Q4 2024 Kontoor Brands Inc Earnings 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.

These uncertainties are detailed in documents filed with the SEC we.

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 often be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier. This morning and is available on our website at Contura Brian's Dot com.

Additionally, participants should note that comparability with prior periods is impacted by the previously disclosed how to Perry duty charge recorded in 2023 accordingly.

Accordingly, and are following comments comparisons to 2023 gross margin operating income and EPS do not include the impact of the 2023 duty charge.

Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors.

Most otherwise noted amounts referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates joining.

Mike: Joining me on today's call are contour Brands', President Chief Executive Officer, and Chairman, Scott Baxter and Chief Financial Officer, Joe <unk>. In addition, we will be Joan joined by Tom Waldron, Chief Operating officer. Following our prepared remarks, we will open the call for questions. Scott. Thanks, Mike and thank you to everybody for joining us on today's.

Paul.

2024 was a banner year for contour, we connected with more consumers in more categories accelerated brand investments to drive market share gains and initiated our project genius transformation. As a result, we delivered on our pivot to growth expanded margins and improved our capital allocation optionality.

Mike: Returning significant cash to shareholders.

Mike: In what remains an uncertain environment, we are operating from a position of strength and executing at a high level.

Mike: Let's discuss highlights from the year as we reported last week fourth quarter revenue and profitability were better than expected. The investments. We are making continued to drive competitive separation in the marketplace. While the environment has been uneven consumers are choosing our brands. We see this in the strength of our own digital business, which grew 11%.

Mike: For the year, including 16% growth in the fourth quarter.

Mike: And this is leading to stronger partnerships in the wholesale channel.

Mike: In 2025, we are actively exploring shop in shops in key retailers that will elevate our presence and provide a greater experience for our consumers.

Mike: We also made progress diversifying our business into new categories, non denim bottoms tops and T shirts grew mid single digits in 2024 to approximately one third of global revenue within that our outdoor business grew at mid teens rate, reflecting the investments we are making in <unk>.

Mike: Development and design, we expect to build on this momentum and twenty-five with another year of growth.

Mike: Moving down the P&L one of the hallmarks of our organization has a strong focus on operational discipline to drive shareholder returns in 2024 was no exception, we significantly expanded margins and drove strong operating income growth.

Mike: As a result, we generated approximately $370 million in cash from operations, allowing us to return almost 200 million to shareholders through our dividend and share repurchase program and further strengthen our balance sheet through voluntary debt repayments.

Mike: Moving to project genius, a year ago, we outlined how project genius would enhance our organization create considerable capacity for investment and to establish a world class multi brand platform.

Mike: With our ERP implementation complete team structure in place and disruption from the pandemic feeding the timing was right to pull together the strategic initiatives from around the organization into one comprehensive project.

Mike: And we progressed through the year, we raised our expected savings target to $100 million with benefits starting to flow through our P&L in 2025 today I am pleased to share we have moved firmly into the execution phase and now see upside to our 100 million of combined gross margin and SG&A savings Joe.

Mike: Unpack the specifics, but there are three areas of improvement we have clear line of sight to achieving first our global sourcing transformation will optimize our business for expanded category growth drive greater efficiency in our sourced vendor network and enhance our planning organization.

Mike: Second back inefficiencies will result in an improved shared platform that can scale with the addition of Helly Hansen, while standing up enhanced data capabilities and third commercial optimization will drive improved product development capabilities increased speed to market and greater responsiveness to meet evolving.

Mike: Customer demands too.

Mike: 2025 will be an important year for project genius and we have the team in place to drive significant value for our organization. The work. We are doing will transform contour into a best in class global multi brand platform, while improving our overall financial profile.

Before I turn it over to Tom a few closing remarks.

Tom Waldron: After successfully completing our first two horizons as a public company. We are entering a new phase of growth for contour, while the environment remains dynamic we have proven the resiliency to navigate the current environment, we have been through multiple cycles and have navigated disruption throughout our careers, including the particularly challenging period of the past.

Tom Waldron: Five years supported by our exceptional leadership team the benefits of project genius and now the upcoming addition of the iconic Helly Hansen brand I am highly confident we are on the right path to drive strong value creation for all shareholders Tom.

Speaker Change: Thanks, Scott and thanks to everyone joining us today 2024, Mark wanted Wranglers, most successful years in decades, we expanded market share made lasting connections with our consumers and invested in the brand to further diversify our product assortment to drive greater category and channel diversification.

Speaker Change: Wrangler is on an incredible trajectory and we continue to take the brand to new Heights.

Speaker Change: One of the most successful initiatives in 2024 was our return to national broadcast.

Speaker Change: Bringing the cowboy spirit to life, we introduced the brand's first global equity campaign in years. Good morning makes for better days. The Wrangler campaign showcased the power of music community and classic Wrangler style. This is our highest tested campaign ever and is a testament to the incredible talent at wrangler.

Speaker Change: Our ability to fuel the brand's continued momentum.

Speaker Change: So how does this translate according this economy in our core U S men's bottoms business Wrangler gained 130 basis points of market share in 2024 in the fourth quarter. This accelerated to 220 basis points.

Speaker Change: Making the 11th consecutive quarter of market share growth.

