Q3 2024 Kontoor Brands Inc Earnings Call
and John Paul.
[inaudible]
Speaker Change: Ladies and gentlemen greetings and welcome to the contour brands Q3 2020 for Uninsconference Call. At this time all participants are in a listen-only mode, a brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star and zero on the telephone keypad.
Speaker Change: As a reminder, this conference has been recorded.
Speaker Change: It is now my pleasure to introduce your host Michael Carapetian. Please go ahead.
Speaker Change: The End of the Video Episode 2
Michael Carapetian: Thank you operator and welcome to Contour Brands 3rd Quarter 2024 earnings conference call.
Michael Carapetian: 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: These uncertainties are detailed documents filed with the SEC. We argue to read our risk factors, cautionary language, and other disclosures contained in those reports.
Speaker Change: A man's referred to one 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.
Speaker Change: for Outlook is presented on an adjusted dollar basis.
Speaker Change: Additionally, participants should note that Comparability with prior periods is impacted by the previously disclosed 13 million out of period duty charge recorded in the third quarter of 2023.
Speaker Change: Accordingly, in our following comments comparisons to 2023 gross margin, operating income and EPS, do not include the impact of the 2023 duty charge.
Speaker Change: Reconciliation's upgap measures to adjust it amounts can be found in the supplemental financial tables, included in today's news release, which is available on our website at contourbrands.com. These tables identify and quantify excluded items and provide management view of why this information is useful to investors.
Michael Carapetian: Joining me on today's call are Contour Brands President, Chief Executive Officer and Chair Scott Baxter and Chief Financial Officer Joe Alkire.
Michael Carapetian: Following our prepared remarks, we will open the call for questions. We anticipate this call will have to about one hour. Scott.
Scott Baxter: Thanks, Mike, and thank you to everybody joining us on today's call. Our third quarter results exceeded expectations driven by accelerating revenue growth, improving profitability in strong cash generation.
Scott Baxter: We anticipated a top line inflection starting in the third quarter and I am pleased to share we delivered our investments in product innovation and demand creation are driving continued market share gains in the strong foundation for future growth.
Scott Baxter: and what remains an uncertain environment our strategies are working and we are executing at a high level. With that, let's discuss highlights from the quarter.
Scott Baxter: Wrangler revenue grew 4% including 5% growth in the US and 10% growth in global D to C. There are several exciting wins from the quarter, but I want to start with an important milestone.
Scott Baxter: and our core bombs in short business, Wrangler Gain 90 basis points of market share in the US according to Sarkana. This marks our tenth consecutive quarter of market share gains in our largest market.
Scott Baxter: It takes more than one thing to drive this level of consistent performance, but it starts with our people and our incredible product stories that are resonating with our consumers. Let's get to a few of those now.
Scott Baxter: Starting without door, during the quarter we launched our Cliffside Utility Pant and Outdoor Chino, in both are off to a strong start. We continue to advance our product development capabilities that are driving increased penetration in this large and growing category.
Scott Baxter: as well as expanded distribution opportunities with exporting goods retailers.
Scott Baxter: Year to date, outdoor has grow 12% and we continue to expect double digit increases for the year.
Scott Baxter: Turning to Beastpoke, our new female fit innovation.
Scott Baxter: As I shared in prior quarters, early market response was very encouraging.
Scott Baxter: Today I am pleased to share the man-exceeded our high expectations. We launched across D to C in specialty retail. With many styles quickly selling out, we will build on this momentum and look to scale this platform in 25.
Scott Baxter: Staying within female, we also launched our collection with Laney Wilson and as expected was our single largest collaboration today.
Scott Baxter: This was also a great opportunity to leverage our new e-commerce capabilities, including early access for loyalty members. In fact, we saw a 100% increase in daily sign-ups and loyalty members accounted for a third of purchases.
Scott Baxter: Lainey has been a fantastic partner and we are excited to continue this momentum in 25. Take it together, Wrangler's Female Business Group Double Fidgets.
Scott Baxter: We also debuted the Wrangler Global Equity Campaign late in the quarter.
Scott Baxter: If you have not seen it, I encourage you to do so. This was our first campaign of this scale as a public company, with Wrangler's building momentum and strong pipeline of new innovation, the timing was right to play office.
Scott Baxter: and Market Response has been fantastic.
Scott Baxter: We have received strong feedback from our retail partners as well as numerous accolades.
Scott Baxter: In Beyond the Energy, this is Creative for the Brand. This campaign is a unique success story. Leveraging the investments we are making as part of our new multi-brand structure, it was developed almost entirely in-house, allowing for greater potential ROI.
