Q2 2024 Kontoor Brands Inc Earnings Call
Your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Microcar repeating Vice President corporate development Enterprise strategy and Investor Relations. Thank you you may begin.
Speaker Change: Thank you operator, and welcome to contour brands second quarter 2024 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.
Speaker Change: Uncertainties are detailed in documents filed with the SEC, we urge you to read our risk factors cautionary language and other disclosures contained in those reports.
Amounts referred to on today's call will be in constant currency, unless otherwise noted and often on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning our.
Our outlook is presented on an adjusted dollar basis reckon.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website at contour brands Dot com. These.
Speaker Change: These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.
Speaker Change: Joining me on today's call are contour Brands', President Chief Executive Officer, and Chair, Scott Baxter, and Chief Financial Officer, Joe <unk>.
Speaker Change: Following our prepared remarks, we will open the call for questions. We anticipate this call will last about one hour Scott Thanks, Mike and thank you to everybody joining us on today's call I'm pleased to share that we delivered second quarter results above our expectations. Our results were driven by continued market share gains gross margin.
Speaker Change: Expansion and strong earnings growth and cash generation.
Speaker Change: And what remains an uncertain environment, the consistency of our execution and power of our model is driving competitive separation and improving fundamentals. We are entering the second half of the year with great momentum our brands are winning with the consumer and we expect revenue growth to accelerate for both brands through the balance of.
The year base.
Based on our improving visibility and stronger profit outlook, we are raising our full year gross margin earnings and cash flow guidance, including incremental investments, we are making in both brands.
Speaker Change: Midway through the year, we have executed our plan well and I am confident our best is still ahead of us.
Speaker Change: With that let me review highlights from the quarter.
Speaker Change: Wrangler revenue grew 1% with growth in nearly every channel and region fueled by continued share gains and expansion into new categories, and our core bottoms and shorts business. We gained nearly 100 basis points of market share in the U S. According to <unk> and our non denim business, which includes outdoor.
Speaker Change: <unk> grew 14% in the quarter.
Speaker Change: This broad strength demonstrates the power of the brand and the momentum we are carrying into the second half of the year.
Speaker Change: POS trends in the U S also accelerated through the second quarter, increasing 4% in June our strongest month year to date.
Speaker Change: Behind the strength is a combination of product and demand creation platforms that are resonating with consumers like never before starting with outdoor which grew 25% in the quarter, we are bringing great product in value to the market in the consumer is responding as an example, our utility plant grew triple digits in the quarter and we saw.
Speaker Change: LOL similar strength in shorts, our investment in talent design and product development are advancing our penetration in this large and growing category.
Speaker Change: And we have visibility to this momentum continuing supported by new launches. This fall such as the Atg Chino in Cliffside utility patent. We believe we are just getting started and have a long runway for outsized growth, including double digit increases this year.
Speaker Change: In our western business U S revenue grew 8% Wrangler is rooted in western culture, which has been part of its DNA since its founding in $19 47, our collaborations with artists such as Laney Wilson and Cody Johnson are bringing a new generation of consumers into the brand.
Speaker Change: And George Strait, who we've collaborated with since 2003 recently set a record for the largest ticketed events in U S history, and most recently, we partnered with the summer blockbuster twisters, showcasing wranglers deep connection to America's Heartland.
Speaker Change: We get asked if western travels around the world and the answer is a clear yes in Europe, we're seeing similar strength with the consumer across western bottoms, and tops, which is attracting a younger and more female consumer into the brand.
Speaker Change: Looking at the balance of the year. Our pipeline is the strongest we've had Bellini Wilson collection is on track to be our largest collaboration to date. The market response to be spoke our new female fit innovation has been fantastic we enter our second year with the Dallas Cowboys.
Speaker Change: And we are planning our first equity campaign in years across broadcast television and live sports. The early reads on the campaign has been incredibly strong and we can't wait for its public debut in September.
Speaker Change: Taken together, we expect second half revenue for the brand to accelerate to low to mid single digit growth.
Speaker Change: Turning to Lee as expected revenue in the quarter decreased 6%, reflecting sequential improvement or decline in U S wholesale and macro pressures in Europe, and Asia more than offset global growth in digital that said the reported figures don't tell the full story. So let me share details on what's behind the numbers.
Speaker Change: First we saw encouraging signs as the quarter progressed, including U S. Pos accelerating to 6% growth in June this was the strongest Pos performance all year in.
Speaker Change: In addition, our core bottoms and shorts business gained approximately 20 basis points of market share in the U S.
Speaker Change: Conservative retailer inventory management, and the slow start to seasonal negativity impacted selling but the momentum we are seeing with sell through gives us confidence the brand is resonating with consumers.
Speaker Change: Our consumer insights work is also advancing our end to end brand assessment and refreshed segmentation in particular, we are seeing green shoots with younger and female consumers in Gen Z Lee female saw a 42% increase in perceived brand equity and a 36% increase in purchase consideration or.
Speaker Change: For the last 12 months as we discussed last quarter. This is a significant focus for the second half of the year and we are confident the work will pay dividends in the coming years.