Speaker Change: It is clear the wrangler brand is resonating with our consumers and reaching them in many areas to engage particularly focused on sports culture and music.

Speaker Change: Leaning into the intersection of country music and Western culture, we continue to build momentum through our successful collaborations with Cody Johnson one of the biggest country stars of his generation.

Speaker Change: And the highly anticipated collection of Grammy Award, winning Superstar Laney Wilson loss is our single largest collaboration to date.

Speaker Change: I am excited to announce that we are following up with a second collection this spring, including a broader expansion in EMEA and coincides with ladies European tour kickoff.

Speaker Change: Further fueling momentum with Ranga female our newest female fit innovation bespoke launch across DTC and specialty retail exceeding our high expectations with many styles quickly selling out.

Speaker Change: We spoke will continue to be growing product story and twenty-five as we look to scale. This platform wrangler female grew 8% for the year and 19% in the fourth quarter.

Speaker Change: And finally outdoor continues to be a major category for wrangler outdoor has grown to more than $200 million up 15% last year and doubling from approximately 100 million five years ago, we expect outdoor to post another year of growth in 'twenty, five and see room for the business to double again over time fueled by our <unk>.

Speaker Change: <unk> and talent product development and design.

Speaker Change: Putting it together wrangler global revenue grew 9% in the fourth quarter, including 9% in the U S 9% growth in direct to consumer.

Speaker Change: We see tremendous opportunity on the horizon and I am confident that our strategy has set wrangler on a path to continued success.

Speaker Change: Turning to leave 'twenty 'twenty four marked a year of strategic planning and focus for Lee.

Speaker Change: We have strengthened the identity of the brand launching a new creative vision.

Speaker Change: Let me remind you. This is work we did with the Wrangler brand five years ago, and we believe it was a catalyst to unlocking languish growth. We have now just completed this work for Lee.

Speaker Change: With clarity on lease brand identity refined consumer targets and new brand leaders with proven track record of success. We have built the foundation needed to improve the performance of the Lee brand and we are committed to doing just that.

Speaker Change: In 2020 for leaning into his legacy of innovation that Lee launched <unk> and M. B P heritage denim in the fourth quarter. These new platforms combined the look and feel of authentic world class denim with the comfort of performance Pan both <unk> and MVP heritage are off to an encouraging start and are poised to build <unk>.

Speaker Change: <unk> in 2025, they are also paving a path for new channels and distribution and new consumers.

Speaker Change: For Lee female the brand gained market share for the 12th consecutive month of December across denim, non denim and seasonal products. According to sarcoma.

Speaker Change: Our new lifestyle product categories, including steps dresses skirts and tops have been well received and provide a great opportunity to expand our wear occasions, while creating brand loyalty with our younger consumers.

Speaker Change: Global revenue declined 5% in the fourth quarter.

Speaker Change: 2025, we will continue to be a transitional year for Lee as we harmonize the brands improve positioning address challenges with mid tier distribution and scale new innovation platforms. We are confident we have the right team in place and new strategic playbook to build our way back to growth over time.

Our path forward is built on three pillars product distribution and brand all of which are rooted in meeting the needs of our refresh consumer targets. We are building to grow growth using our central creative vision that stays true to the heritage and rich history that has cemented leaves legacy as a global.

Speaker Change: Denim icon.

Speaker Change: Through data driven insights, we are introducing brand storytelling that creates deeper connection with consumers both longtime brand fans and new younger generation.

Speaker Change: We are launching a demand creation platform that will allow lead to regain its place in the center of culture.

Speaker Change: We see early signs of success with leaves brand health metrics that have meaningfully improved over the last six months that said this will not be linear we must continue to create trend right products diversified distribution and elevate marketing to fuel our go forward strategy.

Speaker Change: In early 2025 brand collaborations with Buck Mason and Paul Smith will paint a clear picture of how Lee is bringing iconic American cool to life for consumers across the globe and we will build momentum in the back half of the year with the launch of a brand equity campaign.

Speaker Change: I am excited about the important work, we have done to recalibrate, our path forward to refine consumer segmentation choices.

Speaker Change: Sharpen focus on product innovation, and a stronger brand positioning will put the brand on its best footing in decades, we are on the right path to return the brand to growth and I am confident <unk> best days are ahead Joe.

Joe: Thanks, Tom and thank you all for joining us today.

We are pleased with our strong finish to the year, which came in above our outlook driven by better than expected revenue growth earnings and cash flow.

Joe: In what remains an uneven environment, we are operating from a position of strength and executing well.

Joe: Our fourth quarter results put a capstone on what was a strong year for contour brands.

Joe: Global revenue increased 5% relative to our prior outlook, we saw stronger results in the U S and Asia with Europe performing as anticipated.

Joe: By brand Wrangler Global revenue increased 9% strength was broad based with growth in every channel and geography, including 9% growth in both the U S and international 9% growth in wholesale and DTC, 19% growth in female and 29% growth in outdoor.

Joe: We were encouraged by the strength we saw in Pos during the holiday season, despite uneven performance month to month as has been the case over the past year. We saw continued strength in overall sell through performance at retail.

