Q1 2025 Kontoor Brands Inc Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to the Kontoor Brands' first quarter of the year 2025, Earnings Convince Call.
Speaker Change: At this time, all lines are in a listen only mode. Following the presentation, we will conduct a questioning answer session. If at any time during this call would require immediate assistance, please press door zero or the operator.
Speaker Change: I would no like to turn a conference call over to Michael Carapetian's Vice President of Corporate Development Enterprise Strategy and Investor Relations. Please go ahead.
Speaker Change: Thank you, operator, and welcome to Kontoor Brands' first quarter 2025 earnings conference call.
Speaker Change: 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 and documents filed with the SEC. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports.
Speaker Change: A month referred to on today's call will often be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning, and is available on our website at KontoorBrands.com.
Speaker Change: Reconciliation of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release.
Speaker Change: These tables identify and quantify excluded items and provide management's view of why this information is useful to investors unless 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.
Joe Alkire: Joining me on today's call are Kontoor Brands President, Chief Executive Officer and Chairman Scott Baxter, and Chief Financial Officer Joe Alkire.
Joe Alkire: Following our prepared remarks, we will open the call for questions. Scott?
Thanks, Mike, and thank you all for joining us today.
Joe Alkire: I'd like to begin our call with the exciting news we shared this morning. We have cleared regulatory approval for the acquisition of Helly Hansen. In the coming weeks, we expect to close the transaction and begin the next chapter of our story fueled by accelerating top-line growth.
Joe Alkire: Stronger earnings and cash generation and significantly improved capital allocation optionality. The goal was clear, drive greater value for our shareholders and structurally increase our TSR potential.
Joe Alkire: We expect to see an immediate benefit to 2025 revenue growth, earnings and cash flow, and long-term benefit is even greater.
Joe Alkire: To ensure we deliver on our commitment, we have established a value creation framework built on four pillars.
First, accelerate Helen Hansen's growth.
Joe Alkire: The global opportunity for the brand is significant. As we discussed in February , the U.S. is the largest outdoor apparel and footwear market in the world.
Joe Alkire: While it is helle's fastest growing, it remains significantly under penetrated relative to its peers.
Joe Alkire: Through a combination of wholesale and retail expansion, strong digital growth and investments in demand creation, we see a clear path to double-digit growth in our home market.
Joe Alkire: Global Workwear and Category Expansion that will further support long-term, sustainable growth.
Joe Alkire: As a result, we expect a meaningful increase in our fundamental growth profile, greater diversification, and increased penetration in the interactive outdoor and work where markets where we have deep expertise.
Second.
Joe Alkire: Double Helley's Operating Margin. We expect to increase operating margin from high single digits today to mid teens through a combination of gross margin and SGNA benefits.
Joe Alkire: We will leverage our global operating model as well as our supply chain and technology platforms this will provide significant scale advantages for both organizations while driving greater back end efficiency improve decision making and increase investment capacities to support growth initiatives.
Joe Alkire: Third, increased capital allocation optionality. Over the near term, we will focus on improving Kelly's profitability and networking capital. Within 12 months, we expect to be under two times leverage and within 24 months, back to pre-deal leverage, while consolidating a significant increase in earnings.
Joe Alkire: Long-term, we will deploy the increase in cash flow potential to support our capital allocation framework including our dividend and share repurchased programs.
Joe Alkire: and finally, established Kontoor as the employer of choice in the industry.
Joe Alkire: Attracting and retaining top talent will ensure long-term success. At the same time, any potential transaction needs to be a strong cultural fit. Healy accomplishes both.
Joe Alkire: We continue to be impressed by their organization. There is depth of talent at all levels, but it is also humble, gritty and committed to doing things the right way. These are the same qualities that you'll find at Kontoor.
Joe Alkire: Canadian tire has been a great steward of the business, but there has been one consistent message I've heard from the team above all others. Kontoor will be the first owner of the business in 20 years that operates in the apparel industry. We know the business and speak the same language.
Joe Alkire: They have been executing at a high level on their own, buying a more confident than ever in the significant benefits as a more synergistic global brand owner.
Joe Alkire: Before turning to our results, let me spend a few moments on the current environment. As you are well aware, there has been an increase in macro volatility over the past few months and the past you have heard me talk about our focus on execution and controlling what we can't.
Joe Alkire: This time will be no different. We have operated through multiple cycles and have the team an operating playbook to nominally navigate the current environment but come through the other side even stronger. Our first quarter highlights the resiliency of our organization with multiple paths to deliver our outlook.
Joe Alkire: to fight a slowdown in POS mid-quarter operational agility and the strength of our supply team drove a significant increase in gross margin in better than expected earnings and cash flow.
Joe Alkire: While the consumer remains under pressure around the globe, it has been resilient. In times of disruption, consumers and retailers lean into brands they know and trust. We are managing the business prudently, but as Joe will discuss, we have seen trends improved in March and April .
Joe Alkire: On tariffs, we do not expect an impact to second quarter results due to recently announced policy changes and mitigating actions have been put in motion that will begin in the third quarter.
As an organization, we challenge ourselves to look around corners.
Joe Alkire: Coming through the supply chain disruptions over the last several years, we put plans in motion to create a more agile organization.