Speaker Change: We know we need to capitalize on the opportunity to improve lease topline performance. The foundational work on consumer insights segmentation product development and demand creation gives us confidence we are on the right path.
Speaker Change: And over the near term, we have several initiatives that support the second half acceleration in.
Speaker Change: In June we launched the exciting collaboration with Hey, Dude across both apparel and footwear and just yesterday, we followed up with the leave forever 21 collaboration tying into the consumer work I just shared these collaborations speak to the younger consumer that is seeking the brand, while expanding lee into new categories and our <unk>.
Speaker Change: <unk> platform of the year <unk> is on track for its global launch. This performance innovation combines elite comfort with world class aesthetic at incredible value is launching as a true platform at wholesale and DTC and will include bottoms tops and non denim. It will launch later this year and scale in 'twenty five.
Speaker Change: And we are excited to share in upcoming collaboration with legendary designer Paul Smith. He has worked with some of the world's most iconic brands and speaks to the rich heritage Lee has around the globe. This will launch as a premium collection and spring 'twenty five.
Speaker Change: Supporting these initiatives, we will be making incremental demand creation investments in the second half of the year, which has been incorporated into our raised earnings guidance, putting it together, we expect second half lead revenue to improve to low single digit growth.
Speaker Change: Finally, let me provide an update on project genius. The planning phase is going well and we have started to move into the execution phase on several initiatives. We have a line of sight to approximately $100 million of annualized savings at full run rate none of which are included in our guidance. This will structurally increase.
Speaker Change: Profitability ceiling, while adding significant investment capacity and Optionality, we will be sharing more details over the coming quarters.
Speaker Change: Before I turn it over to Joe Let me reiterate the confidence we have in achieving our 24 plan. Our brands are winning with the consumer revenue is accelerating and we expect to generate double digit operating profit growth over the balance of the year. We have also raised our earnings guidance to the top of our prior range and now expect to generate over 300.
Joe: Third $50 million in cash from operations, reflecting our significant capital allocation optionality, including over $100 million returned to shareholders year to date through our dividend and share repurchases.
Speaker Change: We are sensitive to the current operating environment, which remains challenging much as much as it's been for the last five years, but our teams are executing at a high level inventory levels at retail are in good shape and we like the fundamentals of our brand positioning as high value and are central to the lives of many of our consumers.
Joe: We are operating from a position of strength and we ended the second half of the year with great momentum to drive value creation for all stakeholders Joe.
Joe: Thanks, Scott and thank you all for joining us today.
Speaker Change: We are pleased with our second quarter results, which came in above our outlook driven by higher revenue stronger gross margin expansion and better than expected earnings and cash flow.
Speaker Change: We are executing well against what remains an even environment around the globe.
Speaker Change: For the quarter revenue declined 1% gross margin expanded 420 basis points operating earnings increased 10% and EPS grew 27% to 98.
Speaker Change: As expected the fundamentals of our business strengthened as we closed out the first half of the year.
Speaker Change: I will review the details of the quarter in a moment, but first I'd like to share some perspective on how we see the business at the midpoint of the year.
Joe: We are seeing modest upside relative to our plan, particularly with regard to profitability and cash flow.
Joe: As a result, we have raised our gross margin operating earnings and cash flow outlook, including the incremental demand creation investments we announced today.
Speaker Change: While there have been slight changes to our quarterly phasing the fundamentals of our business are poised to further accelerate in the second half of the year.
Speaker Change: Our balance sheet remains strong and as a result of stronger earnings in networking capital management, we've been able to return more than $100 million to shareholders year to date through share repurchases and dividends.
Speaker Change: In addition, we made a $25 million voluntary debt payments against our term loan during the second quarter to further optimize our capital structure.
Joe: Yet. Another example of our balanced capital allocation approach and the Optionality of our model provides.
Joe: We are entering the second half with good momentum and remain on track to achieve solid growth for the balance of the year.
Joe: Pos in the U S accelerated through the quarter with May increasing 2% and June increasing 5%.
Joe: To further support our accelerating revenue trajectory, we are investing an incremental $6 million and demand creation, both brands that will largely occur in the second half of the year.
Joe: We will continue to plan the business conservatively in light of the environment, but are confident these investments will support increasing brand equity and fuel accelerated growth.
Speaker Change: So with that let's review the details of our second quarter results.
Speaker Change: Global revenue declined 1% as 4% growth in DTC was offset by a 2% decline in wholesale.
Joe: Revenue in the quarter benefited by approximately two points from the earlier timing of shipments in the U S from the third quarter into the second quarter.
Joe: Excluding the timing shift revenue was modestly above our previous expectations.
Joe: By brand Wrangler global revenue increased 1%.
Joe: Growth was driven by continued category and channel expansion, including 11% growth in direct to consumer and strong growth in both outdoor and female.
Joe: In the U S revenue was consistent with the prior year with 10% growth in direct to consumer offset by a slight decline in wholesale.
Joe: Wrangler Pos continues to outperform its largest points of distribution leading to another quarter of market share gains.
Joe: Following a softer April Pos strengthened as the quarter progressed with May and June displaying the strongest Pos we've seen year to date.