October increased at a low single digit rate with November and December accelerating meaningfully to 8% growth on a combined basis.

Joe: This was the strongest Pos performance in over a year, reflecting the brand momentum discussed earlier.

Joe: Now turning to lead global revenue decreased 5% U S revenue decreased 6% driven by a decline in wholesale partially offset by double digit growth in DTC.

Joe: <unk> performance was below our expectations as challenges in the mid tier channel pressured wholesale revenue more than anticipated.

Joe: Additionally, during the fourth quarter Lee revenue was negatively impacted by approximately three percentage points from the exit from the club channel.

Joe: We are evolving leaves go to market strategy in areas that are misaligned with the brand strategy and consumer insights work.

Joe: While these decisions may have a near term impact on revenue. They will result in greater consistency and performance for both our wholesale partners and our own DTC channels long term.

Joe: Partially offsetting the decline in wholesale was an improvement in DTC, including strong double digit growth in the fourth quarter, which we expect to continue in 2025 and.

Joe: In the first quarter lease digital business is up 7% quarter to date.

Joe: Lee International revenue decreased 4% with declines in wholesale offsetting growth in DTC and.

Joe: In Europe revenue declined 1%.

Joe: Both in DTC, including 17% growth in digital was offset by declines in wholesale.

Performance was generally consistent with expectations as the uneven macro environment continues to weigh on retailer behavior.

Joe: In APAC revenue decreased 4% performance was modestly better than we expected.

Recall last quarter, we tempered our outlook for the region as a result of more challenging operating conditions we.

Joe: We will continue to manage the business prudently in light of the environment. However, we are encouraged by the modest improvement in performance of the region over the past few months.

Joe: 2025 will be a transition year for Lee as we work to set a stronger foundation for the brand and reposition it for growth and improved fundamentals.

Joe: We are confident our consumer driven strategy will strengthen the brand and expect the performance of the business to improve as we move through 2025.

Joe: Moving to the remainder of the P&L adjusted gross margin expanded 160 basis points to 44, 7% driven by the benefits of lower input costs and mix.

Joe: This was partially offset by the targeted pricing actions included in our plan.

Joe: Adjusted SG&A expense was $211 million up 5% compared to the prior year driven by investments in demand creation and volume related variable expenses and.

Joe: And adjusted earnings per share was $1 38, representing an increase of 2% compared to the prior year.

Joe: Excluding the discrete tax benefit in the prior year adjusted EPS increased 23%.

Joe: Now turning to the balance sheet.

Joe: Inventory decreased 22% to $390 million.

We achieved our annual turnover target of approximately three five times and our days on hand goal of approximately 100 days.

Joe: We anticipate inventory to grow in line with sales going forward net working capital management cash generation and return on invested capital will remain a top priority.

Joe: We finished the year with net debt, our long term debt less cash of $406 million and $334 million of cash on hand.

Joe: Our net leverage ratio or net debt divided by trailing 12 month adjusted EBITDA was 1.0 times at the low end of our targeted range.

Joe: During the fourth quarter, we paused share repurchase activity in anticipation of our acquisition of Helly Hansen.

Joe: We have $215 million remaining under our current authorization.

Joe: Our board approved a regular quarterly cash dividend of 52 per share.

Joe: And during 2024, we returned $198 million to shareholders through share repurchases and dividends.

Joe: Finally on a trailing 12 month basis, our adjusted return on invested capital was 32% representing an increase of 550 basis points compared to the prior year.

Joe: Before moving to our outlook, let me discuss two topics I know are top of mind project genius and tariffs.

Joe: Starting with project genius, when we launched our transformation program. The goal was to create investment capacity to drive accelerated growth.

Joe: Prove profitability and returns on capital.

Joe: As we've discussed project genius will result in significant gross and operating margin expansion and allow for a step change in investment to fuel the next leg of our value creation journey.

Joe: As Scott highlighted we now see total run rate savings in excess of 100 million for the genius program.

Joe: In 2025, we anticipate a benefit of approximately $30 million before reinvestment.

Joe: The first half of 2025 will primarily benefit from SG&A savings related to operational efficiencies and improvements within the indirect procurement.

Joe: The second half of the year will include the added savings from supply chain initiatives that will contribute to our gross margin expansion.

Joe: Unpacking. This in more detail, we expect project genius to benefit full year gross margin by approximately 10 to 20 basis points.

Joe: Savings will be primarily driven by optimizing our sourced versus internally manufactured product.

Joe: We have performed a deep skew level analysis and expect these savings to ramp meaningfully starting in the second half of 2025 and into 2026.

Joe: As a result, the majority of the supply chain related savings will occur in the second half of the year, most heavily weighted toward the fourth quarter.

SG&A will benefit by approximately $20 million in 2025 savings will be generated primarily from indirect procurement and improved organizational design and other operational and go to market efficiencies.

Joe: We plan to reinvest over half of these savings to support our 2025 growth initiatives, including incremental demand creation and brand equity campaigns channel and geographic expansion and product development and consumer insight capabilities.

Joe: Net of reinvestment, we expect project genius to benefit 2025, operating income by $10 million to $15 million.

Joe: As we move into 2026, we expect project genius savings to mature to a full run rate in excess of $100 million, providing us with a higher level of investment capacity to further support accelerated growth expand profitability and returns on capital.