Joe Alkire: As part of Project Genius, we kicked off an SKU level analysis to create increased flexibility within our manufacturing and sourcing operations.
Joe Alkire: This body of work has given us a tremendous head start, and I am confident we will be able to meaningfully offset the impact from terrorists in a 12 to 18 month period. We have dealt with supply chain shocks in the past and have proven the resiliency to maintain profit and returns over time.
Joe Alkire: With that, let's review highlights from Q1. Wrangler had another solid quarter with global revenues increasing 3% growth has been broad-braced across all regions and channels, including a 15% increase in digital.
Joe Alkire: Female continues to be a remarkable success story. During the quarter, female grew 40%
Joe Alkire: Our investments in the team, product development and marketing are delivering excellent results.
Joe Alkire: Following a very strong year, our collaboration with Laney Wilson is off to a great start in 25. We launched her second collection in the spring, including a broader expansion in Emma that coincided with Laney's European tour kickoff.
Joe Alkire: and we are building on the momentum generated by our female fit innovation bespoke. We are scaling a platform following a strong 24, and I am pleased to share the collection continues to perform very well, driving greater growth in penetration within the specialty channel.
Speaker Change: At just 10% of global revenue, Wrangler's Female Business is just getting started.
Joe Alkire: What used to simply draft off the mail business is now a dedicated focus. We are targeting the female consumer and seeing results, giving me tremendous confidence in the long-term growth opportunity in the years ahead.
Joe Alkire: The Heart of the Wrangler Brand Western also drove strong growth in the quarter, coming off mid-single-digit growth in 24 trends accelerated to mid teens in the first quarter.
Joe Alkire: Our key hostile customers are healthy and growing, Western culture is expanding, including record rodeo attendance and our product portfolio has never been better.
Joe Alkire: As a result, Wrangler delivered another quarter of sharegames, according to Sarkana and our men's and women's bottom business, Wrangler gained 70 basis points of market share in the first quarter. Wrangler is on an incredible trajectory and 2025 is off to a great start.
Joe Alkire: Turning to Lee, the quarter performed as expected with revenue declining 8%, our brand repositioning is tracking the plan and we are seeing green shoots that give us confidence in sequential improvement going forward.
Joe Alkire: Our new creative vision is starting to show up in the marketplace. We are driving better segmentation across consumer types, sharpening our storytelling to be more aligned with least consumer, and addressing challenges in mid-tier distribution. We are confident that we have the right team in place.
Joe Alkire: and a new strategic playbook to build our way back to growth over time.
Joe Alkire: To support these efforts, we are leveraging our improved multi brand platform. Over the last 18 months, we have doubled the tools available to the team to drive greater consumer driven insights as a result, digital traffic, brand equity and purchase intent all increased in the first quarter.
Joe Alkire: The barometer of the business is digital, where we have the direct path between building better product and telling better stories and engaging our consumers.
Joe Alkire: This is where we expected to see the first proof points that our realignment is working and that's exactly what we're seeing in the first quarter digital increased 8% and we have seen that momentum continue in April .
Joe Alkire: Looking ahead, our new equity campaign is planned for the back half of the year which will bring our new vision to life. We are sharpening the brand's focus, establishing a stronger foundation, and refining consumer choices. I am confident these steps will put the brand on its best footing in decades and fuel the brand's return to growth.
Joe Alkire: Before I turn it over to Joe, a few closing remarks. Regardless of the environment, we have tremendous optionality in the business. Wrangler has momentum and is winning with the consumer.
Joe Alkire: Our first quarter was better than expected and we remain on track to deliver the outlook we provided in February . While our outlook for Healy Hanson has strengthened, our teams are executing at a high level and I am confident we are on a path to drive long-term value creation for our shareholders, Joe.
Joe Alkire: Thanks, Scott, and thank you all for joining us today. For the balance of the call, I'd like to focus on three topics. First,
I'll provide an update on the acquisition of Helen Hanson.
Joe Alkire: Second, I'll review the highlights of our first quarter results. And finally, I'll provide an update on our full-year outlook, including tariffs, and add some perspective on the current operating environment and why we believe we are well positioned to continue to drive strong returns for our shareholders.
Joe Alkire: Starting with Helen Hanson, as we announce this morning, I am pleased to share we have cleared all required regulatory approvals.
Joe Alkire: The acquisition of Haley significantly increases our long-term TSR profile by both accelerating growth and increasing our cash flow optionality.
Joe Alkire: We have progressed well through integration planning and anticipate closing the transaction at the end of May.
Joe Alkire: We are looking forward to welcoming the entire Heli Hanson organization to the Kontoor family.
Joe Alkire: We expect Kelly Hanson to contribute approximately 425 million to full-year revenue as the business is on track to deliver double-digit growth on a year-over-year basis in the second half of the year.
Joe Alkire: We expect Halley to now contribute 20 cents to full year earnings per share, including 48 cents in the second half of the year, excluding synergies.
Joe Alkire: This compares to our previous expectation of 15 cents of accretion.
Joe Alkire: Art Confidence and the significant value creation opportunity as a combined company has further increased.
Joe Alkire: Let me share one example. As we discussed in February , helle operates as a standalone business today. Within the supply chain, it utilizes its own inbound and outbound freight contracts independent from Canadian to the entire.
