Kontoor Brands Reports Fourth Quarter and Full Year 2019 Results; Provides Outlook for Full Year 2020

  • Fourth Quarter 2019 GAAP EPS of USD 0.50, Adjusted EPS of USD 0.97; Full Year 2019 GAAP EPS of USD 1.69, Adjusted EPS of USD 3.84
  • 2019 Reported Revenue of USD 2.55 billion, Adjusted Revenue of USD 2.52 billion, consistent with full year guidance
  • Fourth Quarter Reported Gross Margin increased 210 basis points to 40.7 %  and Adjusted Gross Margin increased 30 basis points to 40.9 %
  • 2019 EBITDA of USD 194 million, Adjusted EBITDA of USD 341 million, consistent with full year guidance
  • Inventory declined 3 %  at year end, consistent with guidance
  • Significant cash flow generation supported aggressive debt paydown and superior dividend payout.

Kontoor Brands, Inc. (NYSE: KTB), a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, today reported financial results for its fourth quarter and full year ended December 28, 2019.

“2019 has been a year of transformational change for our organisation, our leadership teams and our employees around the globe. Since our spin-off in May of 2019, we have been successfully executing on our Horizon 1 strategic initiatives, making excellent strides in setting the foundation for more profitable, and sustainable, long-term growth,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “As we look to 2020, we remain sharply focused on the continued optimisation and globalisation of our operating model.”

Baxter added, “Our strong cash flow generation has allowed us to pay a superior dividend while also significantly de-levering our balance sheet, by paying down debt well ahead of guidance, during the first seven months post-separation. This robust cash flow will continue to be an important pillar in support of our evolving capital structure, further enhancing our financial flexibility in 2020 and beyond.”

This release refers to “adjusted” amounts that exclude the impact of restructuring and separation costs, changes in our business model, a non-cash impairment charge related to our Rock & Republic® trademark and other adjustments. This release also refers to “constant currency” amounts. These adjustments are further described in the Non-GAAP Financial Measures section below. All per share amounts are presented on a diluted basis.

Fourth Quarter 2019 Income Statement Review

During the fourth quarter and throughout 2019, the Company has undergone transformational change to improve operational performance, address internal and external factors, and set the stage for long-term profitable growth. While this change has negatively impacted near-term revenue, quality-of-sales initiatives that focus on higher margin and faster growing lines of business, as well as the exit of select non-strategic lines of business and points of distribution, position the company for future success.

Revenue decreased to USD 653 million, a 10 % year-over-year decline on a reported and constant currency basis. Revenue declined 8 % compared to fourth quarter 2018 adjusted revenue.

Revenue declines during the quarter, compared with fourth quarter 2018 adjusted revenue, were significantly impacted by three transformational factors:

  • Proactive strategic quality-of-sales initiatives contributed 3 points to the decline, reflecting business model changes and actions taken to exit an underperforming country and other global points of distribution, including select channels in India;
  • The reduced sales of certain lower margin lines of business and lower distressed sales, which represented approximately 1 point of the decline; and,
  • Impacts of a major U.S. retailer bankruptcy in the fourth quarter of 2018, which contributed approximately 1 point of the decline.

During the fourth quarter, U.S. revenue was USD 517 million, down 8 % on a reported basis. Compared with 2018 adjusted revenue, U.S. revenue declined 6 %, driven primarily by the transformational factors previously mentioned, as well as softness in broader retailer traffic during the holiday period and the exit or reduction of select non-core programs. These declines were partially offset by growth in digital, with U.S. digital wholesale increasing 52 % .

International revenue was USD 136 million, down 17 % on a reported basis and down 16 %  in constant currency. Compared to fourth quarter 2018 adjusted revenue, international revenue declined 14 % driven primarily by the previously mentioned quality-of-sales initiatives. These declines were partially offset by growth in owned digital revenue in Europe and China, which grew 36 % and 8 %  in constant currency, respectively.

Wrangler® brand global revenue decreased to USD 417 million, a 6 % decline on a reported and constant currency basis. Compared to fourth quarter 2018 adjusted revenue, global revenue declined 5 %  and U.S. revenue declined 3 % . Lower distressed sales and the exit or reduction of select non-core programs were the primary drivers of the U.S. decline.