Joe: Moving to tariffs.

Joe: Approximately 25% of our expected 2025 U S production volume originates from Mexico.

Joe: Our China exposure is immaterial as the sourcing we do from China is directly for China.

Joe: While the situation remains fluid we have evaluated a range of potential outcomes and have developed a robust set of scenarios and mitigating actions should tariffs proved to be more permanent.

Joe: Should tariffs be implemented in March at the proposed 25% level on all imports from Mexico, the unmitigated impact to operating profit in 2025 is approximately $50 million.

Joe: This assumes no mitigating actions, including transferring production within our global supply chain pricing increases changes to foreign currency or other proactive mitigating cost actions.

Joe: We would expect the mitigated impact in 2025 to be below $50 million and would work to largely offset any potential impact of tariffs more fully in 2026.

Joe: We have experienced supply chain shocks in the past, including patent spikes.

Joe: Supply chain and ocean freight disruption and inflation.

While we are not immune to these events over a near term window. We are confident we can largely offset the impact of tariffs within a 12 to 18 month period.

Joe: Now turning to our outlook.

Joe: Outlook excludes the expected revenue earnings and cash flow contribution from Helly Hansen and any potential impact from tariffs as just discussed.

Joe: Full year revenue is expected to increase 1% to 3% and includes an approximate 1% headwind from the stronger U S. Dollar.

Joe: Our outlook for 2025 also includes the impact of a 50 <unk> week, which is not expected to meaningfully impact revenue on a full year basis.

Joe: Our revenue outlook includes the following assumptions.

Joe: First we continue to plan the business conservatively and assume no meaningful improvement in retail inventory positions for the year.

Joe: While inventory levels at retail remains optimal the environment is uncertain and our retail partners remain in a conservative posture with regard to inventory management.

Joe: This is consistent with our assumption in 2024.

Joe: Second relative to our expectations of 120 days ago, our outlook Embeds, an approximate 100 basis point incremental headwind from foreign currency.

Joe: This will have an equal impact on first and second half revenue growth.

Joe: Third the impact of lease evolving strategy and distribution footprint and the amount and timing of category expansion distribution gains and new programs for both brands has rebalanced revenue growth to be more equally weighted between the first and second halves.

Joe: And finally after an encouraging start to the year.

Joe: Pos trends have softened over the last four to six weeks.

Joe: January P O S increased 4% and we gained approximately 100 basis points of market share.

February P. O S has declined at a low single digit rate as a result of weather disruption and more subdued consumer spending as a result of macro uncertainty.

Joe: Based on the visibility we have we believe the recent slowdown in February Pos is across brands and categories that are largest points of distribution and not specific to wrangler and Lee.

Joe: As I mentioned earlier, we have seen month to month variability over the last year and are planning the business prudently in light of recent trends.

Joe: For the first half of 2025, we expect low single digit revenue growth, including the approximate 100 basis point incremental impact from foreign currency and the factors I just discussed.

Joe: For the first quarter, we expect revenue of approximately $625 million.

Joe: Our first quarter outlook reflects quarter to date trends as well as the impact of seasonal programs and distribution expansion that are more heavily weighted to the second quarter.

Joe: For the full year, the low end of our revenue outlook assumes a low single digit decline in Pos for the balance of the year based on the softness we've experienced in February.

Joe: The high end of our revenue outlook assumes Pos trends that are more consistent with the performance we have experienced over the last six to 12 months.

Joe: While the composition and phasing of our revenue plan for 2025 has evolved differently. There is no change to our growth outlook for 2025 on a constant currency basis relative to 120 days ago.

Joe: More specifically stronger FX headwinds and softer Pos trends to start the year have been offset by greater than expected new distribution and category expansion, primarily in the Wrangler brand.

Joe: Moving to gross margin, we expect adjusted gross margin of $45 three to 45, 5%.

Joe: Our outlook represents an increase of approximately 20 to 40 basis points compared to adjusted gross margin of 45, 1% in 2024.

Joe: We have a high degree of confidence in our ability to continue to expand gross margin supported by project genius and the benefits of structural mix, partially offset by product cost inflation.

Joe: Gross margin is expected to be weighted to the second half of the year driven by the scaling benefits of project genius.

Joe: We expect first half gross margin to expand approximately 10 to 20 basis points compared to prior year.

Joe: For the first quarter, we expect gross margin of 46% or an increase of approximately 30 basis points compared to prior year.

Joe: SG&A is expected to increase at a low single digit rate on an adjusted basis.

We expect to make investments in areas, such as demand creation product development and DTC and international expansion.

Joe: This will be partially offset by the benefits of project genius and prudent discretionary spending.

Joe: EPS is expected to be in the range of $5 20 to $5 30.

Joe: Representing an increase of 6% to 8%.

Joe: Full year EPS does not include the benefit of share repurchases as a result of the pending acquisition of Helly Hansen.

Joe: Our outlook also does not yet reflect the expected revenue earnings and cash flow contribution from healthy.

Joe: Assuming a closing during the second quarter of 2025, we anticipate approximately 15 of accretion to the full year 2025 adjusted earnings per share.