Joe Alkire: As you'd expect, Kontoor Supply Chain and Global Scale will provide heli with capability enhancements and significant cost advantages.
Joe Alkire: More specifically, as part of Kontoor, hell is freight expenses will decrease between 10 and 20 percent the benefits of which are not yet included in our accretion expectations.
Joe Alkire: By leveraging our global operating platform, we have clear line of sight to double heli's operating margin over time by both gross margin expansion and S.G.N.A. leverage.
Joe Alkire: This will create additional investment capacity to further accelerate top-line growth, improve profitability and cash flow, and generate even greater long-term value for our shareholders.
In April , we successfully completed our financing of the Transaction.
Joe Alkire: We have entered into an amended and restated credit agreement, a portion of which will be used to fund the acquisition.
Joe Alkire: Our improved capital structure also provides us with greater flexibility and debt capacity.
Joe Alkire: We intend to fund the acquisition with $660 million of new debt and approximately $240 million of excess cash, driven by stronger cash generation in the first quarter relative to our previous
Joe Alkire: In addition, we have entered into a series of interest rate swaps to mitigate our exposure and risk.
Joe Alkire: Our expected effective interest rate is approximately 5% compared to our prior expectation in the 6-7% range.
Speaker Change: Before moving on, I'd like to echo Scott's comments and thank the Haley Hansen and Kontoor teams for their dedication and commitment throughout the transaction and integration process.
Speaker Change: Together, we are creating a powerful, more diversified business with enhanced growth characteristics and even stronger value creation potential in the years to come.
Now let's review our first quarter results.
Speaker Change: Global Revenue was flat with the prior year and consistent with our outlook.
Speaker Change: As we discussed last quarter, after an encouraging start to the year, POS trends softened in late January and into February .
Speaker Change: January POS increased 4% and February declined at a low single-digit rate to the first three weeks of the month.
Speaker Change: Following our fourth quarter earnings call, POS trends further deteriorated with the final week of February declining at a mid-teen rate, below our expectations.
Speaker Change: Trends improved from February to March, with March POS declining approximately 1%.
Speaker Change: Softer than anticipated, POS and our key accounts in the first quarter was offset by strength in Western, ETC and our international businesses relative to our plants.
Speaker Change: The U.S. trends were steady in April , declining 1% and have turned positive in early May.
Speaker Change: While we are encouraged by the recent improvement in POS, we have seen month to month variability over the last year and continue to plan the business prudently, as I'll discuss in more detail in our outlook.
Speaker Change: by Brandt, Wrangler Global Revenue, increased 3% growth was broad-based across all channels and geographies.
Speaker Change: We saw particular strength in our female business which increased 40% in the quarter.
Speaker Change: In the U.S. Revenue increased 3%, driven by 2% growth in wholesale and 14% growth in DTC.
Speaker Change: The relative strength at wholesale drove another quarter of market share gains.
Speaker Change: as measured by Serkana, Wrangler Mail and Female Bottoms gained 70 basis points of market share during the quarter.
Speaker Change: Wrangler International Revenue increased 4%, driven by 6% growth in wholesale, partially offset by the crime in DTC.
Speaker Change: Now turning to Lee, Global Revenue Decreased 8% and was in line with our expectations. US Revenue Decreased 8%, driven by a decline in wholesale, partially offset by 12% growth in digital.
We have seen this momentum continue into the second quarter.
Speaker Change: Lee International Revenue decreased 8% with declines in wholesale offsetting growth in DTC.
Speaker Change: Performance was modestly better than expected, despite the uneven macro environment in both Europe and APEC.
Speaker Change: Now moving to the remainder of the PNL, adjusted gross margin expanded 200 basis points to 47.7% driven by the benefits of lower input costs and mix.
Speaker Change: This was partially offset by the carryover of targeted pricing actions from a year ago.
Speaker Change: Relative to our outlook, we exceeded our gross margin plan by 170 basis points, reflecting the strength of our supply chain, favorable mix, and the early benefits from Project Genius.
Speaker Change: As a great example, skew rationalization is contributing to improve inventory health and lower promotional support.
Speaker Change: Over the past 12 months, we have reduced SKUs by approximately 20% in the US.
Speaker Change: We will expand these efforts to our international operations in the second half of the year.
Speaker Change: While the environment remains dynamic, our operational agility is a competitive advantage in support of our earnings algorithm and cast generation.
Speaker Change: Adjusted SGNA expense was 201 million, up 3% compared to prior year driven by investments in
Speaker Change: In addition, the quarter included 8 million of incremental acquisition related stock based compensation expense that was not included in our previous outlook.
Speaker Change: Excluding the incremental stock base compensation expense, SGNA was down 1% compared to the prior year.
Speaker Change: and adjusted earnings for share was $1.20, including an 11-cent impact from the previously mentioned acquisition related stock-based compensation expense.
Speaker Change: Excluding this expense, adjusted EPS was $1.31 compared to our prior outlook of a $1.16 and increased 13% compared to prior year.
Speaker Change: Turning to the balance sheet, inventory decreased 12% to $443 million.
Speaker Change: We are pleased with the quality and composition of our inventory and will continue to manage working capital prudently in light of the environment while opportunistically leveraging our supply chain model.