Scott Baxter: Finally, the relaunch of Dennemet Target is off to a great start. While it is still early, performance has exceeded our expectations.
Scott Baxter: Wrangler is closing out the year from a position of strength and will be entering 25 with great momentum. Joe will provide more detail, but we have good visibility to the front half of the year. As a result, we have provided preliminary guidance for total revenue growth of 4% in the first half of 25.
Scott Baxter: Turning to Lee. Revenue decreased 3% sequentially, improving from the second quarter, uneven macro conditions in Europe and Asia, have continued to pressure the international business.
Scott Baxter: and the US revenue-inflicted positive driven by 2% growth in wholesale and we were encouraged to see the US accelerate as the quarter progressed. We are seeing particular strength in our female business which grew 10%.
Scott Baxter: As we discussed last quarter, our consumer insights work and refreshed brand segmentation is yield in green shoots with younger and female consumers.
Scott Baxter: As an example, our work led to the development of a lead layers, which was the top-performing new program of the season. And our premium ever-fit platform also drove nice growth in the quarter.
Scott Baxter: We also had several successful collaborations during the quarter with Forever 21, Oliver Cabell, and Stoegerheim aimed at reaching younger consumers while driving category extensions.
Scott Baxter: As a result, we are seeing increases in perceived brand equity and purchase consideration. This is translating to improve self-ru.
Scott Baxter: As measured by Sir Kahnah, POS for female increased mid-single digits in gained 60 basis points of market share.
Scott Baxter: Over the near term, we expect Lee U.S. business to further accelerate in the fourth quarter.
Scott Baxter: To support this acceleration, we are excited about the upcoming launch of Lee X. In the fourth quarter, we will be launching the Lee X move collection of denim, non denim and tops. This will be followed by Lee X light in the first half of 25.
Scott Baxter: Lee X is a true platform that will provide innovation at scale and support our return to growth.
Scott Baxter: Finally, I will provide an update on our global transformation initiative.
Scott Baxter: Project Genius is progressing well and we remain on track to deliver 100 million of combined gross margin and SGA savings.
Scott Baxter: We have identified three major areas for improvement. First, our global sourcing transformation where we will optimize our business for category growth and our evolving growth strategies through our greater efficiency in our source vendor network and enhance our planning organization.
Scott Baxter: Second, back-end efficiencies, where we leverage an improved share platform across both brands while standing up enhanced data capabilities.
Scott Baxter: and third commercial optimization where we will drive increased speed to market and improved product development.
Scott Baxter: As I've stated in the past, Project Genius is one of our most significant and important undertakings as a public company.
Scott Baxter: The work we are doing will transform our organization to a best and class global multi-brand platform while unlocking significant sources of value. We will see improved decision making, faster speed to market, and a meaningfully higher profitability ceiling.
Scott Baxter: We anticipate Project Genius to have a modest benefit to the first half of 25 with more meaningful benefits in the second half of 25 in into 26.
Scott Baxter: Before I turn it over to Joe, let me provide some final perspective.
Scott Baxter: Our business has great momentum, revenue and profit are accelerating. We have raised our earnings in cash flow guidance and we have significant capital allocation optionality. We have returned 168 million to shareholders here today and recently raised our dividend.
Scott Baxter: While the environment remains dynamic, our brands are winning with the consumer and we expect to continue growth as we look to the new year, including 4% growth in the first half.
Scott Baxter: We are operating from a position of strength and I am confident we have a team in place to continue to drive strong value creation for all stakeholders. Joe.
Joe Alkire: Thanks, Scott, and thank you all for joining us today.
Joe Alkire: Our third quarter results were stronger than expected as our business fundamentals continue to strengthen.
Joe Alkire: As expected, revenue growth inflicted positively in the third quarter, driven by new product innovation, distribution gains, and accelerating POS.
Joe Alkire: We also delivered stronger profitability and returns on capital, as Gross Mars and Expansion was higher than anticipated as a result of lower product cost and supply chain efficiencies.
Joe Alkire: When combined with our focus on networking capital management and driving further reductions in inventory, we generated significant cash from operations supporting our capital allocation framework, including 40 million of share repurchases and a 4% increase in our quarterly dividend.
Joe Alkire: We are pleased with our strong execution and performance here today, and momentum in the business is building as we close out the year. But more on that in a bit.
Joe Alkire: Let's review our third quarter results in more detail.
Joe Alkire: Global revenue increased 2% and exceeded our expectations.
Joe Alkire: Relative to our prior outlook, we saw modestly stronger results in the U.S. with Europe and Asia performing largely as anticipated.
Speaker Change: Hi, brand, Wrangler Global Revenue, increased 4%.