Joe: This outlook does not include any benefit from potential synergies.

Joe: We expect first half EPS growth to be consistent with our full year 2025 outlook.

Joe: We expect first quarter EPS of approximately $1 16.

Joe: Finally, we expect another year of strong cash generation.

Joe: Cash from operations is anticipated to exceed $300 million, reflecting the cash generative nature of our business.

Joe: Our outlook does not include the contribution from Helly Hansen with a meaningful net working capital opportunity we discussed last week.

Joe: Before opening it up for questions I'd like to reiterate the confidence we have in our ability to deliver our 2025 objectives.

Joe: We have multiple paths to drive increasing revenue and operating earnings growth.

Joe: The benefits of strong fundamentals project genius and the addition of Helly Hansen are a powerful combination.

Joe: While the environment remains dynamic we have a strong operating model that has proven resilient regardless of market conditions.

Joe: I'm highly confident in the strength of our team and the power of our enhanced <unk> model and our ability to drive best in class returns in the years ahead.

Joe: This concludes our prepared remarks, and I'll now turn the call back to the operator.

Joe: Thank you.

Joe: We'll now be conducting 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. You May Press Star two if you would like to remove your question from the queue.

Joe: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

Joe: One moment please poll for questions.

Ike bar: The first question is from Ike bar, a child from of Wells Fargo. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question a couple of questions on my end.

Ike bar: First one is I wanted to ask is.

Ike bar: Just a little bit more detail on Lee.

Ike bar: The DTC up I think around double digit wholesale down around double digits, just unpack that a bit and how that flows through the year based on your guide and then Joe on the gross margin to make sure I heard you right that <unk>.

Ike bar: Grosses up 30 in the first quarter and up 10 to 20 for the first half.

Ike bar: If I heard that right why would the second quarter gross margin expansion to be less in Q1. Despite the fact that you're you're saying revenue should be better in the second quarter versus Q1.

Ike bar: Yes.

I'll take the gross margin and then I'll, let Scott and Tom start with with Lee. So yeah for the full year gross margin is expected to be up 20 to 40 basis points. We set up 30 in the first quarter and then that moderates a bit in the second quarter Theres. Some seasonal dynamics just in terms of of.

Ike bar: Mix, but the biggest driver is we expect product cost tailwind is a modest product cost tailwind in the first quarter and then that begins to flip to a headwind based on the product cost inflation that we expect to see that we that we can see given the inventory commitments. We've made to date and then you have project genius beginning to kick in as we move into the second quarter.

Ike bar: And into the back half.

Alright, so I'll start with Lee and then kick it over to Tom, but I think basically I do want to take you back a little bit years ago. When we started this journey seven years ago, almost we had a little bit of a problem with wrangler and we went through a very elongated about year and a half process. We took wrangler down to the studs almost like building a new house that we're doing the exact same thing with me right now we're on the other.

Ike bar: <unk> of it, but we feel real confident about it but what you're seeing right now from a sell through especially a D to C is you're starting to see some of the new product and some of the resignation resonating we're having with women specifically so our team has done a really good job getting ahead of that building great product, telling really good stories, and we're able to bring that to life immediately because.

Ike bar: It's on our website and in our E Commerce channel. So that's why you're seeing the beginnings of that happening happening really nicely. So we're really proud of that and real happy but that is the culmination of the work that's been going on for the past year now what youre going to see is you're going to see that continuation from a wholesale standpoint, but it takes a little bit longer as you know to <unk>.

Ike bar: Will that pipeline going forward. So we're at that inflection point right now feeling really good as a team, but I will tell you an incredible amount of work we've had to change out some of the team we've changed out some of our advertising agencies, we've really done a nice job from a product standpoint, we have left nothing untouched as we move forward you saw what happened with wrangler and all that.

Ike bar: Work that was done we're very optimistic that we're doing the same with Lee.

Speaker Change: Yeah, and I got to hand, it to the leadership team in terms of the team very quickly last year.

Speaker Change: Really the as Scott said took it down to this does created a new creative vision, new consumer targets the product innovation and that is something that's going to pull through and continue to accelerate as the year goes look we have work to do with Lee Theres No question about it we understand where our issues are but we're really excited about the work that's been done by the leadership team and I always look at.

Speaker Change: <unk> is a little bit of a leading indicator.

Speaker Change: With that pulling through is resonating with the consumer and so we're looking forward to this transition year and back to growth in 'twenty six.

Speaker Change: Great very helpful. And then if I can sneak in one more.

Joe: Joe basically just want a sanity check the genius math too so on genius, you're saying 30 million benefits to this year with flow through of $10 million to $15 million and that Youll see full benefits by the end of 2006. So just to be clear that leaves 70 million plus of genius benefits for 'twenty six and if the.

Joe: <unk> latest similar to 25, which seems like it's 35% to 50% roughly that would imply you guys have around 25% to $35 million at a minimum of EBIT tailwind from the initiative as you and when you go into 2016.

Level is that the right way to think about it.

Joe: Yeah, you got you got the numbers right, let me just unpack that a bit because theres a lot in there. So we are delivering $30 million of savings in 'twenty five on a gross basis, we intend to reinvest about half of those back into the business and the brands to fuel the growth initiatives that we have in front.