Speaker Change: That said, we are also making targeted inventory investments to capitalize on growth opportunities as they arise.
Speaker Change: Looking forward, we expect inventory to decline in the second quarter and grow approximately in line with revenue in the second half of the year.
Speaker Change: We finished the quarter with net debt or long-term debt less cash of $379 million and $357 million of cash on hand.
Speaker Change: Our net leverage ratio, our net debt divided by trailing 12-month adjusted EBITDA was 0.9 times below the low end of our targeted range as expected in advance of the upcoming acquisition
Speaker Change: Our liquidity position is strong. Post-closing, our pro-former net leverage ratio will be less than three times, and we anticipate returning to under two times net leverage within 12 months and back to pre-deal leverage within 18 to 24 months.
or $500 million revolver remains undrown.
Speaker Change: Share Repurchase Activity remains on pause near-term as we focus on paying down acquisition related debt and reducing leverage.
Speaker Change: We have 215 million remaining under our current share repurchase authorization.
Speaker Change: and as previously announced, our board declared a regular quarterly cash dividend of 52 cents per share.
Speaker Change: Finally, on a trailing 12 month basis, our adjusted return on invested capital was 32 percent.
Speaker Change: representing an increase of 710 basis points compared to the prior year.
Speaker Change: Before moving to our outlook, let me briefly discuss our decision to continue to provide a 2025 outlook amidst the uncertainty of the current environment.
Speaker Change: While our business has become more volatile week to week, overall trends have generally improved over the past two months.
Speaker Change: Despite some puts and takes, we have not seen a meaningful change in our ability to deliver our full-year commitments.
Speaker Change: Our outlook for Heli Hanson has strengthened and our tariff mitigation plans are crystallizing.
Speaker Change: We've taken steps to protect the business, including a disciplined posture on discretionary expenses, inventory commitments, and capital spending, while protecting the investments required to further advance our strategies.
Speaker Change: We have a deep sense of responsibility to manage the business appropriately, as well as an obligation to our shareholders, employees and stakeholders to communicate what we're seeing in the business and how that's informing our decisions.
Speaker Change: We hold strongly a belief that this transparency is even more important in times of uncertainty.
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Operational Agility, Execution and Optionality are cornerstones of our model.
Speaker Change: If there is one message to take away from today, it is our commitment to delivering our 20-25 objectives.
Speaker Change: by accessing multiple levers, including supply chain agility, operational and financial discipline, project genius in the acquisition of Helen Hanson.
Speaker Change: We have put ourselves in a position to successfully navigate the current environment to emerge stronger and take advantage of the disruption in the marketplace.
So with that, let's review our updated outlook.
Speaker Change: Bullier revenue is now expected to be in the range of 3.06 to 3.09 billion, representing growth of 17 to 19 percent.
Speaker Change: Kelly Hansen is expected to contribute 425 million to full-year revenue, assuming an end-of-may closing.
Speaker Change: Outlook for 2025 includes the impact of the 53rd week, which is not expected to meaningfully impact revenue on a full year basis.
Excluding Haley, we expect organic revenue growth of one to two percent.
Speaker Change: This compares to our prior outlook of 1 to 3% growth.
Speaker Change: We continue to plan the business conservatively and assume no meaningful change in retail inventory positions for the year.
This is consistent with our prior outlook.
Speaker Change: While inventory levels at retail remain suboptimal, our retail partners remain in a conservative posture with regard to inventory management.
Speaker Change: The low end of our revenue outlook assumes a low single digit decline in POS for the balance of the year, consistent with our prior outlook.
Speaker Change: A high end of our revenue outlook now assumes a more modest POS environment than what we experienced throughout 2024 in into January of this year, reflecting the impact of increased macro uncertainty on consumer behavior.
Speaker Change: For the second quarter, we expect revenue of approximately 630 million, representing growth
Speaker Change: Our outlook includes an expected 20 to $25 million dollar contribution from
Speaker Change: Excluding Haley, our second-quarter outlook reflects POS trends that are consistent with March and April . Offset by the timing of seasonal programs and distribution expansion.
Speaker Change: Our updated outlook implies approximately 3% growth in the second half of the year, driven almost entirely by the benefit of new programs, distribution gains, and the impact of the 53rd week.
Speaker Change: Moving to Gross Margin. Adjusted Gross Margin is now expected in the range of 45.9 to 46.1%.
Speaker Change: Our outlook represents an increase of approximately 80 to 100 basis points compared to gross margin of 45.1% in 2024.
Speaker Change: Ellie Hansen is expected to benefit full-year gross margin by approximately 40 basis points.
Speaker Change: Excluding Haley, we expect full-year gross margin expansion of 40 to 60 basis points, compared to our prior outlook of 20 to 40 basis points.
Speaker Change: We now expect first half gross margin to expand approximately 100 basis points compared to our prior outlook of 10 to 20 basis points reflecting our stronger first quarter results.
Speaker Change: We do not expect Haley Hanson to have a meaningful impact on 2nd quarter gross margin.
Speaker Change: S-DNA is expected to increase approximately 20% reflecting the contribution from
Speaker Change: Excluding Haley, we expect SGNA to increase at a low single-digit rate on an adjusted basis consistent with our prior outlook.