As expected, Lee® brand global revenue sequentially moderated in the fourth quarter, decreasing 12 % to USD 202 million on a reported basis and in constant currency, driven by the previously mentioned transformational factors.

Other global revenue declined 36 % to USD 34 million, driven primarily by planned reductions in sales of product manufactured for others, non-branded VF Outlet™ and Rock & Republic®.

Gross margin increased 210 basis points to 40.7 % of revenue on a reported basis. On an adjusted basis, gross margin increased 30 basis points to 40.9 % of revenue. Increases were primarily due to the favourable impacts of restructuring and quality-of-sales initiatives, as well as improving channel mix, which more than offset the negative impact of actions taken to exit points of distribution in India and foreign currency headwinds. Year-over-year adjusted gross margin comparisons have improved in each of the last four quarters, including expansion during the last two, despite pressures from actions taken in India.

Selling, General & Administrative (SG&A) expenses were USD 207 million on a reported basis. On an adjusted basis, SG&A was USD 182 million, down 90 basis points to 27.9 % of revenue, with tight expense control and restructuring benefits more than offsetting fixed cost de-leverage due to revenue declines.

Operating income on a reported basis was USD 59 million. On an adjusted basis, operating income was USD 85 million, up 2 % over the same period in 2018. Operating margin on a reported basis declined to 9.0 % of revenue. Adjusted operating margin increased 130 basis points to 13.1 % of revenue, driven by restructuring, cost savings and quality-of-sales initiatives.

Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was USD 65 million. Adjusted EBITDA was USD 93 million, up 1 %, EBITDA margin on a reported basis declined to 10.0 % of revenue. Adjusted EBITDA margin increased 130 basis points to 14.2 % of revenue, driven by the previously mentioned strategic initiatives. Actions taken in India drove an approximate USD 4 million unfavourable adjusted EBITDA impact in the quarter.

Earnings per share was USD 0.50 on a reported basis. Adjusted earnings per share was USD 0.97. Actions taken in India drove an approximate USD 0.07 unfavourable adjusted earnings per share impact in the quarter.

2019 Income Statement Review

Unless otherwise stated, 2019 revenue is presented on an adjusted basis.

Revenue decreased 8 % to USD 2.55 billion on a reported basis, down 6 % in constant currency. Compared with 2018 adjusted revenue, 2019 revenue declined 6 % to USD 2.52 billion, in line with company full year 2019 guidance.

Revenue declines, compared with 2018 adjusted revenue, were significantly impacted by two transformational factors:

  • Proactive strategic quality-of-sales initiatives contributed 3 points to the decline, reflecting business model changes and actions taken to exit an underperforming country and other global points of distribution, including select channels in India; and Impacts of a major U.S. retailer bankruptcy in the fourth quarter of 2018, which represented approximately 2 points of the decline.
  • Foreign currency headwinds impacted revenue by approximately 1 point.

U.S. revenue was USD 1.91 billion, down 5 % on a reported basis. U.S. revenue declined 3 % compared with 2018 adjusted revenue, primarily driven by the transformational factors previously mentioned, as well as the exit or reduction of select non-core programs. These declines were partially offset by growth in digital, with U.S. digital wholesale increasing 43 %.

International revenue was USD 639 million, down 15 % on a reported basis and down 10 % in constant currency. Compared with 2018 adjusted revenue, international revenue declined 13 %, with second half revenue rate comparisons improving relative to first half results. Declines were driven primarily by the previously mentioned quality-of-sales initiatives. International declines were partially offset by growth in digital wholesale, owned digital and China, which grew 14 %, 6 % and 2 %  in constant currency, respectively.

Wrangler® brand global revenue decreased 5 % to USD 1.52 billion on a reported basis, down 4 % in constant currency. Compared with 2018 adjusted revenue, global revenue declined 4 % and U.S. revenue declined 2 %. The previously mentioned customer bankruptcy accounted for 2 points of the decline in the U.S.