Speaker Change: Growth was broad-based driven by strong PLS and Market Share Games with continued momentum in distribution and category expansion.
Speaker Change: including 10% growth in DTC, 10% growth in female, 7% growth in outdoor and 16% growth in tops.
Speaker Change: In the US, revenue increased 5% supported by increased investments in demand creation, product development, and our digital platform.
Speaker Change: Revenue growth was balanced as DTC increased 10% including 13% growth in digital while wholesale revenue increased 5%.
Speaker Change: During the quarter, we were encouraged by the strength we saw on POS with trends accelerating through the quarter, including 6% growth and September. The strongest performance we've seen all year.
Speaker Change: While retailers are in a conservative posture and inventory levels are suboptimal, are self-ruh remains strong and we continue to drive consistent market share games.
Speaker Change: Wrangler International Revenue Decreased 2%.
Speaker Change: High single digit growth in DTC was more than offset by declines in wholesale.
Speaker Change: We are seeing success with the expansion of our iconic 13 MWZ Cowboy cut gene, which was our strongest selling style on our digital platform.
Speaker Change: and while challenging macro conditions are pressuring our business outside the U.S., we are encouraged by improving order books in Europe with spring summer 25 up at a mid-single digit rate.
Speaker Change: Now turning to Lee. Global revenue decrease 3% reflecting sequential improvement in the business as we work to return the brand to growth.
Speaker Change: In the US, trends unfolded as anticipated with revenue inflecting to 1% growth driven by 2% growth in wholesale.
Speaker Change: Similar to Wrangler, POS accelerated through the quarter with September increasing at a low single digit rate.
Speaker Change: Our female business, which has been an early beneficiary of our new consumer segmentation and insights work, was particularly strong, increasing 10%.
Speaker Change: We also saw strength and category extensions, including strong growth and t-shirts.
Speaker Change: We expect continued improvement for the US business in the fourth quarter supported by accelerated growth in DTC, the launch of the Lee X Innovation Platform and a more than 30% increase in demand creation.
Speaker Change: Lee International Revenue Decreased 7%.
Speaker Change: and Europe revenue declined 10%.
Speaker Change: Growth in DTC, including more than 30% growth in digital, was offset by declines in wholesale.
Speaker Change: Performance was consistent with our expectations as the uneven macro environment continues to pressure retailer behavior, leading to more conservative inventory management.
Speaker Change: In APEC, revenue increased 1%. Revenue growth was more modest than we expected compared to 90 days ago, as the operating environment in the region became more difficult as the quarter-progressed.
Speaker Change: That said, we are seeing continued momentum in digital, which increased 6% in the quarter.
Speaker Change: While brick and mortar retail remains soft due to weaker traffic, we are seeing strong results in our new concept stores.
Speaker Change: Compared to our fleet average, we are seeing a double digit cop lift in our new store environments.
Speaker Change: We are encouraged by this performance and the early returns on our investment and plans to continue with the rollout of our new concept stores in 2025.
Speaker Change: However, we will be prudent and more measured with the pace of investment next year as a result of the environment.
Speaker Change: wholesale revenue increased 5%. As we discussed last quarter, we continue to take proactive measures to improve the quality and health of our retail network in China.
Speaker Change: That said, we are taking a more conservative view of the near-term outlook for the business while remaining confident in the long-term opportunity for our brands in the region.
Speaker Change: Moving to the remainder of the P&L, adjusted gross margin expanded 150 basis points to 45%. Driven by the benefits of lower input costs and supply chain efficiencies.
Speaker Change: This was partially offset by the targeted pricing actions included in our plan.
Speaker Change: Adjusted SGNA expense was 195 million, up 5% compared to the prior year, driven by investments in demand creation, product development, and volume-related distribution and freight expenses.
Speaker Change: and adjusted earnings per share was a dollar 37, representing an increase of 12% compared to the prior year.
Speaker Change: Turning to the balance sheet, inventory decreased 24% to 462 million.
Speaker Change: Networking Capital Management remains a top priority and has contributed to our strong cast generation here today.
Speaker Change: We expect further reductions in inventory in the fourth quarter as we approach optimal levels in our annual turnover target of approximately 3.5 times.
Speaker Change: We finished the quarter with net debt for long-term debt less cash of 476 million and 269 million of cash on hand.
Speaker Change: Our net leverage ratio, or net divided by trailing 12-month adjusted EBITDA was 1.2 times trending toward the low end of our targeted range.
Speaker Change: During the quarter, we repurchased 40 million of stock under our current authorization, and as previously announced, our board declared a regular quarterly cash dividend of 52 cents per share, representing a 4% increase.
Speaker Change: Here today we have returned 168 million to shareholders through share, repurchases and dividends.
