone The television show with Wrangler and then we've talked a lot about the collaboration there another component of this but we also have the event sponsorships that we've never done before so the American.
With some of that amplify demand creation and Q2 that we talked about and are prepared remarks in the back half you know, we expect greater second half benefits from reductions in in non strategic expand and tight cost controls you know that's an area of focus forest, Bob It always will be.
And and certainly freeze up opportunities to either you know continue to improve the bottom line or invest back into the business to drive that top line growth.
Maybe I'll shift over to a couple of your other questions. You know you talked a little bit about inventory and and Optionality. So so let me hit that one Bob and and and then maybe I'll close with a data point about cell N versus sell through that that might help kind of resonate. There. So you know it was <unk>.
Think about sort of capital allocation you you've heard us talk a lot Bob over time about Optionality and we really think that's critical particularly in an uncertain operating environment like we're in at at the moment you know our near term priority is gonna remain on cash generation and conversion you know as we work down the inventory.
Lori levels in an enhanced our operating cash flow.
As I said, a few minutes ago, we we do expect significant improvement in the inventory levels as we go through the back half of the year and certainly that increases the cash flow and gives you that optionality.
You know, we've we've talked about share repurchase in the past, we did not repurchase any shares in the first quarter.
You know, Bob we repurchased about $62 million last year, and and returned $166 million to shareholders in in 22, with a combination of share repo and and dividends.
Certainly share repurchase remains an important option in our capital allocation model and we've got 62 million remaining under that share repurchase authorization. So you know we intend to use our share repurchase to offset dilution opportunistically while buying shares.
But but certainly you know looking at excess cash flows and market conditions as well.
Obviously, our priority is always going to be as we think about capital allocation first and foremost opportunities to organically invest back into the branch to continue to strengthen those and make sure that we're driving that top line growth. So hopefully that gives you a little bit of a sense, Bob about where some of that cash potentially.
Can be deployed you know as we go forward. We also have you know options around debt repayment certainly the dividend is is an important element of that capital allocation as well.
You know your last question about cell in versus sell through maybe I'll give you a data point that I think you know kind of helps dimensionalize it a little bit and I'll talk about men's jeans, which clearly is our largest category Bob.
So when you look at M. P D over the last three months for the total measured market around men's jeans, the market was down low single digits.
As you saw R. U S. Wholesale business was was up low single digits.
But I'll talk a little bit about wrangler, specifically in that category cause I think it is important.
The Wrangler P O S again N P. D data total measured market for men's jeans over the last three months was up 9%.
So that gives you a little bit of a data point about the strength of of the brands and hopefully dimensionalize is a little bit about how P. O S is outpacing ships in N out pacing the the overall market as we continue to gain share. So hopefully that helps a little bit Bob thanks for the questions appreciate it.
Thank you. Our next question comes from the line it became Jeffrey with Stifel. Please proceed with your questions.
Hi, Good morning. This is Peter Mcgoldrick on for Jim. Thanks for taking a question I was curious about the the inventory at domestic wholesale as as you.
Looking to the channel the inventory what visibility do have to the inventory they have on hand, and given the higher rate of fell through could you anticipate a return to strengthen in the U S market.
Yeah, I'll go ahead, and and take that one Peter so.
As we think about retailer inventory certainly in the back half of last year, I, I think pretty well chronicled <unk>.
You know about the the rebalancing efforts that that took place in the back half of last year, you know as we think about the the wholesale channel certainly it's in a much healthier spot I would say than than where it was middle part of last year.
But with that being said I think you know certain certainly retailers or are being cautious as they think about the outlook moving forward.
And the open to buy dollars remain restricted.
So again I think the inventory levels are and healthier spots and that's why we focus a little bit more on the P. O S and how our our brands are doing in terms of sell through because certainly over time that supply and demand will find equilibrium you know as we <unk>.
Move forward in the markets. So again, I think continuing to improve but but still a tight environment out there. So hopefully that answers your question Peter Thank you.