Speaker Change: who will manage the business prudently while prioritizing investments in support of our strategic initiatives.
Speaker Change: Full-year SGNA now includes 9 million of incremental acquisition-related stock-based compensation expense, the majority of which occurred in the first quarter.
and many more. Thank you. Thank you.
Speaker Change: Our investment priorities and expected benefit from project genius are unchanged.
Speaker Change: Project Genius Savings are expected to mature to a full run rate in excess of 100 million in 2026, consistent with our prior outlook.
Speaker Change: EPS has now expected to be in the range of $5.40 to $5.50 representing an increase of 10 to 12%.
Speaker Change: Ellie Hansen is expected to benefit full year 2025 EPS by approximately 20 cents excluding synergies.
This compares to our prior outlook of 15 cents.
Speaker Change: Excluding Haley, we expect full-year adjusted EPS of $5.20 to $5.30.
Speaker Change: This is consistent with our prior outlook and now includes an incremental 13 cents of acquisition related stock based compensation expense.
Speaker Change: The Heli Hanson Business Exhibits Revenue and Earning Seasonality, similar to other brands in the outdoor industry.
Speaker Change: Historically, the second quarter has been Helle Hansen's smallest quarter, which has resulted in operating losses.
Speaker Change: including Haley, we expect second quarter EPS of approximately 80 cents.
Speaker Change: Excluding, helly, we expect second quarter EPS of $1.8, representing an increase of approximately 10%.
Finally, we expect another year of strong cast generation.
Speaker Change: Cash from Operations is now expected to exceed 350 million, including HeliHanson.
Moving to TERFs [inaudible]
Speaker Change: The situation clearly remains highly dynamic. That said, we have evaluated a range of outcomes and have developed a robust set of mitigating actions that will begin to take effect in the third quarter should tariffs prove to be more permanent.
Speaker Change: The majority of our expected 2025 U.S. production volume originates from Bangladesh, Mexico, Egypt.
Pakistan and Kenya.
Speaker Change: Our China exposure is immaterial, at the sourcing we do from China is directly for China.
based on currently available information, Mexico is exempt under USMCA.
Speaker Change: Excluding Haley, the unmitigated impact to operating profit in 2025 is now approximately 35 million based on the current tariffs in effect.
This compares to our prior estimate of $50 million.
Speaker Change: Ellie Hansen is 100% sourced with the majority of its U.S. production volume originating from Southeast Asia, including China, Vietnam, Bangladesh and Cambodia.
Speaker Change: Recall that approximately 75% of Haley's global revenue is outside the US.
Speaker Change: Should Terrace remain at the currently proposed levels on all imports, the unmitigated impact to operating profit in 2025 is approximately 50 million, including Healey Hansen.
Speaker Change: This assumes no mitigating actions, including transferring production within our global supply chain, pricing increases, inventory management, supplier partnership initiatives, and other proactive mitigating cost actions.
Speaker Change: While we are not immune over the near term, our supply chain is a competitive advantage.
Speaker Change: We expect to begin to offset the impact of tariffs beginning in the third quarter of this year.
Speaker Change: and we expect the mitigated impact of tariffs in 2025 to be below 50 million, and are confident we can substantially offset the impact of tariffs within a 12 to 18 month period.
Speaker Change: As Scott discussed, we have successfully navigated supply chain shocks in the past, including
Speaker Change: Supply Chain and Ocean Threat Disruption and Inflation, and have proven the ability to recover and maintain profitability and returns on capital over a relatively short time horizon.
Speaker Change: Before opening it up for questions, I'd like to reiterate the confidence we have in our 20-25 objectives and our ability to successfully navigate the environment and emerge stronger.
Speaker Change: In the coming weeks, we expect to complete the acquisition of Helen Hanson, significantly increasing our value creation potential.
Speaker Change: Combined with Project Genius, our strong fundamentals, and operational agility, we have multiple paths to drive increasing revenue and earnings growth.
Speaker Change: Operational Execution and Financial Discipline are hallmarks of Kontoor's organization and culture.
Speaker Change: Our operating model has proven resilient regardless of market conditions, and I am highly confident in our ability to drive superior returns in the years ahead.
Speaker Change: We are in a position of strength and well positioned to capitalize on opportunities that arise from the disruption and volatility in the marketplace.
Speaker Change: This concludes our prepared remarks and I'll now turn the call back to the operator.
Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the questioning answer session. Should you have a question? Please press the store followed by the one on a touchstone phone.
Speaker Change: Should you wish to cancel your request, please press the star followed by the page.
Speaker Change: If you are using a speaker phone, please lift a hand set before pressing any keys.
Speaker Change: Once again, that is door one. Should you wish to ask the question?
Speaker Change: Your first question is from Ike Boruchow from Wells Fargo. Your line is that open?
Ike Boruchow: Hey, thanks. Good morning, everyone. A couple of questions for me. Maybe I wanted to start. I love all sorts of things.
Yes.
State of U.S. Consumer, I think you-
Speaker Change: He used the word confused three months ago, one kind of describing the end market, is that still the case in your mind? It sounds like things are a little better but is anything changing and then just to kind of take that same conversation over to your retail partners. How is that trended relative to the last time we heard from you? [inaudible]
Speaker Change: Good morning. This is Scott. I'll go ahead and take that one.