Speaker Change: Finally, on a trailing 12 month basis, our adjusted return on invested capital was 30%.
Speaker Change: representing an increase of 660 basis points compared to the prior year.
Speaker Change: Now turning to our outlook, the full year revenue is now expected to be 2.6 billion, consistent with the midpoint of our prior outlook range.
Speaker Change: In the fourth quarter, we expect revenue of approximately 695 million, representing growth of 4%.
Speaker Change: Our revenue outlook continues to embed the following assumptions.
Speaker Change: First, we continue to have good visibility to category expansion, distribution gains and new innovation platforms in the fourth quarter. And we continue to support these programs with increased demand creation and other investments to fuel our performance and momentum into 2025.
Speaker Change: Second, 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.
Speaker Change: While the consumer has been resilient and inventory levels at retail are suboptimal, the environment is uncertain and our retail partners are in a conservative posture with regard to inventory management.
Speaker Change: Moving to Gross Margin, we are raising our outlook to 45.1% from approximately 44.8%.
Speaker Change: Our updated outlook represents an increase of 260 basis points compared to a just-in-gross margin of 42.5% in 2023. And now includes an incremental 20 basis point impact from supply chain and inventory management actions.
Speaker Change: These actions were taken proactively from a position of strength and are expected to provide a stronger foundation for the business as we close out this year.
Speaker Change: More specifically, the Supply Chain Actions were primarily expedited freight to secure inventory positions in support of our growth expectations for the remainder of this year and early next year.
Speaker Change: We took these actions as a precautionary measure in light of recent supply chain volatility to ensure service and support growth plans with our largest customers.
Speaker Change: Proactive inventory management actions included efforts to more aggressively clear excess inventory. Further improve the composition and quality of our inventory in increased cash flow.
Speaker Change: These actions further strengthen our balance sheet, free up additional investment capacity, and allow us to reinvest in more productive areas of the business.
Speaker Change: We remain pleased with the overall quality of our inventory and the progress we've made reducing inventory levels.
Speaker Change: For the fourth quarter, our outlook now implies 150 basis points of gross margin expansion, which compares to our prior outlook of an increase of approximately 120 basis points.
Speaker Change: SGNAs expected to increase approximately 4% consistent with our prior outlook.
Speaker Change: Operating income is now expected to be 385 million reflecting growth of 11% compared to the prior year.
Speaker Change: Relative to our prior outlook, adjusted operating income now includes 6 million of incremental supply chain and inventory management actions previously discussed.
Speaker Change: Hortz Horter adjusted operating income is expected to be 105 million reflecting growth of more than 20%.
Speaker Change: EPS is now expected to be $4.83, including an impact of eight cents from the incremental supply chain and inventory management actions discussed.
Speaker Change: Our updated outlook represents growth of approximately 9% compared to our prior outlook of approximately $4.80 reflecting growth of 8%.
Speaker Change: As a reminder, full year EPS growth will be negatively impacted by about 5% points from a higher tax rate, including a 25% point headwind in the fourth quarter.
Speaker Change: We expect 4th quarter EPS of $1.31 reflecting a decrease of 3%.
Speaker Change: Normalizing for the tax rate differential, fourth quarter EPS is expected to increase approximately 20%.
Speaker Change: We now expect cash from operations to exceed 360 million as a result of stronger earnings growth and further reductions in inventory.
Speaker Change: This compares to our previous outlook for cash from operations to exceed 350 million.
Speaker Change: Our increased outlook highlights the cash generated nature of the business and provides additional capacity to pursue our capital allocation framework.
Speaker Change: And finally, I'd like to provide perspective on the preliminary 2025 outlook we included in the earrings released this morning.
Speaker Change: While we are not providing the full details of our 2025 outlook at this time, we want to take the opportunity to provide an early look at how we see the business evolving next year.
Speaker Change: Our preliminary 2025 outlook reflects our current visibility of the business and the confidence we have in the momentum building in the next year.
Speaker Change: First, we expect revenue growth to be driven by ongoing market share gains, category expansion, new distribution, and strong momentum in outdoor and female.
Speaker Change: Based on current visibility, we expect revenue growth to approximate 4% in the first half of the year.
Speaker Change: For the full year, we expect 2025 revenue growth to be more weighted to the front half as we begin the anniversary category expansion and distribution gains in the second half.
Speaker Change: Second, we have a high degree of confidence in our ability to continue to expand Grossmargin next year, supported by Project Genius.
Speaker Change: Based on current visibility, we expect the benefits of project genius in our ongoing structural mix to be partially offset by modest product cost inflation and ongoing supply chain volatility.