Joe: However, as anticipated.
Joe: Retailers remain in a conservative posture with regard to inventory management, which continues to impact the cadence of ourself.
Joe: Wrangler International revenue increased 7% driven by double digit increases in direct to consumer.
Joe: The heat generated in the U S is translating in key European markets and is helping to bring a younger female consumer into the brand.
Joe: In Europe strengthened PTC was partially offset by wholesale which remains under pressure due to challenging macro conditions in the region.
Joe: Now turning to Lee <unk>.
Joe: Global revenue decreased 6% the quarter unfolded, largely as expected sequentially improving from the first quarter.
Joe: 10% growth in digital was offset by reduced wholesale shipments in the U S and macro pressures in Europe and Asia.
Joe: U S wholesale declined 2%, reflecting retailer inventory management actions and a decrease in seasonal as we expected.
Joe: But we saw sequential improvement in both Pos and shipments as the quarter progressed with June Pos increasing at a mid single digit rate.
Joe: Supported by new innovation platforms, and the incremental demand creation investment previously discussed we expect improved performance for the brand globally as the business and flex to growth in the second half.
Joe: Lee International revenue decreased 11%.
Joe: In Europe revenue declined 10% similar to wrangler ongoing macro pressures are contributing to cautious retailer behavior and more than offset 20% growth in digital.
Joe: We expect the macro environment to remain uneven for the balance of the year consistent with our prior expectations.
Joe: In APAC revenue declined 13% with varied performance by channel.
Joe: And digital momentum continued with double digit growth.
Joe: We are seeing strong performance on live streaming platforms, such as <unk>, which grew at a triple digit rate driven by innovation platforms, such as lease cooling technology.
Joe: <unk>.
Joe: In wholesale we continue to make progress improving the quality and health of our retail network.
Joe: During the quarter, we took proactive actions to accelerate these initiatives and establish a stronger foundation moving forward.
Joe: While these actions had a near term impact on revenue. We are confident the investments, we're making will best position our brands for long term success in the region and are focused on building a healthy growing marketplace with our partners for.
Joe: For the second half, we expect high single digit growth for the APAC region.
Speaker Change: Moving to the remainder of the P&L adjusted gross margin expanded 420 basis points to 45, 2% driven by the benefits of lower input costs product mix and efficiencies we are driving through the supply chain.
Speaker Change: This was partially offset by targeted pricing actions included in our plan.
Joe: Adjusted SG&A expense was $195 million up 8% compared to the prior year.
Speaker Change: Investments in direct to consumer and technology were partially offset by lower volume related distribution and freight expenses.
Joe: And adjusted earnings per share was <unk> 98, representing an increase of 27% compared to the prior year.
Joe: Turning to the balance sheet inventory decreased 22% to $488 million, which was better than our previous expectation.
Joe: Net working capital management is a top priority and has contributed to our strong cash generation year to date.
Joe: We expect our inventory to decline at a low to mid teen rate in the second half of the year as we approach optimal levels in support of our annual turnover target of approximately three five times.
Joe: We expect a further unwinding of our inventory to contribute to strong cash generation in the second half and support our capital allocation framework.
Joe: We finished the quarter with net debt or long term debt less cash of $525 million and $224 million of cash on hand.
Joe: Our net leverage ratio, our net debt divided by trailing 12 months adjusted EBITDA was one four times trending toward the low end of our targeted range.
Joe: During the quarter, we repurchased $25 million of stock under our current authorization and as previously announced our board declared a regular quarterly cash dividend of <unk> 50 per share.
Joe: Additionally, we made a $25 million voluntary payments against our term loan further strengthening our balance sheet, while providing additional flexibility and optionality.
Joe: Finally on a trailing 12 month basis, our adjusted return on invested capital was 28% representing an increase of 210 basis points compared to the prior year.
Joe: Now turning to our outlook revenue is still expected to be in the range of $2 $5 7 billion to $2 63 billion, reflecting a decrease of 1% to an increase of 1%.
Joe: Relative to our plan, we are pleased with our performance through the first half of the year.
Joe: With our second half revenue well positioned to inflect positively let me share additional perspective on our assumptions for the balance of the year.
Joe: First last quarter, we discussed growth expectations of approximately 2% for Q2 through Q4 period.
Joe: There is no change to this expectation however, given the two point impact from the earlier timing of shipments into the second quarter from the third quarter. We now expect growth in the second half up between 2% and 5%.
Joe: Excluding the timing shift there is no change to our expectation of mid single digit growth in the second half of the year.
Joe: Second we continue to have good visibility to category expansion distribution gains as well as new innovation platforms in the second half.
Joe: To support these platforms and accelerating revenue growth, we are investing an incremental $6 million and demand creation against both the wrangler and Lee brands to fuel our momentum for the balance of the year and into 2025.
Joe: Third we continue to plan the business conservatively and assume no meaningful improvement in overall, Pos or retail inventory positions for the balance of the year.
Joe: While the consumer has been resilient and inventory levels at retail remain suboptimal retailers remain in a conservative posture as a result of the uncertain environment.