Speaker Change: Yeah, I think incredibly resilient is how I would turn it now and coming back in a very, very positive way.
Speaker Change: You know, the start of the year was really strong in January , and then all I would say about February
Speaker Change: is that people were absorbing all the information that was coming in at them from the new administration and all that was happening. I think things have settled down to a normal, you know, past, and we've seen March bounce back incredibly strong. April also, and now it's inflicted positive in May, which has been really nice.
Speaker Change: I think really what it boils down to for us is we're controlling what we can, our product is terrific.
Speaker Change: Our male and female, which is really nice to be able to talk a lot about the great female product that we're making right now. In addition to the fact that we continue to gain share, Joe talked about that, I talked about that. You know we continue to market. We're going ahead and taking advantage of the time. You know, I think the other thing I can we talked about this in the past is. [inaudible]
Speaker Change: Times like this for product like ours, you know, we're catching the up and the down. We are in a great space, we're at a great price, we're at a trusted brand and we have very broad distribution.
Speaker Change: across the globe. And you probably saw the results in our international markets was pretty strong too, so I would characterize this as a really good time heading into an even better time and we feel real confident going forward. Thanks.
Speaker Change: and then just one more for Joe, just so the guidance that's kind of implied for 2Q in the back half is it basically kind of POS in that flatish.
Speaker Change: Range that you're kind of baking into plan and then Joe any chance you could you could help us with some initial 2026 Algo commentary you'll have helly obviously things will be a little bit more stable just curious if you could give us any insight to how you would start to plan that out.
Joe: Yep, sure. Good morning. Good morning, Mike. Yeah, on the second half, you know, we took the top hand of our full year revenue growth down.
Joe Alkire: About a point, so we now are expecting one to two percent growth on an organic basis that that implies second half growth of...
of just about 3%, [inaudible]
Joe Alkire: The growth in the second half that we have contemplated is effectively all driven by the 53rd week new programs and some distribution expansion where
Joe Alkire: Frankly, our visibility is quite high, similar to the same dynamic we had in the second half in the last half of the year.
Joe Alkire: of 24. We have moderated our POS assumptions somewhat on the top end of our guide relative to to where we were before, just given the overall.
Joe Alkire: Environment, and we have assumed that inventory levels remain at their current state, which as we...
Joe Alkire: Talked for several quarters in a row now, they continue to be quite lean as our Retail Partners manage inventory very conservatively as you would expect.
Joe Alkire: On 26th, while we're not going to, you have a 26th outlook today, certainly appreciate the question given all the moving parts to our story, but I will give you a high level framework and again this is.
Barring a major slowdown in the macro environment.
Joe Alkire: The organic business, Wrangler and Lee, the brands are performing well, and we do expect those businesses to grow. Next year, we do have the tariff impact or potential tariff impact, but we expect to substantially offset that impact over a 12 to 18 month period as we said.
Joe Alkire: You'll have project genius savings that will be maturing to a full run rate and will reinvest at least a portion of those savings back into the business to continue to to drive growth.
Joe Alkire: The Haley business, as you can see, is performing really well given the cash we expect to generate as a combined company will be lever quickly and that will be
Joe Alkire: Attailwind as well as add some additional capital allocation optionality as we consolidate and grow the earnings and cash flow of the combined business. So again, we like where we are, we like our model. We clearly have a lot of levers we can pull to drive accelerated growth and returns over the next. [inaudible]
Handful Liars.
Bye, friends.
Speaker Change: Thank you. Your next question is from Brooke Roach from Goldman Sachs, your line of thumb open.
Brooke Rauch: Good morning, and thank you for taking our question. Scott, I was hoping that you could unpack the lead transition in a little bit more detail. How is that progressing versus your expectations? And how should we be thinking about the timeline for an inflection back to growth in the lead brand specifically in the US business?
Scott: So I would characterize it like this and I'm going to hit free bullet points that are really meaningful to me. I've been around this business broke for almost 20 years now and in those 20 years I have never seen better product and that's where it all starts with great product.
Scott: We have the testing some product, we have been pushing some product out early, we've done some coal labs, we've done some things that we have never done before.
Scott: The next piece is the digital piece. That's the thing that we can get after quickest, and that's the thing that we can be close as to storytelling online. Things like that into consumer is just grabbing our product they love it. So both male and female. So we're up as you heard us both say about 8% in the digital space.
Scott: and it continues to grow and we see that continuing throughout the year and into next year. So really positive from the standpoint of where we can touch the consumer very quickly.
Scott: It's really resonating and working exceptionally well. And then there's one of the things that's really interesting that's that's been really good for us and really good for the team is that we are now coming out with a fairly sizable equity campaign.
Scott: and that comes out in the fall. And we're testing that, and it tested even better than the Wrangler campaign that we just rolled out this past year that's done exceptionally well that all of you have seen.
Scott: So, we've got a really good campaign, you know, being supported by incredible product and really good storytelling.
Scott: and we've really worked really hard at this and I want to give a shout out to the teams that have been leading this effort and I think that in 26 we'll start to see this inflect positive again but feel very confident about what that team has done and real proud of that group and what they've done to put us in a position to win and leave brand here going forward.