Speaker Change: Third, we expect operating income growth to outpace revenue growth driven by both gross margin expansion and SGNA leverage.
Speaker Change: We expect to increase our rate of investment in areas such as demand creation, product development, and DTC and international expansion while remaining prudent with regard to discretionary spending.
Speaker Change: Project Genius is expected to fuel investment capacity and we expect to both expand operating margin and reinvest a portion of the savings to further support growth.
Speaker Change: And finally, we expect the benefits from Project Genius to vary by half next year.
Speaker Change: We expect the first half of 2025 to benefit from S.G.N.A. savings primarily related to back indifficiencies in our shared platform.
Speaker Change: We expect the second half of the year to include the added savings from supply chain initiatives that will begin to scale and support cross margin expansion.
Speaker Change: As we move into 2026, we expect Project Genius Savings to mature to a full run rate, providing us with a higher level of investment capacity to further support growth and expand profitability and returns on capital.
Speaker Change: We intend to share more specific details about Project Genius in its evolution, along with our investment plans in the context of our 2025 outlook in February.
Speaker Change: Before opening it up for questions, a few closing remarks.
Speaker Change: We are executing well and operating from a position of strength.
Speaker Change: Revenue growth is accelerating and the momentum of the business is building.
Speaker Change: Wrangler is driving broad base growth and the fundamentals of Lee continue to improve.
Speaker Change: We expect project genius to create meaningful savings and investment capacity to support growth while improving profitability and returns on capital.
Speaker Change: and the strength of our balance sheet and cash generation provide us with significant capital allocation optionality to drive additional layers of value creation.
Speaker Change: This concludes our prepared remarks and I will now turn the call to the operator.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
Speaker Change: If you would like to ask questions, please press star and one on a telephone key back. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star, and too, if you'd like to remove a question from the queue.
Speaker Change: for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, we will wait for a moment while we pull for questions.
Speaker Change: and Michael Carapetian.
Speaker Change: The first question is from the line of Ike Borucha with Wells Fargo. Please go ahead.
Ike Borucha: Hey guys, good morning Scott Joe Mike, who's rats on the quarter. I guess maybe, maybe for Joe, maybe also for Scott just, wanted to kind of dig in a little bit more on the 2025 commentary. And specifically just drivers of revenue that gives you the confidence in that 4% in the first half.
Ike Borucha: And then this is my follow up as based on the commentary, is it fair to say that you're basically expecting the revenue growth, weighted to the first half, but due to the timing of genius and some saves, maybe margin expansion, weighted to the back half, so just kind of curious to get you come up on the shape.
Ike Borucha: and James.
Speaker Change: Hey, I'm Karawria. Thanks for, you know, the call with us today. I'll go ahead and start kick it over to Joe, but I think for us really I could boil it down to, you know, as we kind of discussed a little bit, but consumers are choosing our products and the way that we look at it is, too.
Speaker Change: and since POS our performance in POS has been really strong. It's been broad-based, our performance with our own D to C has been really good, our digital platforms across the globe have been really strong. You know, we've had 10 consecutive quarters.
Speaker Change: of Growth.
Speaker Change: and Mark Atcher again with Wrangler. And that is really significant. I mean, that's two and a half years and we continue that, you know, expect that to continue as we move forward. But we're making really significant investments in our talent. We've never had a more talent to team. We've upgraded the talent over the last year and have significantly your seeing the results from that.
Speaker Change: and that's what we're making in product, innovation, they're all starting to pay off. So we've got really good momentum as we head into the second half here. And as we headed to next year too, and I think the thing that's really important for us, helpful for us is we look into 25 is we know what we have out there from a new business standpoint, and we have things like outdoor, which I touched on a little bit, but you know, a lot of top business that we've grown, our lex line, which is coming out here in the fourth quarter, and then lex light in the first quarter next year's exceptional. I'm really looking forward to that hitting the marketplace.
Speaker Change: and see how it does, but again, we have really strong collaborations from our team and our new distribution. So all of that kind of role together with the positive momentum we have right now with the team that we have behind that, puts us in a really good spot. Go!
Speaker Change: Yeah, hey, good morning. So yeah, we're not providing the specifics of 2025 at this time, but look, we thought it would be helpful.
Speaker Change: to at least provide our initial perspective on 25 and how we see the business of all being in the next year. And really to underscore the confidence we have in the trajectory of the business as well as highlight the strength of our fundamental profile, the profile we're delivering in the second half.
Speaker Change: Lowe to mid-single-bidget growth, gross margin expansion, strong operating earnings growth, cash generation. We see that continuing in the next year and the building blocks to drive another year of strong growth in return.