Joe: In the third quarter, we expect revenue of approximately $660 million, representing 1% growth, including the two point impact from the timing shift.
Joe: We expect mid single digit growth in the fourth quarter.
Joe: Moving to gross margin, we are raising our outlook to approximately 44, 8% from 44, 6%.
Joe: Our updated outlook represents an increase of 230 basis points compared to adjusted gross margin of 42, 5% in 2023, excluding the out of period duty expense.
Joe: For the second half of the year, our outlook implies approximately 100 basis points of gross margin expansion driven by the following assumptions.
Joe: First we will continue to benefit from the structural drivers of mix.
Joe: This is expected to contribute approximately 30 to 40 basis points to the full year.
Joe: Beyond this year, we expect the benefits of mix to continue as we scale, our DTC and international businesses.
Joe: Second we have good visibility on input costs with cost locked in for the balance of the year on both sourced and manufactured product.
Joe: We continue to expect over 200 basis points of benefit for the year between lower product costs and proactive actions to optimize our supply chain.
Joe: These benefits were largely front half weighted and we anticipate a modest benefit from lower product costs in the third quarter and a limited benefit in the fourth quarter.
Joe: Third we assume a modest headwind from lower pricing increased promotional activity and supply chain disruptions.
Joe: Collectively these inputs are expected to negatively impact our gross margin by less than a point for the full year.
Joe: Taken together, we expect approximately 100 basis points of gross margin expansion in the third quarter and approximately 120 basis points of expansion in the fourth quarter.
Joe: And finally I continue to have a high degree of confidence in our ability to drive significant gross margin expansion over time supported by project genius.
Joe: Our planning and execution work is progressing as expected and we remain on track to share additional details over the next one to two quarters.
Joe: SG&A is now expected to increase approximately 4%, including the additional demand creation investment I discussed earlier.
Joe: Operating income is now expected to be at the higher end of the prior range of $377 million to $387 million, including the impact of the incremental demand creation investments, reflecting growth of 10% to 11% compared to the prior year, excluding the duty charge.
Joe: We expect second half operating income to increase at a double digit rate.
Joe: EPS is now expected to approximate $4 80.
Joe: Including <unk> <unk> of incremental demand creation investment representing growth of approximately 8% compared to adjusted EPS in the prior year, excluding the out of period duty charge.
Joe: This compares to our prior outlook range of $4 70 to $4 86.
Joe: Okay.
Joe: Full year EPS growth will be negatively impacted by about five percentage points from a higher tax rate, including a 12 percentage point headwind in the second half.
Joe: We expect third quarter EPS of approximately $1 25.
Joe: Finally, we now expect cash from operations to exceed $350 million as a result of stronger earnings growth and improved net working capital.
Joe: This compares to our previous outlook for cash from operations to exceed $335 million.
Joe: Our increased outlook highlights the cash generative nature of the business and provides additional capacity to pursue our capital allocation framework.
Joe: We will continue to evaluate options to effectively utilize our balance sheet and cash flow to enhance shareholder value.
Joe: Before opening it up for questions I'd like to reiterate the confidence we have in our 2024 objectives.
Joe: We are mindful of the uncertain environment and the pressures on the consumer and while we will continue to manage the business conservatively. We are entering the second half of the year with momentum.
Joe: Our teams are executing well and we have line of sight to accelerating revenue growth double digit operating earnings growth and $200 million of cash from operations over the balance of the year.
Joe: The strength of our balance sheet and cash generation further support capital allocation Optionality and CSR enhancing investments.
Joe: We are operating from a position of strength and I am confident in our ability to continue to deliver superior returns for our stakeholders.
Speaker Change: This concludes our prepared remarks, and I will now turn the call back to the operator.
Speaker Change: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Speaker Change: Press Star two if you would like to remove your question from the queue for.
Keith: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Joe: Star one at this time, one moment, while we poll.
Speaker Change: My first question.
Ike <unk>: Our first question comes from Ike <unk> with Wells Fargo. Please proceed.
Ike: Hey, everyone. Good morning Congrats.
Ike: Two questions for me. The first one is more high level, just maybe Scott and Joe how are you feeling about the state of the business today.
Speaker Change: Versus six months ago, when we started.
Speaker Change: Just from a macro perspective across the globe and then maybe just a little bit more on that $6 million of investment like what's driving that decision and what specifically are those dollars going into.
Speaker Change: Good morning, Ike how are you all go head to start and kick it over to Joe will go ahead and do this both of us, but the state of consumers very similar to the last six months or so we're at about the same position here in the United States I think of it as status quo from the standpoint of the consumer but very resilient. So we like that about the consumer and.
Speaker Change: Europe, the macro environment is challenging and we've kind of put that in our guide going forward. It's been that way for a couple of years no real relevant change there in in Asia as we've talked about the recovery has been uneven, but we're feeling better about it now and we think it's going to for us it will be positive and inflect positive in the back half so in general no.
Speaker Change: Big change, but I think the thing that's probably most important for us as we continue to just focus on as a team controlling what we can so just controlling the environment to the best of our ability, creating great products and great great marketing. So I think you know our products are a great value for our great brands. So in an environment and in a time like this this is where we are.