Of us.

Joe: About $10 million of that will come on the gross margin side concentrated primarily in the fourth quarter given the lead times in the supply chain and the lag effect as to when those benefits start to show up in the P&L. So as you can imagine as we turned the corner into 'twenty six those benefits start to scale quite meaningfully on the SG&A.

Joe: Side or delivering about $20 million of savings those are more evenly dispersed throughout the year, but we do expect those savings to grow in 26, as we continue to execute against the initiatives within the program from a from a reinvestment perspective or investing half this year, that's not necessarily.

Joe: Representative of where we'll end up we will continue to appropriately balance.

Joe: And evaluate the investment opportunities we have against our goal of accelerating growth, but also improving profitability and returns on capital. So that's the big picture you know.

Joe: Say just one more thing we're thoughtful about the approach given the integration of of Kelly.

Joe: But the end goal hasn't changed but we are we are mindful on just the burden on the organization just given the pending integration we have in front of us. So again no change to the angle, but we may re sequenced some things as we move through 'twenty five 'twenty six.

Speaker Change: Got it thanks a lot.

Joe: Yeah.

The next question is from Jim Duffy from Stifel. Please go ahead.

Speaker Change: Thank you Hi, Scott Hi, Joe Nice work with the working capital and the return on invested capital.

Two questions for you first just a little more detail on the mechanics of the gross margin benefits for project genius explained how that scales in 'twenty six and speak to the incremental opportunities you've identified that take you beyond the $100 million initial objective and then on Helly Hansen accretion.

Speaker Change: Look super Conservative given the seasonality of the business that seemed to imply this low to mid single digit operating margin in their seasonally strong three Q4 Q.

Speaker Change: I'm curious to 15 cents estimates is that a pro forma number for the full year or is there something else that explains why that's a higher thanks.

Yeah. Thanks, Jim So I'll start with healthy so in terms of the outlook.

Speaker Change: Said, we have not included at this point the revenue earnings or cash flow contribution.

Speaker Change: At this point the ultimate accretion is going to be somewhat dependent on the closing date, which we do expect to occur in the second quarter. How he does lose money in the second quarter similar to other outdoor brands just given the seasonality of the business. So about 60% of the business is in the second half where we expect.

Speaker Change: On both the topline and an earnings too to accelerate we said about 15 of accretion in 'twenty five based on what we can see today, that's basically the EBITDA, we expect in the back half of the year minus the interest expense on the on the debt financing we have not included synergies in that accretion math.

Speaker Change: At this point, we have not included what we believe to be significant working capital.

Speaker Change: Cash generation opportunity for the business under our ownership so more to come on that Jim We've got to get.

Speaker Change: Through closing and we will give you an update based on what we see at the time, but I think suffice to say, we're really excited about the acquisition and the and the value creation opportunity, we see within our within our portfolio.

So on genius I'll I'll take the financial piece of this Jim I mean, we talked about optimizing the balance between our own manufacturing and sourced in some cases that does lead to lower costs.

Speaker Change: We're committed committing to that inventory as we speak those costs will begin to show up in the P&L in the back half mainly in the fourth quarter and that will carry through into 2026 cost is is just one factor in terms of the total equation.

Speaker Change: You know focused on on speed, our ability to react certainly servicing our accounts and that capability has been a real source of strength for us over time, but that's the biggest benefit as.

Speaker Change: As we sit today in terms of what's driving it in 'twenty five.

Speaker Change: And then Joe what is it that takes you beyond the $100 million initial objective what are the incremental opportunities you've identified with project genius.

Speaker Change: Yes. It is.

Speaker Change: Both gross margin and SG&A, Jim just as we get deeper into the execution phase. We're just we're finding more opportunity.

You know just as we as we start to move into execution.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Thanks, Jim.

Speaker Change: Our next question is from Brett Roche from Goldman Sachs. Please go ahead.

Brett Roche: Good morning, and thank you for taking my question I was hoping we could follow up on Mike's question and unpack the transitions that you're seeing for Lee from a distribution perspective, particularly in the U S. How should we expect the Lee brand distribution footprint to look when you complete the transformation year.

Speaker Change: Yeah.

Brett Roche: Yes, I'll take that thanks, Brooke so as we talked about there has been some transition, particularly in the club.

Brett Roche: Area, but as we look at this brand and we look at creating this creative vision and this kind of new consumer target and a new elevated.

Brett Roche: Sort of outlook for it we expect to expand distribution.

Brett Roche: Current footprint in terms of space in real estate, but also moving into upper tier distribution certainly some specialty.

Brett Roche: Not going to get into any particular accounts, but this is all about elevating the brand and moving the brand up as we think two to three years out.

Brett Roche: Great and if I could just follow up on the investments in demand creation that you're expecting can you speak to the percent of sales and marketing that you plan to spend this year and how we should be thinking about any cadence of sequential investment between wrangler and Lee.

Brett Roche: Yeah on the on the.

Brett Roche: The percent of revenue broke I mean, we moved higher this year I think our demand creation in the back half was up.