Speaker Change: We've got project genius that will fuel the investment capacity. We've got a strong balance sheet, a lot of dry powder and flexibility to drive additional layers. So yeah, as we look in the next year, we're fairly confident. We'll give you more specifics as we get to February.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: Thanks for watching!
Speaker Change: The next question is from Jim Duffy, which Steve will please go ahead.
Jim Duffy: Thank you.
Jim Duffy: Good morning.
Jim Duffy: My compliments on execution across the year. I'm very interested in project genius opportunities. I hope you can speak a more detail on the mechanics of project genius and how that translate to both strategic opportunities on the top line. And then the P&L impact of how that plays forward in the first half and second half of 25 and then in the future years. Thanks.
Speaker Change: Jim, I'll start and then I'll kick it over to Joe. Genius for us has been an all-encompassing project. We've got a terrific team working across genius and putting in a long, long hard hour. So we're much appreciative of that, but it's going to break down in the three very specific categories. It's our global supply chain transformation.
Speaker Change: It's the back indifficiencies that we need to do a better job which we're going to have capturing and also strategically thinking about moving forward. And then it's our commercial optimization. Let me take you through a little bit on how we're thinking about those and then Joe can kind of fill in the blanks. But if you think about our sourcing transformation, you know.
Speaker Change: When we spun off, we were a complete clone and go from our parent company before. So we were just a denim supply chain and just a clone from where we were and where we are and where we're trying to progress to now. So you think about our business and how it's changed.
Speaker Change: And you think about the outdoor, you think about some of the different products that we have, you think about, you know, our tops.
Speaker Change: Just all those different things that are making our supply chain a little bit different now when we've got to grow and change and become more efficient when it comes to that. So we're spending a lot of time working on our product portfolio and how we can customize the supply chain for what we're going to look like in the future.
Speaker Change: We've got to drive big efficiencies with our current source fender network which is really important.
Speaker Change: and then one of the things that we needed to do, another example of where we needed to grow at a ball as a company is in our planning department. So we've recently hired a planning expert who's doing the company about a month ago, thrilled to have that person on board. It'll help us think about as our business has gotten a little bit more complex, a little bit more global, and a little bit different. We've got that team in place now to go ahead and help us kind of plan for that here, going forward.
Speaker Change: and then from a back end standpoint, we want to get to the point where we're really comfortable from the standpoint of...
Speaker Change: A very similar back-end for the brands, but then the front end, the brands can go and be and have their own identity on what they're going to evolve to and what they're going to be.
Speaker Change: but a little bit of a differentiation there from back end to front end but take advantage of all the scales that we can in the back end.
Speaker Change: One of the things that we invested in which is really important in this process is data analytics.
Speaker Change: A really good team. It's added, you know, it's been very added here in the last 18 months and only getting better as we move forward and obviously everyone here in the call knows about our new ERP system and you know, we want to, we want to test that, put that to work and really push that because it was such a significant investment.
Speaker Change: and then from a commercial standpoint, we've got to increase our speed to market and we've got to have a product development. It's a great opportunity for us and especially since we're getting into these new categories, it'll be significant as we go forward.
Joe Alkire: Joe, was there anything I missed? Yeah, Jim, just financially, you know, we expect a hundred million of savings at full run rate. You know, we said 50 to a hundred million, you know, roughly a year ago, so we've gravitated to the high end of that.
Joe Alkire: Range, we've got certain work streams that are in the execution phase, other work streams that are, you know, continue to move along, you know, from a planning perspective. We'll share more specifics in February, but, you know, soon we're pretty confident in that 100 million.
Joe Alkire: The savings will be more gross profit driven versus S.G. and A. I think we've said that before and I would think of it as roughly.
Joe Alkire: 2-3-1-3. So the way this will evolve, it'll be a gradual build. We will start to see the S.G.A. savings in the first half of 25 and the gross margin savings will begin to work their way into the P&L into the back half, just given the lag of one they'll start to show up.
Joe Alkire: You know, look, overall we're really excited about the program and what we think we can deliver in terms of freeing up investment to accelerate growth, improve profitability and returns on capital.
Speaker Change: Thank you.
Speaker Change: Thanks for watching.
Speaker Change: Thank you. The next question is from Lion of Bob Dribber, with Guggenheim partners, please go ahead.
Speaker Change: Good morning, good morning guys.
Speaker Change: Two questions really, I think the first one...
Speaker Change: Can you spend some time just on the performance improvement at Lee? I think definitely seems like there's a step change there and just...
Speaker Change: Loafery of expand on that a little bit and then...
Speaker Change: Joe, you talked about sort of into 25 product cost inflation.