Thank you. Our next question comes from the line of Brooke wrote with Goldman Sachs. Please proceed with your question.
Good morning, and thank you so much for taking our question.
I was hoping that you could help us quantify the level of demand creation that you guys aren't bedding and your outlook as you lean into brand new investments and marketing and then <unk> I was hoping that you could help us understand how the conversations that you're having with wholesale partners <unk>.
Now versus a few months ago, and what's really changed and perhaps if you think about the second half how are you thinking about <unk> price opportunity in the U S market. Thank you.
Look I'll go ahead and start and then hand, it over to rest and.
What we've done here is that after having several years of experience and also bringing in you know.
Bridget and Holly some true professionals that know how to run these categories. In this business, we're actually spending a lotta time on the R. O Y and what we've done is in addition to what we have from a core standpoint, where reallocating dollars to the higher opportunities from and Roy standpoint, and having that data available to us now and looking at it differently, but also in addition to that just having different.
Programs and doing different things that we can evaluate and look at it and see how sticky it is and how the consumers you know just answering our questions that we're asking and how they're carrying on a conversation with a so for us it's really about an allocation of the heart higher RLI and the things that bring the consumers.
Yeah and broke good morning. Thanks for the question you know in terms of the wholesale partner conversations.
I would say that you know similar to to our comments on the call here you know, we certainly in conversations with our partners focus on the fact that the brands are resonating with consumers.
The sell through is really strong in the brands are gaining momentum and gaining share.
Certainly I just mentioned that I I think many wholesale partners are are cautious about the back half outlook and you've heard that hurt us reflect that as well and and you know our outlook taking that into consideration in the back half with the U S.
And certainly you know continuing to sort of work through that but you know I won't get into dimensionalizing units versus price assumptions, but again, keeping the brand strong making sure that their resonate in offering a compelling value to consumers when they come on the floor really important for his key it key piece of our strategy and we're gonna continue to do that.
In the back half and make sure that the brands are strong by investing in demand creation. So thanks for the questions.
Thank you. Our next question comes from the line of Sam Poser with Williams trading. Please proceed with your question.
Good morning, Thank you for taking my questions I have a handful number one.
Since there was some misunderstanding about how the gross margin was gonna fall in the first quarter and can you give us a better direction for what's happening with you know how how much. The gross margin is gonna be down or are we looking at a 40% or I mean is it.
<unk> 200 reps and Q2 or were you looking at.
600, Gibson Q2, that's number one just give us and on the rest of your day as well give us some help here because there was some misunderstanding in Q1 and.
I hope there's not as many misunderstanding is going forward number two target.
Discussion that you had in the prior Congress.
The prior question was that involving wrangler and can you give us the status of both brands Lee and wrangler at target and thirdly inventory levels in the third quarter should be in line with sales growth. So call that you know low to mid single digit sales growth in in the corridor in Q3.
That would put inventory above.
[noise] above where it is today, even though it's not up as much on a year over year basis, and it would mean that you're forward weeks of supply would be quite high so what is the accurate.
Like sort of.
Inventory term that you want and what should normalized inventories look like.
Sure. Good morning, Sam interesting I'll I'll go ahead and start with the question on gross margin and then and then flip over to Scott on target and then come back on your inventory question.
So you know in Q1, our gross margin was down 180 basis points, we were down 200 basis points in the in the fourth quarter, Sam as you well know and we talked about and that fourth quarter call that we expected higher inflation geographic mixing and production downtime to be partially offset by.
Strategic pricing and moderating transitory cost like error free so as I mentioned earlier certainly came in line with our expectations.
You know with shipments lagging P O S Q.
Q1, twenty-three inventory finished higher than expected. So so we're really getting after taking action here in the second quarter as we've talked a little bit about and that includes you know incremental proactive actions and managing that internal production bits plan here in Q2.
For you know based on on those more elevated inventory levels, Sam the highest cost goods are now expected to flow through the P and L. In Q2.
So we will be at peak inflation of what's flowing through the P and L.