Speaker Change: Perform really well and then we can talk about $6 million in the second but Joe anything to add on the consumer and maybe just a few things good morning.
Joe: Look we just came through the first quarter better than expected we came through the first half better than expected we have the toughest part of our year behind us and the fundamental profile of the business is accelerating so we feel like we're operating from a position of strength in what remains a volatile time for our sector as we said.
Joe: The beginning of this year, we're planning the business conservatively in light of the environment. However, we've continued to drive strong share gains strong gross margin improvement.
Joe: Strong operating earnings growth and cash generation through the first half. So the balance sheet is strong and we're focused on what we can control and that's delivering high quality fundamental results were certainly mindful of the environment and the pressures on the consumer but we think we've put ourselves in a position to play offense.
Speaker Change: How much by defense.
Speaker Change: And a little bit on the $6 million the additional investment like that you asked about we're in a really good position relative to how we're gaining momentum throughout the year June was really strong from a Pos standpoint. So we thought it was prudent to go ahead and put some more money back into marketing continue to drive those market share gains that we've had which have been really significant I think one of the things that youll see as an environment is.
Lee: Consumer is our new Big television commercial we haven't had one in many years, it's a really big deal for US it's tested extremely well, obviously, we're going to run it because it's tested really well, but we're really proud of it and youll see that starting in September and then Lee is really focused from an additional investment standpoint in the digital area. So in the U S.
Speaker Change: Also in Europe, and Asia, II, So global but I think just that additional investment in the business at this time of the year at this stage just kind of speak volumes about the confidence we have in full year 'twenty four but more of the confidence we have in our people and our product.
Lee: Got it and then a follow up maybe for Joe, but what scope it for you as well maybe.
Thank you for your attention at this session.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: Just any more visibility on genius, just kind of curious you guys have had some time to work through this I.
Speaker Change: I know the majority of the savings are hitting next year and beyond but I don't know any update on how we're thinking of the $50 million to $100 million like where we are that it's a big range any thoughts there and then any any any quantification on flow through to the bottom line versus reinvestment at this point.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: That's star one at this time. One moment while we hold for our first question.
Ike: Yes, you bet Ike.
Speaker Change: Genius is incredibly important let me first start before we get into some of the details we've put some of our best minds against genius in this in this organization globally because it is a global project for us and they have really gotten out of the gate very quickly. It impressed us tremendously on the work that they're doing as a team. Therefore, we've taken that number up to $100 million. So we are at.
Speaker Change: Hey, everyone. Good morning. Congrats.
Joe: The high end of the range. So thats, how we see it going forward, but as I've stated before and as Joe has talked about before its the right time for US we did the spin off $5 six years ago, but we also ran into the pandemic not long after that so we didn't get a chance to get after this so the timing is really right. The brands are doing well, we had the right people and the right talent in place.
Joe: And we just are very excited about what that can do for our company from an optionality standpoint going forward with the cash that it frees up and also a really important thing for us in any company is how you simplify your business model will work on the key initiatives and I think that's one of the things that we're doing really well as an organization right. Now we are working on the key things that drive performance and.
Speaker Change: And in Asia, as we've talked about, the recovery has been uneven, but we're feeling better about it now, and we think it's going to, for us, you know, be positive and select positive in the back half. So, in general, no big change, but I think the thing that's probably most important for us is, like, we continue to just focus on, as a team, controlling what we can, so just controlling the environment to the best of our ability, you know, creating great product and great marketing. So, you know, I think you know our products are a great value for a great brand, so in an environment and in a time like this, this is where we perform really well.
Speaker Change: Also drive culture, and also drive our consumer connectivity, which is really important in that is going to help us tremendously with genius, it's not just that cash and how we deploy it will be significant Joe.
Joe: Yeah sure so.
Joe: I'd say the planning and early execution work is progressing as we expected. So we remained on track we do intend to share more specific details in the next quarter or two but suffice to say that we're really confident in the $101 billion opportunity that we have in front of us just from a.
Speaker Change: Shaving standpoint, those savings will be more gross profit driven in SG&A, driven and I think at this point you can think about that as two thirds one third in terms of the of the split we do expect to reinvest a portion of the savings back into the business, we intend to lay out the details of that in the context.
Speaker Change: We have the toughest part of our year behind us, and the fundamental profile of the business is accelerating. So, we feel like we're operating from a position of strength in what remains a volatile time for our sector.
Ike: How we're thinking about 2025 in the next couple of years in the coming quarter. So so overall, we're really excited about the program and what we think we can deliver in terms of accelerated growth improve profitability and returns on capital over the next couple of years.
Speaker Change: Thanks, so much guys.
Mike: Thanks, Mike.
Brook Road: Next question comes from Brook Road with Goldman Sachs. Please proceed.
Brook Road: Good morning, and thank you for taking our question I always have.
Brook Road: Hoping you could help us understand the drivers of your confidence in your outlook for Lee performance improvement in the back half how should we think about that improvement between the U S and Asia and the U S. Could you help us quantify the portion of improvement that you expect to see as a result of new distribution or demand creation investments relative to the underlying base business.