Speaker Change: Can you expand on what you guys are seeing there and sort of when exactly it sort of flips because I think you're seeing some product cost benefits right now and sort of surprised here that in the 25. Thanks.
Speaker Change: If I'll go ahead and start with Lee, I think the single most important thing for me from a lead perspective is the leadership that we've put into the lead team.
Speaker Change: Tom Leibandet, we've got Jenny and Holly and Tom. That team working together with the Leigh team right now.
Speaker Change: Looking at all aspects of the business looking at design, looking at product, looking at go-to-market
Speaker Change: and looking at all those things and bringing that kind of story together. And that started a little while back as you know, and we started to see some really interesting green shoots specifically around our female business. And you heard we talk a little bit about some of the really big wins that we've had in female, you know, whether it would be, you know,
Speaker Change: B. Spowk and some of the other things that we've done there, but it's been significant and we're really happy with that.
Speaker Change: We've got a long way to go. We've got a lot more coming. We've got LeX and LeX light here coming in the men's area which is really important.
Speaker Change: But I want everyone to know that behind the scenes we've really, really dug into this in a pretty significant way.
Speaker Change: It's still early on, which is fairly encouraging because of all the good things that are yet to come as we move forward, but yet we're seeing some really good things that are really helping the business. And I think the other thing too, Bob, it's really helping the morale of the team around the globe too.
Speaker Change: Seeing these early wins, seeing that they can really contribute to the rest of the organization in the significant way. And the leadership has really brought everybody in this and everybody is in this together. So really pleased with what we're seeing here with the team, how they're thinking about it, how they've torn this whole thing apart.
Speaker Change: I think there's a lot for us to talk about going forward and we'll spend some time we've talked about our investor day. We'll get that date nailed down and we will really dig into this an investor day and have some of our big leaders from the leet team there to participate and share with what they're doing.
Speaker Change: but a lot more to come but encouraged with where we are right now ahead of what I what in where I thought we would be when we made those changes to start to move this forward.
Speaker Change: Yeah, hey Bob, good morning. On the product cost front look, I mean it's been a more volatile supply chain environment more recently when I think that our supply chain is well suited to navigate.
Speaker Change: As we look at next year, we expect to see a neutral product cost environment overall. Certainly there are some puts and takes to that, we're seeing increases in labor, certainly for eight rates have elevated more recently, but we've got supply chain efficiencies and some other things.
Speaker Change: You know that'll help us.
Speaker Change: You'll have a first half second half dynamic. We are starting to anniversary the lower product cost that we started to see.
Speaker Change: Last year, so that benefit will become smaller and smaller as we move into the first half, and then we'll have more modest product cost inflation.
Speaker Change: as we get to the back-of-and-then I think for us, we've got certainly our structural mix that will continue to benefit us and then we've got project genius. So we'll lay that out in more specifics in February but big picture, that's how we see things evolving.
Speaker Change: Great, thank you.
Speaker Change: Thanks for watching.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Maurice Seusserna with UBS please go ahead.
Maurice Seusserna: Great, good morning, and thanks for taking our questions. I would like to focus on your commentary about the incremental supply chain and inventory actions. It's used to hear like, it seems like you erase the growth margin out, but by 30 basis points despite this.
Maurice Seusserna: 20 cent impact that you are highlighting the release. Maybe you could talk about the putton takes there. That would be very helpful. Thank you.
Speaker Change: Sure, hey, Marisa, good morning. So yeah, the actions that we talked about.
Speaker Change: or worth about six million in terms of operating profit about eight cents of EPS impacting really the third quarter and the fourth quarter.
Speaker Change: These were proactive actions that we took from a position of strength, really to secure inventory to support growth initiatives as we round out this year and move into next year and further improve the strength of the balance sheet as we move into next year. So on the supply chain side, really expedited, freight, some one of the precautionary measures just given the...
Speaker Change: the recent supply chain volatility to ensure that we can continue to service growth with our largest accounts. Nothing material to the business but we have seen some delays given some of the volatility Bangladesh port strike in the leg.
Speaker Change: On the inventory side, this is really an evergreen process for us. We saw an opportunity to be more aggressive clearing excess inventory and improving the composition and quality of our inventory and freeing up cash.
Speaker Change: to reinvest in other areas of the business. So absolutely the right thing for us to do. In terms of the outlook, we raised the full year gross margin guidance by 30 basis points that does include...
Speaker Change: about a 20 basis point impact from these actions. And from an EPS standpoint, we raised the full year by three cents, including the eight cents from these actions. So, said differently, excluding the eight cents impact, we would have likely raised our outlook by about 11 cents.
Speaker Change: Bargaret Hamffel, and then just on the project genius initiative. So, it's fair to assume that you're going to get like a big portion of a hundred million dollar savings in fiscal year 25 and then just the rest is in 26 or how should we think about those savings flowing through.