Speaker Change: That's really helpful. Thank you. Joe, can you help us understand the drivers of the significant growth margin of performance, this quarter, and the levers that are driving the higher margin outlook that was offered today for your base business? How should we be thinking about the sustainability of each of those drivers about performance?
Joe Alkire: Sir, good morning, Brooke. So, yeah, in the quarter, on a year-over-year basis, we were up about 200 basis points. Mix was about 80 of that. We're still seeing the benefits of lower product cost. That was about 40 basis points, and then the balance is genius and handful of other things, which we're talking about.
Joe Alkire: at the additional 80, I'd say relative to our plan and our prior outlook.
Joe Alkire: We were about 170 basis points higher than where we thought we'd be there was some conservatism built into the outlook in line of the environment and we executed really well. [inaudible] a little bit more of a little bit more of a little bit more of a little bit
Joe Alkire: across the quarter. We also have a fairly meaningful mixed benefit with Western DTC in our international businesses performing above plan. As you know, those are...
Joe Alkire: and a creative areas of the business for us, and you start to have project genius benefits that are beginning to kick in.
Joe Alkire: in a fairly meaningful way. As you think about the balance of the year, the mixed benefit,
Joe Alkire: We'll moderate a bit, but still remain positive. Our genius benefits are intact, and then our input costs, our product costs will become more muted in the second quarter relative to the prior year and flip to a modest headwind as we enter the, as we enter the back half.
Great. Thanks so much. I'll pass it on.
Thanks, Bob.
Speaker Change: Thank you. Your next question is from Paul Kearney from Bartois. Your line is so open.
Paul Turney: Hi, good morning. Thanks for taking my question. One click, terrifying question and a follow up. What's assumed in the 50 million unmitigated tariff impact? Is it just a continuation of the tariff rates for the pause period? And what are the mitigating efforts already being put into place?
Speaker Change: Yeah, I'll start. Good morning, Paul. So on the 50 million, so recall, Paul last quarter we had estimated 50 million for just the Kontoor business
Speaker Change: That's now 35 million, and the biggest change there is Mexico, so where we had assumed Mexico would be at a 25% tariff rate.
Speaker Change: That's now zero and protected under US MCA, at least currently, for the rest of the world for KTB, we've assumed the 10% baseline tariff China for us is is
Speaker Change: On the heli side, there's about a $15 million estimated impact, that's really 10% for Southeast Asia, and then you have China at a more elevated rate.
Speaker Change: Okay, great. And then the follow-up is with the advantage that Mexico now has under current tariffs, what is the capacity in Mexico to take on further production? What are the opportunities to further lean on vertical integration and what are the constraints? Thank you.
Speaker Change: Hey Paula Scott, I'll go ahead and take that. You know we've done those plants really well and have for a very long time and then if you recall about a year ago we moved out of Nicaragua and we moved a lot of the production from there into our Mexico plants.
Speaker Change: So I got to say that there's not much room left but I got to say that that's an extreme positive because we run those plants so well and so efficiently. So we do a really nice job down there. So right now, I think we're in really good place.
Thank you, Patron.
Speaker Change: Matthew, your next question is from Peter McGoldrick, Thomas Diffle. Your line is out open.
Thanks for taking my question.
Peter McSoldrick: I was curious how you should think of the annual run rate contribution from Helle Hansen, relative to the 650 million revenue and 75 million EBITDA performance in 2024 as you scale to the US penetration opportunity, can you help us think of the pace of development
Speaker Change: Yeah, hey, Peter, I'll start Scott, Scott can jump in. Yeah, I think a little bit premature to go too far given that we don't own the business yet, but I will say a couple things. So year to date.
Peter McSoldrick: through the first four or five months of 2025, the business has performed in line to modestly better than what we expected. For the second half, we talked about
Peter McSoldrick: 400 to 405 million of revenue that reflects double-digit growth on a year-over-year basis. So pretty solid growth, pretty broad growth across channel geography and categories. We do expect the brand to expand.
Peter McSoldrick: Margins and profitability in the second half of the year that excludes synergy. So the fundamentals of the business are in pretty good shape. I think
Peter McSoldrick: Longer term, medium term, we have said that our expectation for the brand is to grow at a high single digit rate and we think under our ownership we can not only invest more back into the business but also improve profitability given given our capabilities.
Peter McSoldrick: And Joe, I'll add a couple things, Peter, maybe this will help clarify some of maybe what you're getting at a little bit.
Peter McSoldrick: Relative to an outdoor brand, and we've all been around outdoor brands quite a bit. Seasonality can play a big part in that being weather.
Peter McSoldrick: One thing we love about Heli Hansen here is that workwear component. That large workwear component is a very steady annuity in the business month to month 30 year. So that is a benefit relative to how we think about owning this entire business.
Peter McSoldrick: and I think Joe's points are spot on for the rest but as you think about how the business is going to play itself out I think of it as an outdoor company and how that usually works and you know the strong quarters there but now you know underpinned with that really really strong work for a business that's just very steady month of up.
Thanks for that perspective. And then I was curious on...
Speaker Change: Working Capital, a strong working capital progress in the quarter, can you talk about the requirements for working capital for the Heli Hanson business and how that contributes to the $350 million.