Speaker Change: And a little bit on the $6 million, you know, the additional investment, Ike, that you asked about. You know, we're in a really good position relative to how we're gaining momentum throughout the year. You know, June was really strong from a POS standpoint. So, we thought it was prudent to go ahead and put some more money back into marketing.
Speaker Change: And then in Asia can you provide a little bit more color on what's underpinning that confidence and the improvement to high single digits in second half. Thank you.
Brook Road: Jim.
Speaker Change: Good morning Brook I'll go ahead and start and then kick it over to Joe We've made some significant changes to our organization here recently and we feel real confident on how we're thinking about this as two global brands working together and Lee we've done a lot of work in a very short period of time behind the scenes on product on consumer insights.
Joe: Segmentation on building the team, which is really important and we're starting to see some very encouraging signs, although I want to make sure everybody realize it's very early but we had a pretty significant share and Pos increase here at the end of the second quarter, which was really important and I think it was it was an important confidence boost for the team to to see all the work that's been going on.
Speaker Change: <unk> start to pay off a little bit.
Speaker Change: I know the majority of the savings are hitting next year and beyond, but I don't know. Any update on how we're thinking of the $50 to $100 million, like where that's a big range? Any thoughts there? And then any quantifications on flow-through to the bottom line versus reinvestment at this point?
Speaker Change: Won't happen overnight, but I am confident confident from a very high level that we're on the right path going forward. It's a great brand with incredible amount of history and heritage and we have the right team against it going forward globally, which is really important to us.
Ike: Yeah, you bet, Ike.
Brook Road: Yeah Brook, maybe on Asia. So excluding the actions that we took in the quarter on a sequential basis. The business was actually fairly consistent we saw really really strong performance on the digital side, which continues and I think as we sit mid point of the year pretty good visibility into the into the high single digit growth in the back half of the year.
Speaker Change: Say that the biggest change we've been working to improve the overall quality and health of our retail network in China. We've been in the process of consolidating partners moving to more strategic partners with strong capabilities in that have the ability to invest alongside us, which we think sets of <unk>.
Speaker Change: So we are at the high end of the range, so that's how we see it going forward.
Ike: The brands are doing well, we have the right people and the right talent in place and we just are very excited about what that can do for our company from an optionality standpoint going forward with the cash that it frees up. And also a really important thing for us and any company is how you simplify your business model to work on the key initiatives.
Brook Road: Longer foundation for the region moving forward and we think we'll start to reap the benefits of those actions in the second half the APAC market, mainly China similar to the U S has been plagued with excess inventory in the channel and we've been working with our partners over the past 12 months and at this point, we think that situation is large.
Ike: And I think that's one of the things that we're doing really well as an organization right now. We're working on the key things that drive performance, and also drive culture, and also drive our consumer connectivity, which is really important. And that is going to help us tremendously with Genius. It's not just that cache and how we deploy it will be significant.
Brook Road: Behind us.
Speaker Change: Great. Thank you so much I'll pass it on.
Bob <unk>: The next question comes from Bob <unk> with Guggenheim. Please proceed.
Bob <unk>: Hi, good morning, guys.
Speaker Change: Yes, sure.
Bob <unk>: Hey, Bob.
Speaker Change: I'd say the planning and early execution work is progressing as we expected so we remain on track. We do intend to share
Speaker Change: Alright.
Bob: First question I have is.
Bob: Can you just talk about where you think we are in this western cycles as sort of a denim cycle, where it's playing the best.
Ike: more specific details in the next quarter or two, but
Brook Road: Even by segment and then the second question is on the Cowboys the demand creation investments on the Cowboys.
Speaker Change: Do you think Jerry Jones should re up back before the season starts or they could just play it out.
Speaker Change: Well, let me go ahead to start with the Cowboys, yes for sure.
Speaker Change: Our big Cowboys fans here, now where big Dax hands, and we're all in and we do love our partnership there, it's gone really well, but from a western in denim standpoint, we think that this is just a casual and <unk> across the globe. We've kind of tried really hard to stop talking about some people talk about these denim moment that we have denim cycles and stuff and we think we are.
Speaker Change: Well past that and the denim is really just acceptable everywhere and we think that we've done a really nice job has a company go ahead and growing those other businesses that are ancillary to it to kind of for instance, as we've talked quite a bit about in our prepared remarks, our all to all terrain gear and we've got two big big products that we're kicking off in July we kicked.
Brook Road: Off our Cliffside pant from all terrain gear and then.
Brook Road: We're kicking off our outdoor Chino and that business has doubled in the last couple of years $200 million and we think we have a line of sight on that business to $400 million in the next few years, but the western piece of it you know what's funny people talk about western kind of up and down but we've been growing the western business pretty steady since 1947, so we kind of see it as you know.
Brook Road: A business that's going to continue to grow and the one thing thats been kind of interesting in the western business has become more global top in the last kind of year year and a half in that year.
Speaker Change: Europe's having a really nice moment.
Brook Road: And it seems to be really sticky there in that respect.
Speaker Change: And we're all in on the Western side Laney Wilson, we just re upped for two more years Cody Johnson line kicks off with us here real soon.