Speaker Change: Yeah, this will be a gradual build. So quantitatively, you know, we'll be back in February. Certainly appreciate the question, but we'll see modest benefits in the first half really from an SGA perspective. The gross margin benefits will start to unfold in the back half, but gradually scale. And as I said, as we move into 26.
Speaker Change: will be pretty much at full run rate and expect to reinvest a portion of those savings to further support growth.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Paul Kaley, with Barkley's please go ahead.
Paul Kaley: Hey, good morning. Thanks for taking my question. With the operating margin target of over 15% well-in flight in an additional 100 million of saving from product genius, how are you thinking between reinvesting the savings for growth versus flowing through to earnings?
Paul Kaley: and then related to that, there's an acceleration of the purchases in the quarter. How should we think about your capitalisation strategy going to next year? Thank you.
Speaker Change: I'll take these so...
Speaker Change: You know, look Paul, we laid out financial targets in 2021 that reflected a gross margin of 46% and an operating margin of 15%. That was...
Speaker Change: Pre-significant supply chain disruption, inflation, everything that you know.
Speaker Change: I'd say the incremental for us is really project genius. We run a nice glide path to achieve the prior targets, where we go from here we have it.
Speaker Change: The Claire will do that in the context of our new long-term plan but safe to assume with project genius we see a path to be started moving higher.
Speaker Change: Thomas.
Thomas: Capital Allications at the end point. You know, look, the priorities are unchanged. Certainly reinvest in the business. We've demonstrated the appetite. You know, to do that we will continue to do that. We've got a strong commitment to growing the dividend and then you've got chair repo and and M&A. We've certainly been more active on the repurchase front.
Thomas: Cashflow for us has been really strong, cash is building the balance sheet of strong, you know, our net leverage is starting to move toward the low end of our targeted range. So, you know, we've got a lot of optionality, a lot of flexibility and we'll be nimble here.
Thomas: Thank you for watching
Speaker Change: Thank you. The next question is from Lauren Vasilesko with BNP Paribar. Please go ahead.
Speaker Change: Hey, good morning, but this is Leah, y'all on for Laura. Thanks for taking my question. So I'm growth margin, I think you got adjusted the growth margin by nearly 50 years to date. So could you help us to have a driving loss adjustment and should we expect those adjustments to continue in four weeks?
Speaker Change: Yeah, I'll take that. So there have been some adjustments on the gross margin side really related to the ongoing supply chain transition that's further supporting the gross margin expansion that we see. Adjustments from here will primarily be project genius related, which will lay out in the full context of our forward outlook.
Speaker Change: Thank you, and there are projects you need. Could you provide us with some preliminary thoughts on how much the project you need will cost and how much do you expect to meet us?
Speaker Change: Yeah, sure, so we'll provide those specifics in February. We've said previously that we do expect some one time adjustments as we transition.
Speaker Change: You know, the returns we see on the overall program are a multiple of the costs that will require to achieve those, but we'll get into the specifics in February.
Good, very helpful, thank you.
Speaker Change: Thank you.
Speaker Change: As there are no further questions I would now like to hand the content over to Scott Baxter, President CEO and Chair of the Board for closing comments.
Before I think of buying and thank everybody for being on the call, I wanted to make sure that everyone has had a chance to see our new campaign.
Scott Baxter: We kicked off a global Wrangler campaign that Halley and her team have done and real proud of the group because they did the entire campaign almost entirely in-house so that we could use more funds to go ahead and get the word out as you can imagine.
But it's really a terrific spot. We're going to see a lot more of it now as the election went down and then we can go ahead and be out there. We wanted to make sure that we got it at a point where we had more visibility.
Scott Baxter: But if you have a chance, please go ahead and take a look or look it off for get with one of us, get with Mike and we can send it to you too if that would even be easier for you. But it's just a terrific spot and I think it has a lot to do with the fact that the brand has so much momentum.
The company has momentum but I think there's also another piece here from a cultural standpoint. I think our organization is real proud about how this company is doing, real proud about how the brands are performing. And when the entire company sees something like this and a global ad campaign, our first one is contour brands. There's a lot of pride in this and a lot of pride from all of us in the entire organization.
about how well we're doing and how hard what we're going to make things really good for our shareholders.
Scott Baxter: and I hope you all have a chance to see that. So with that, thank you for your participation today. We'll look forward to hearing from you again in February. We'll wish everybody a happy and wonderful holiday season. And we'll talk to you all soon. Thanks everybody. Take care.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.
and Michael Carapetian.
Speaker Change: and Michael Carapetian.