Speaker Change: of cash, cash flows from operations. I think the commentary was for inventory in line with forward sales growth in the back half, but I just wanted to make sure that that was on a consolidated basis with, including, Heli Hansen.
Speaker Change: Yeah, thanks for the question, Peter. Yeah, I'm the KTV side.
From an inventory perspective, we expect inventory to be down.
Speaker Change: You over a year and then grow in line with our revenue expectations in the second half, which are more in that 3% kind of range.
Speaker Change: As it relates to Healey, you can see the cash contribution that we expect from that business that does not yet include a fairly significant working capital benefit that we see for the business that will happen over the course of 2026.
Thank you.
Speaker Change: Thank you. Your next question is from Levant Vasilescu, from the anti-pireball. Here's a minus
Speaker Change: Good morning. Thanks for all the colors this morning. So back it in late October , I think it was called out that one each 25 top lines should grow 4% but today's guidance calls.
Speaker Change: I think for 1-H-H-H slightly down, maybe down as much as 1%. Organic compares do get harder into H. So, curious to know what gives you the confidence that 2-H organic reviews should grow slightly low to mid-single digits. Thank you very much.
there.
Speaker Change: You've got a really strong, resilient economy and consumer. We play at a great price point.
Speaker Change: really good distribution, adding helly Hanson, and a really really strong workforce. And then we've got our target business that kicks in in a more significant way. So as I look around and think about all the things that are going very well and the things that we simply that we can control, it's a really positive environment. And then the one thing that's been really nice is the international businesses. [inaudible]
Speaker Change: I have really found their footing and have done really well, so we've been pleased with that too. And then I'll tell you you know there's another thing here too lastly and then Joel kick it over to you if you have some comments.
Speaker Change: But the fact the Helle Hansen acquisition has been a real shot in the arm for the organization. I think the organization is really, really energized and really excited about the fact that we're adding them to our portfolio. And then on the reverse side of that, I think the Helle Hansen Group is really excited to join our organization because we speak the same language. You know, they haven't worked for an apparel company for 20 years. Haven't been owned by an apparel company. And then on the reverse side of that, I think they're really excited to join our organization. And then on the reverse side of that, I think they're really excited.
Speaker Change: for 20 years, and now they're going to be, and I think there's high energy there. And I'll tell you what, we have been thrilled with the talent that we've seen there too. So, absorbing that talent, bringing that brand in-house, all of us working together, all the things that we have going on, I think it gives us a lot of confidence here at Contour Brands.
Speaker Change: Laurent, I'd say just a couple things. So as you think about what we communicated or flashed last fall for the first half versus today, a few pieces. So FX became a larger headwind than what we saw.
Speaker Change: In the fall, we clearly did not anticipate a high single-digit decline in POS for February and certainly did not anticipate the fall of cruelty in the overall
Speaker Change: Environment. Those are the biggest pieces. I think as you think about the implied growth in the second half, like I said, it's really the 53rd week and the visibility we have into new programs and distribution as Scott just mentioned, the POS assumptions are, you know, pretty much what we saw in March, April , which is down about 1%. [inaudible]
Speaker Change: Super helpful. Thank you very much. And how much is the 53rd week contribute for top line and bottom line? And then I've got a follow-up question on the HH. Thank you.
Speaker Change: Yep, on the 53rd week, Laurent, I mean, we don't have a big retail business. As you know, it will be bigger with Kelly, so just pure KTV organic. It won't have a meaningful impact, but it is bigger for the second half and for the fourth quarter in particular.
Speaker Change: Okay, very helpful. And then that remaining question is on the HH. It looks like it's losing 28 cents in 2Q per the guide. But that's only with one month of ownership since the deal closes in late mate. So I'm just curious, is it the right way to think about it? That if you only for three three months, it would lose something around 70 cents.
Speaker Change: We're asking other way, how should we think about this business as we think about an NTM basis, like the EPS contribution to Q and one Q. Thank you.
Paul Kearney, Paul Kearney,
Speaker Change: Yep, yep, I'll take that, Laurent. So this business does exhibit typical seasonality similar to other outdoor peers, as you know, very well.
Speaker Change: Q2 is Haley's lowest volume quarter and it has historically generated losses in that quarter. I'd say the
Speaker Change: The 28 cent impact for really just June is not reflective of a full quarter, so I would not run rate that. It's really timing within a single month which can have an outside impact. You also have. [inaudible]
Speaker Change: and some interest expense in financing amortization for that month without the benefit of the earnings of the business. So, there's a little bit of noise in the stub period, but I would not take the 28 cents and assume that that's what a full quarter will be for the business going forward.
Okay, thank you very much, best luck.
Sir, Sir, Sir,
Thank you.
Speaker Change: Oh, Jim, there are no further questions at this time. I will now hand the call back over to Scott Baxter, Leo, part of the closing remarks.
Scott Baxter: Thanks everyone for joining us for the call. Really appreciate it. We're looking forward to getting together again this summer and we'll continue to stay in touch. Best of luck to all of you as we head into the summer season, late spring and we'll talk to you soon. Thanks again, everyone.
Thank you.
Scott Baxter: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
[inaudible] Paul Kearney, Paul Kearney,