Speaker Change: <unk> is coming up in December our investments that we make in rodeos in all of our partners.
Speaker Change: And I think most of all of our product we've got a leading position in both tops and bottoms male and female and we just continue to resonate really strongly with our consumer and if youre if youre real cowgirl Nouriel Cowboy you were ranked it's just that simple.
Speaker Change: Thank you.
Speaker Change: <unk>. The next question comes from Jim Duffy with Stifel. Please proceed.
Peter Mcgoldrick: Hi, This is Peter Mcgoldrick on for Jim Thanks for taking our questions. Firstly I wanted to get a little more clarity on the market share momentum that the consumer level, considering both on DTC and at the point of sale, where you have visibility the sequential improvement in DTC is evident in the monthly performance as constructive can you talk about you expect.
Speaker Change: <unk> built into the second half guide and any color you can provide on quarter to date trends.
Brook Road: Yes.
Brook Road: Sure.
Brook Road: Let me start and start Scott So we feel really good we have.
Speaker Change: And we monitor with Circon, our market share gains all the time and we've had a very very nice run over the last two years with both of our brands from a market share standpoint that is all about great product at a great price in the right channels I think we're very fortunate with the partners that we have in our channels the channels that we play in but we're.
Speaker Change: Controlling our own destiny by creating great product now you heard earlier, we're investing another $6 million in the business here in the second half because we think that it's an opportune time to continue to go ahead and gained share in the market and gained share in the channels that we go ahead plant specifically and from a DTC standpoint, our plan is to speak more about that in a pretty early.
Speaker Change: Net level when we go ahead and have our.
Brook Road: Upcoming data that we're going to spend with you or the Investor day here that we'll announce that date soon but there is more and more to talk about there and we feel real confident about our plans for that going forward in the future.
Joe: Joe anything Bob Yes.
Joe: Peter maybe just in terms of the numbers I mean in Q2, we did see our Pos outpace our shipments we did continue to gain share across both brands, but that was tempered by what we would characterize as continued retailer caution on the on the inventory management front, we are starting to see better balanced between.
Pat: Sell in and sell through a more normalized replenishment order Pat.
Speaker Change: Pattern, but look inventory levels at retail are in good shape I said in the prepared remarks, Dave and our sub optimal across some of the key accounts in certain in certain categories, but we saw good performance across the quarter. The acceleration was really driven by seasonal outdoor and female so after.
Brook Road: A softer April may and June really really came on strong.
Speaker Change: Thanks, and then on the capital allocation as you move towards the low end of the target net leverage range at one times Levered.
Speaker Change: <unk> <unk> accretive actions can you talk about.
Speaker Change: Consideration for investments in the business shareholder returns and also how you might be thinking about potential M&A.
Brook Road: Thanks.
Speaker Change: Sure sure I'll start Peter we have been very consistent in one of the things I think I'm really proud of our company about is that we haven't done anything just to do a deal we have been very consistent in our approach and we've talked about not surprising the community and continue to go down that path, we're going to make sure that we do something and if we do something its going to be.
Speaker Change: Fair prices and to be accretive it's going to go ahead and make a lot of sense to everybody and we just haven't found that and we're not going to force I think thats. The that's one of the things that as I look back in the last six years of being the CEO here that we haven't forced the issue just to make people happy from an external standpoint, so we feel real good about that but I think you saw.
Brook Road: I think you saw this quarter some of the things that we did from a capital allocation. We just have so much optionality because we're creating a lot of cash and you saw that we did a $25 million buyback and also.
Speaker Change: Pay down some debt voluntarily, but we've returned $100 million to our shareholders year to date and we are still only halfway through the year, so fairly significant until talked in his script.
Speaker Change: Script, a lot about the cash that we're creating and how we're upping that a little bit. So it continues to give us more flexibility as we go forward as you can see we're investing it back into the brands also but it's just a great place to be and I think the one thing that you can take from this is that count on us to make the right decisions communist to make.
Speaker Change: Great decisions for our shareholders in and count on us to be very prudent in making sure that if we do do M&A, it's going to make a lot of sense, but we don't feel the pressure and we don't feel rushed to have to do anything if it's not right.
Speaker Change: Very clear thank you.
Speaker Change: Yes, you bet.
Speaker Change: Thank you. Our next question comes from <unk> <unk> with UBS. Please proceed.
Speaker Change: Great Great good morning, and.
Speaker Change: Thanks for taking our questions I guess, maybe if you could elaborate a little bit more on.
Speaker Change: Timing shift impacting Q2 and Q3 revenue.
Speaker Change: Just curious about 200 basis points Shipman was that more like doing.
Speaker Change: On acceleration in POF and <unk>.
Speaker Change: The retailers asked pull forward some of that demand or is it just to be cautious because of supply chain challenges.
Speaker Change: Then.
Speaker Change: Maybe on the gross margin guidance.
Speaker Change: It seems like when you were talking about the drivers.
Speaker Change: They are very similar they are the same drivers and it seems like the impact from them are very similar to what you talked about in the first quarter result, So just wondering what is the incremental driver that led you to increase your gross margin guidance by 2020 basis points.