Brett Roche: Digit rate, if not if not a little bit more than that we will continue to invest behind demand creation at a rate above revenue pretty meaningfully above revenue in 2025, I'll, let Tom speak to the to the wrangler versus Lee Yeah. So as we think about last year, we had our new equity campaign that launched really in search.

Brett Roche: Timber of last year with Wrangler.

Brett Roche: That was the highest testing equity campaign that we had ever had.

Brett Roche: We're really excited about the results of that the metrics that are pulling through from a brand equity standpoint are really really encouraging.

Brett Roche: We also invested behind it with Lee we were in a transition year and as we have spent last year getting ourselves ready for this year in terms of having an equity campaign launch in the back half of 2025, we're really excited about investing behind the Lee brand just like we did on the Wrangler brand.

Brett Roche: As you can see the results from the investments behind Wrangler were fantastic in the both the market share gains, but also the shipments and we expect similar results on leap. So broke this is Scott just one quick comment.

Brett Roche: Through the years, you've seen brands that have made significant investments behind the brand and marketing and storytelling and you've seen the message Mis and I think thats. The most important thing here relative to how the message has landed with wrangler I think what youre going to see from Lee going forward is a much more intelligent approach a better approach and a message that will.

Brett Roche: Land going forward. So at the end those dollars are going to work smarter and work harder for us as a company going forward.

Speaker Change: And just finally I was hoping you could elaborate on terrorists in more detail you've spoken about a $50 million unmitigated potential impact for this year with a potential offset within 12 to 18 months can you talk to the mitigating actions you are.

Speaker Change: And how much of that mitigation you could action on in 2025 shut these tariffs get put in place.

Speaker Change: Sure. So I'll go ahead and start so Brooklyn as you can imagine this has been going on for a little while so we've had a chance to go ahead and run through multiple versions of analysis on how we're going to go ahead and approach this and I think we're in a really good spot relative to how we're going to do that Joe can speak a little bit more from the specificity standpoint for what he's already said in the script, but from a strategic.

Speaker Change: What I will tell you is we do have a plan in place we do have auxiliary plants depended upon this situation if it sticks I think we're all hopeful that this will go ahead and work itself out over time and maybe it doesn't work itself out from the beginning but maybe it works itself out over time during the year. So we've taken a couple of.

Speaker Change: Different approaches on how we're looking at it relative to the timing of it but this has been fairly fluid as you know and it still has some more time before it actually takes place and happens, but we're ready for it and I think the one thing that gives me more comfort than anything is we are really good at this and we are really strong from a supply chain standpoint.

Speaker Change: And we have a lot of levers to pull we can start pulling those immediately and they will flow fairly quickly in 'twenty five and then I feel confident by some inflection point, which we should talk about if these come into play in these stick at our next call or to talk about when that will all be mitigated in 'twenty six but there will be a point in 'twenty six where we're past. These if in fact they.

Speaker Change: Stick and stay in place, but I think more to come relative to that anything to add.

Speaker Change: Oh, Okay no no.

Speaker Change: Thanks Brook, thanks, so much.

Speaker Change: The next question is from Paul Kearney from Barclays. Please go ahead.

Paul Kearney: Hey, good morning, Thanks for taking my question I guess going.

Speaker Change: Going back to Leigh can you share some of your findings from the consumer insight work on Lee who is the current customer and what is the segmentation of the customer you'll be going after.

Paul Kearney: And then a follow up after that.

Paul Kearney: Yeah.

Paul Kearney: Yeah I'll take that.

Paul Kearney: I'm not going to get into in terms of that would be more of like an investor day type thing get into all the work that we've done what I will say is that we probably in the past overshot going after a consumer that was too aspirational too edgy and now what we're doing is going after what we would call.

Paul Kearney: A very smart.

Paul Kearney: <unk>, who is very interested in fashion, but not on that edge and really what's happening Paul is the halo effect wasn't translating to our core consumer and so this new consumer that we're going after from our target will have a much better halo on our core consumer. That's just one example, we could spend a lot.

Paul Kearney: At a time with you on this but in general I can assure you that there has been a lot of consumer research a complete segmentation.

Paul Kearney: Revamp on the Lee, who we're going after from a product standpoint, and a marketing standpoint, and we're just going to show up a lot smarter that really is going to help us drive volume as opposed to where I think we were chasing a little bit too far beyond what was going to help us drive our business.

Speaker Change: Okay. Thanks, and just a quick one on tariffs assuming they go through I guess, how quickly does the impact to begin to kind of flow through inventory and into the P&L and then how quickly do you anticipate.

Paul Kearney: Leverage to start to mitigate it.

Paul Kearney: Yeah, Hey, Paul So look we've got about 100 days of inventory. So assuming those tariffs go into effect next week, you're a couple months away before windows would start to show up in the P&L. So I would think late Q2, and our response again, depending on what.

We decided to do in terms of potential price increases are moving production around the supply chain there'll be a lag effect, so you'd start to see the the mitigating actions show up late late second half 2025 and into early 'twenty six.

Paul Kearney: Okay. Thank you.

Paul Kearney: Okay.

Paul Kearney: Thanks, Paul.

Speaker Change: The next question is from Mauricio Serna from UBS. Please go ahead.