Lee® brand global revenue decreased 8 % to USD 882 million on a reported basis, down 6 % in constant currency. Compared with 2018 adjusted revenue, global revenue declined 8 % and U.S. revenue declined 6 % due to the transformational factors previously mentioned. On a constant currency basis, Lee® brand revenue increased 2 % in China during 2019, with broad-based strength across all channels of distribution, including a 2 % comparable store increase and 2 % increase in the digital business.

Other global revenue decreased 26 % to USD 148 million, due to planned reductions in sales of product manufactured for others, non-branded VF Outlet™ and Rock & Republic®.

Gross margin decreased 90 basis points to 39.4 % on a reported basis. On an adjusted basis, gross margin was down 70 basis points to 40.8 %. Declines were primarily due to higher distressed sales and manufacturing inefficiencies associated with the right sizing of capacity, the negative impact of actions taken in India and foreign currency headwinds, which more than offset the benefits of restructuring and quality-of-sales initiatives. As expected, the benefits of these restructuring and quality-of-sales initiatives began to more fully manifest in the second half of 2019, with adjusted gross margin increasing by 25 basis points over the same period in 2018, compared with first half 2019 declines of 180 basis points.

Selling, General & Administrative (SG&A) expenses were USD 803 million on a reported basis. On an adjusted basis, SG&A was USD 719 million, down USD 40 million compared with 2018 adjusted SG&A of USD 759 million, driven by benefits of restructuring and cost savings initiatives and tight expense control. Adjusted SG&A, as percentage of revenue, was up 20 basis points to 28.5 % , driven primarily by fixed cost de-leverage due to revenue declines.

Non-cash impairment of intangible asset represents a USD 33 million charge related to the Rock & Republic® trademark.

Operating income on a reported basis was USD 168 million. On an adjusted basis, operating income was USD 310 million. Operating margin on a reported basis declined to 6.6 % of revenue. Adjusted operating margin decreased 90 basis points to 12.3 % of revenue.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was USD 194 million. Adjusted EBITDA was USD 341 million, down 12 %, EBITDA margin on a reported basis declined to 7.6 % of revenue. Adjusted EBITDA margin decreased 90 basis points to 13.5 %. Actions taken in India drove an approximate USD 12 million unfavourable adjusted EBITDA impact for the year.

Earnings per share was USD 1.69 on a reported basis. Adjusted earnings per share was USD 3.84. Actions taken in India drove an approximate USD 0.21 unfavourable adjusted earnings per share impact for the year, inclusive of a reversal of tax benefits incurred on losses recorded in the third quarter of 2019.

December 28, 2019 Balance Sheet Review

The Company ended 2019 with USD 107 million in cash and equivalents, and approximately USD 913 million in total debt. The company paid down USD 127 million of debt during 2019, including USD 77 million during the fourth quarter.

During the fourth quarter of 2019, the Company paid its second regular quarterly cash dividend of USD 0.56 per share. Additionally, on February 19, 2020, the Company announced that its Board of Directors declared a regular quarterly cash dividend of USD 0.56 per share payable on March 20, 2020, to shareholders of record at the close of business on March 10, 2020.

Inventory at the end of 2019 was USD 458 million, down 3 % compared to the prior year period.

2020 Full Year Outlook

“As a new publicly traded company, we believe it is important to understand the underlying fundamentals of our business, and therefore our outlook for 2020 excludes the impact of the COVID-19 coronavirus. We believe this most accurately reflects our business model, but we also think it is important to provide investors context with respect to potential coronavirus impacts,” Baxter said, which are outlined below.

Kontoor Brands’ outlook for the fiscal year ended January 2, 2021, which includes a 53rd week, compared to adjusted 2019 is as follows:

  • Revenue is expected to be largely consistent with full year 2019 adjusted revenue, with branded Wrangler® and Lee® revenue anticipated to increase low-single digits while other non-strategic revenues are expected to decline double-digits due to ongoing planned reductions in non-branded VF Outlet™ and Rock & Republic®. The 53rd week is expected to contribute approximately one half of a point to full year revenue.
  • The negative impact of 2019 strategic business exits, quality-of-sales initiatives and lower revenue associated with non-strategic lines of business is expected to contribute up to 3 points of headwind to full year 2020 revenue with the majority occurring during the first half of the year. In addition, timing shifts between the second quarter and third quarter shipments are anticipated.
  • Due to these reasons, first half revenue is expected to decline. Revenue is expected to grow in the second half based on the moderating headwinds from restructuring and quality-of-sales actions, benefits of expanding programs and points of distribution, as well as the timing of shipments, with the strongest revenue growth expected during the fourth quarter.
  • Gross margin is expected to be in the range of 41.0 % to 41.5 %  compared with full year 2019 adjusted gross margin of 40.8 % , driven by ongoing restructuring and quality-of-sales initiatives, as well as structural mix shifts to more accretive DTC and international businesses.
  • Adjusted EPS is expected to be in the range of USD 3.55 to USD 3.65 compared with full year 2019 adjusted EPS of USD 3.84. Adjusted EPS excludes expenses primarily related to the implementation of the global ERP system and information technology infrastructure. 2020 includes an additional five months of interest expense that impacts full year adjusted EPS by approximately USD 0.23 compared with 2019 adjusted EPS, which will negatively impact first half 2020 comparisons.
  • Cash flow from operations is expected to be greater than USD 325 million, with significant financial flexibility in support of continued aggressive debt paydown, superior dividend payments and the funding of capital expenditures and implementation costs related to a new global ERP system and information technology infrastructure.

Other full year assumptions include:

  • Adjusted EBITDA is expected to be in the range of USD 350 million to USD 360 million, reflecting a mid-single digit increase at the midpoint compared with full year 2019 adjusted EBITDA of USD 341 million. Adjusted EBITDA excludes approximately USD 90 million of 2020 expenses largely driven by the global ERP system and information technology infrastructure expenses. Due to ongoing restructuring and quality-of-sales initiatives, profitability improvements will be more fully realized within the second half of 2020, with expected top line leverage supporting the strongest year-over-year EBITDA growth in the fourth quarter.
  • Capital expenditures (including ERP) are expected to range between USD 55 million and USD 70 million, including approximately USD 30 million to USD 40 million to support the design and implementation of a global ERP system. As previously announced, the global ERP implementation is expected to require approximately USD 80 million to USD 90 million of capital investment during a two-to-three-year period, including USD 26 million that occurred in 2019, and is expected to result in significant efficiencies and cost savings, once fully implemented.
  • The total reduction in long-term debt for 2020 is anticipated to be in excess of USD 125 million.
  • An effective tax rate of approximately 22 % is anticipated. Interest expense, including funding fees related to an accounts receivable sale program, is expected to be approximately USD 50 million in 2020.

Considerations Regarding Potential Coronavirus Impacts

“Kontoor Brands is carefully monitoring the coronavirus situation. As always, our top priority is to ensure the health and safety of our employees, and our efforts are focused on addressing their needs. Our thoughts are with those impacted,” Baxter said.

“Prior to the emergence of the coronavirus, we saw improved trends from holiday, both within the U.S. and international markets,” Baxter said. “Based on information we have quarter-to-date, we anticipate a potential negative global impact of approximately 4 points to our first quarter revenue, due mostly to our operations in China.”

For additional context, China operations represent approximately 7 % of annual global revenue for Kontoor. Operations in China consist of wholesale channels including digital and partnership stores, as well as owned and operated full price and outlet stores. In February, a majority of owned and partner retail doors were closed for the month while most of the remaining doors saw very substantial reductions in traffic and comps. Over the past few weeks, the number of doors open is increasing, with approximately 75 % now open. Although this trend is anticipated to continue in March, reductions in traffic and comps are expected to continue.

In terms of supply chain impacts, the situation continues to be actively monitored, but currently there are no material disruptions in either manufacturing or sourcing of materials. As a reminder, approximately one third of Kontoor production is owned manufacturing in the Western Hemisphere.

Kontoor Brands, Inc. (NYSE: KTB) is a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands: Wrangler® and Lee®. Kontoor designs, manufactures and distributes superior high-quality products that look good and fit right, giving people around the world the freedom and confidence to express themselves. Kontoor Brands is a purpose-led organization focused on leveraging its global platform, strategic sourcing model and best-in-class supply chain to drive brand growth and deliver long-term value for its stakeholders.

www.KontoorBrands.com