Speaker Change: Hey, Mauricio good morning, so on the timing shift it was about $12 million or about two points of growth in the quarter and about a nickel of EPS relative to the Q2 outlook. We provided excluding the timing shift we came in about about one point ahead on the top.
Speaker Change: Wine and about <unk>.
Speaker Change: On the EPS, mainly mainly driven by stronger gross margin and I think look the driver here, we had not expected in the outlook and improvement in Pos we had not expected overall inventory levels to improve and we saw exactly that so I think given the the Pos performance of both brands and where inventory levels are we saw.
Speaker Change: Some demand pull into the quarter relative to our previous expectations.
Brook Road: In terms of the full year gross Martin shape margin change, we really flowed through the upside that we saw in the quarter to the full year and kept our back half assumptions intact at this point.
Brook Road: Yes.
Brook Road: Hello.
Marcio: Thanks Marcio.
Brook Road: Sorry.
Speaker Change: I think I missed the last part of the answer.
Mary Lynne: Mary Lynne.
Speaker Change: And seconds or something like that yes, sure. So from a from a full year gross margin standpoint, we increased the full year outlook by about 20 basis points, that's really the the.
Brook Road: The upside that we saw in the second quarter that we were able to flow through for the full year for the second half we've kept our assumptions intact at this point.
Speaker Change: Got it and then just maybe if I can follow up just wondering on.
Speaker Change: On the commentary on any impact you saw.
Speaker Change: Could you elaborate a little bit more like what are the actions that youre, taking on on that on that specific market and just again, what gives you confidence that there is going to be.
Speaker Change: Sales growth in the high single digit range in the second half. Thank you.
Speaker Change: Yeah.
Speaker Change: Yes ratio I'll take that so the actions we took were actively clearing excess inventory with our partners. We've really been working through this for the last 12 months to 18 months. So theres no real new news here, but it did have an impact in the quarter.
Brook Road: For the second half we've got pretty good visibility at this point. So we expect continued strong performance in digital we do expect the wholesale business to reinfect back to growth given some of the challenges we've been working through over over the past 12 to 18 months.
Speaker Change: Great Thanks, and congratulations on the results.
Speaker Change: Okay.
Speaker Change: The next question comes from Paul Cooney with Barclays. Please proceed.
Paul Cooney: Hey, good morning, Thanks for taking the question.
Speaker Change: Nowhere.
Paul Cooney: The next two quarters on product genius, but I'm wondering if at a high level. If you can qualitatively go over some of the specific projects within that that are driving some of that excitement.
Speaker Change: And then related to that.
Speaker Change: With improved outlook for cash flow can you go over whats what are the drivers behind the improvement in working capital better sustainable. Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah, Hey, Paul Good morning, Yes, so on project genius.
Speaker Change: We'll get into the details of this in the next quarter or two we'll lay out the plan and fairly good good detail in terms of the areas of the business that we're that we're that we're touching in terms of the stronger cash flow, it's really the stronger earnings and a stronger networking capital management that we see at this.
Speaker Change: Point in the year.
Speaker Change: Our next question comes from Laurent <unk> with BNP Paribas. Please proceed.
Laurent: Good morning, Thank you very much for taking my question.
Speaker Change: In the prepared remarks.
Laurent: For both brands to accelerate in the second half just curious to understand this a little bit more so we can model. This out properly does that mean that we should grow year over year and the second half.
Speaker Change: Hey, Laura it's Joe Yes, that's our that's our expectation.
Speaker Change: Youll see relatively stronger growth in wrangler, but we do expect <unk> to.
Speaker Change: To inflect positively in the second half.
Speaker Change: Okay, Great. That's very helpful. John Thank you very much and then on project Q.
Speaker Change: The $100 million.
Speaker Change: It's great to hear.
Speaker Change: Doug.
Speaker Change: Is it still going to be a positive impact in the fourth quarter. I think you mentioned that in the last two calls.
Speaker Change: And then kind of any kind of.
Speaker Change: Guardrails around I think that the growth number.
Speaker Change: Any I know you probably invest reinvest but any cost considerations that we should consider for from a GAAP EPS perspective.
Speaker Change: Yes, yes.
Speaker Change: No change there is nothing contemplated in the outlook from project genius at this point, we need to get a little further along but we do expect to begin to see the benefits of project genius late this year and then those savings will scale more meaningfully.
Speaker Change: In the next year, we will have some costs as I said last quarter, some transitional onetime costs to get at the savings and we'll lay those out for the group.
Speaker Change: So <unk> got a good understanding of the overall returns that we expect on the program.
Speaker Change: Yeah.
Speaker Change: Very helpful. Thank you very much Joe.
Speaker Change: Okay.
Speaker Change: Alright.
Speaker Change: Thank you there are no further questions in queue at this time I would like to turn the floor back over to Scott Baxter for closing comments.
Scott Baxter: So as you can see we had a really strong quarter count on us to stay focused on our business and really appreciate all the support that each and every one of you give us and we'll look forward to seeing you here later in the fall have a great rest of the summer everyone. Thank you very much for the support.
Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.