Mauricio Serna: Great. Good morning, and thanks for taking my questions, maybe could you talk a little bit more about what youre seeing in terms of the health of the consumer and just interesting.

Speaker Change: You saw like the Pos trends decelerating.

Speaker Change: In February meaningfully after good start of the year. So just wondering what youre seeing across channels and across segments and then maybe could you elaborate on the wrangler brand momentum I guess it seemed like pretty strong growth for many years for several years now.

Speaker Change: So is it fair to assume that there's going to be like this will be like another euro.

Speaker Change: Very divergent performance between Wrangler and Lee Thank you.

Mauricio Serna: Mauricio I'll go ahead and take the consumer and then shift over to Tom for Wrangler. So I think it's really simple from a consumer standpoint, and I talked to the team about this a lot and talk to our board about this a lot. The consumer right. Now is confused if you just put yourself in their in their seat they they're worried about.

Mauricio Serna: Work, they're worried about the businesses that they're in are those going to be impacted by some of the layoffs. The tariffs. The current situation right now when will that fall through and when will they be able to get back to some sort of normalcy anytime the consumer is feeling a little bit under attack like that they get very conservative and I think.

Mauricio Serna: We are in this country right now seeing that conservatism from the consumer because of their worry I think we'll get through that there's a lot of noise in the system right now and instead of it being a little bit more simple like it's been in the past relative to maybe one specific thing is driving that worried.

Mauricio Serna: We have multiple things driving that worry right now and we just need to work through that we've all seen it we've all been through these types of times and I think the most important thing that we will do here as an organization. We will continue to grow. These brands will continue to invest behind them continue to talk to our consumers in a really sophisticated way, we'll work really hard on <unk>.

Mauricio Serna: <unk> genius and then we will integrate everything that we're doing with Sally Hansen and pull that whole package together and then we will all hopefully work through what's currently right now just a very unpredictable time and as soon as we can get to some more predictable state we should all be in a really good place and I feel really good about where we're positioned now and.

Mauricio Serna: I, even feel better about how we will come out of this on the other side.

Speaker Change: Oh, yeah and from a regular standpoint, we anticipate we will continue to take market share with Wrangler I believe were on the 11th quarter of market share gains were really proud of.

Speaker Change: They're really the foundational work that set that up that is something that is a long way and that will continue we think about the equity campaign that launched in September of last year.

Speaker Change: From a metric standpoint, as I mentioned before it's fantastic our all our metrics scores are up particularly in familiar familiar already in consideration.

Speaker Change: And that will if you think about that Q1 Q2 Q3 up against the non equity campaign. So that is a tailwind for the wrangler brand. Additionally, the real estate gains that we had got fourth third and fourth quarter of last year. Those will wrap those performed it also created some really nice real estate wins for us in the back half of.

Speaker Change: 2025, and so that also will help us continue to take market share from a brand standpoint, and as we've talked about before with Lee, but this will be a reset year, but we're really encouraged about early signs as we move through the year.

Speaker Change: Get stronger and we're really looking forward to 'twenty six.

Bruce I just wanted to go back to the outlook because I know there are a lot of moving pieces, but look there's no change to our growth outlook on a full year basis versus 120 days ago, excluding the impact of FX.

Speaker Change: The outlook includes 2% to 4% revenue growth excluding currency solid gross margin expansion, we've got 5% to 7% operating earnings growth with EPS growth of 6% to 8% and strong cash generation of over $300 million. So the outlook is it's balanced it's more balanced than it was first half versus second.

Speaker Change: Half from both a revenue and an earnings growth perspective, the fundamentals of the of the business are strong our expected return on capital is strong and we've got project genius, that's giving us the opportunity to increase the rate of investment behind our brands. So look we think we're really well positioned our model has proven to be very.

Speaker Change: Resilient, but what we've tried to do with the outlook is help you understand the bookings so at the low end of the outlook. We've assumed the Pos trends are softer trends that we've seen in February that that continues through the balance of the year at the high end of the outlook. We've assumed Pos trends that are positive and more consistent with what we've seen.

Speaker Change: Over the last six to 12 months, we've seen this variability throughout 2024 and consistent with 24, we've not assumed that our retailers change inventory levels relative to how they've been managing very conservatively over the past 12 months. So hopefully that helps you just understand some of the.

Speaker Change: <unk> that are included in the outlook we provided today.

Speaker Change: It does very helpful to hear that thank you so much.

Mauricio Serna: Thanks Mauricio.

Mauricio Serna: This concludes the question and answer session I would like to turn the floor back over to Scott Baxter for closing comments.

Thanks, everyone for joining us today, certainly appreciate it and really appreciate the thoughtful questions gives us an opportunity to kind of share with you everything that we have going on here I'm real proud of the team and all the effort that's going into the initiatives that we have in one of the things that I look back on after doing this for a very long time is that during these times are you working on the right things and us.

Mauricio Serna: The team focused on what they need to do to go ahead and get your business into a better position than I feel real confident about contour brands and what we're doing in that respect.

Mauricio Serna: So look forward to our next quarterly call. Thank you for your participation today, and we'll look forward to talking to you all soon thanks, everyone.

Mauricio Serna: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Mauricio Serna: Okay.

Mauricio Serna: [music].