Kontoor Brands Announces Second Quarter 2019 Results

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 second quarter ended June 29, 2019. Kontoor became an independent, publicly traded company on May 23, 2019.

“The restructuring and cost savings actions we’ve taken to simplify and stabilize the organization are paying off and are setting the foundation for improved profitability in the second half of 2019 and beyond,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “We will remain disciplined in our approach and focused on our total shareholder return goal of 8 to 10 percent supported by an industry leading dividend.”

Second Quarter 2019 Income Statement Review

This release refers to “adjusted” amounts that exclude the impact of restructuring and separation costs, changes in our business model and other adjustments, as well as “constant currency” figures, which are further described in the Non-GAAP Financial Measures paragraph below.

Revenue decreased 8 percent to $610 million on a reported basis in the second quarter of 2019 and was down 7 percent in constant currency. On an adjusted basis, revenue declined 6 percent to $602 million.

Adjusted revenue declines, during the quarter, were primarily driven by three factors:

• Impacts of a major U.S. retailer bankruptcy in Q4 2018, which represented about 2 points of the decline;
• Actions to exit an underperforming country in Europe and to change business models in select markets, which contributed an additional 2 points to the decline; and,
• Foreign currency headwinds that impacted revenues by approximately 1 point.

During the second quarter, U.S. revenue was $487 million, down 3 percent on a reported basis. Adjusted U.S. revenues declined 1 percent. International revenue was $123 million, down 25 percent on a reported basis and down 19 percent in constant currency, driven primarily by strategic actions to exit an underperforming country, as well as business model changes in select markets. Adjusted international revenues declined 23 percent, with strategic actions and timing shifts of shipments largely driving the declines.

Wrangler® brand global revenue decreased 8 percent to $364 million on a reported basis, down 7 percent in constant currency, largely driven by international performance. U.S. revenue declined 3 percent due to timing shifts of shipments and the customer bankruptcy. Adjusted global revenues declined 8 percent. Excluding currency and the impact of the customer bankruptcy, Wrangler® adjusted revenue would have been down 6 percent in the quarter. Of note, excluding the bankruptcy, Wrangler’s U.S wholesale performance was up 2 percent in the first half of 2019, and we anticipate global sales to accelerate in the second half of this year.

Lee® brand global revenue decreased 5 percent to $207 million on a reported basis, down 3 percent in constant currency. Adjusted global revenues declined 5 percent. Excluding currency and the impact of the customer bankruptcy, Lee® adjusted revenue would have increased 1 percent in the quarter.

Other (including non-branded VF Outlet™ and Rock & Republic®) global revenue decreased 20 percent to $39 million, while on an adjusted basis, Other global revenue decreased 2 percent to $35 million.

Gross margin decreased 160 basis points to 38.6 percent on a reported basis. On an adjusted basis, gross margin was down 110 basis points to 40.0 percent. Declines were primarily due to charges associated with global restructuring activities and related actions, as well as the impacts of unfavorable channel mix driven by lower international sales and higher levels of distressed sales, as well as negative impacts from foreign currency. The comparative performance in gross margin will improve in the second half of the year versus the first half.

Selling, General & Administrative (SG&A) expenses were $182 million on a reported basis, up 110 basis points, as a percent of revenue. On an adjusted basis, SG&A was $167 million, down 40 basis points as a percent of revenue, driven by expense control.

Operating income on a reported basis was $54 million. On an adjusted basis, operating income was $74 million, down 11 percent. Operating margin on a reported basis declined 260 basis points to 8.8 percent. Adjusted operating margin decreased 70 basis points to 12.3 percent.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $60 million, down 26 percent. Adjusted EBITDA was $82 million, down 10 percent. EBITDA margin on a reported basis declined 250 basis points to 9.9 percent. Adjusted EBITDA margin decreased 60 basis points to 13.6 percent.

Earnings per share was $0.67 on a reported basis. Adjusted earnings per share was $0.96.

Balance Sheet

The company ended second quarter 2019 with $77 million in cash and cash equivalents, and approximately $1 billion in total debt, after paying down approximately $50 million of debt during the quarter.

On July 23, 2019, Kontoor Brands’ Board of Directors declared a regular quarterly cash dividend of $0.56 per share payable on September 20, 2019, to shareholders of record at the close of business on September 10, 2019.

Inventory at the end of second quarter 2019 was $538 million, up 9 percent compared to the prior year period, primarily due to inventory built in anticipation of plants closed during the quarter. At year-end, inventory levels are expected to improve and be relatively flat to below prior year levels.

Full Year 2019 Outlook Reaffirmed

“We have the pieces in place and see a clear path to achieving our long-term revenue growth, margin improvement, and cash generation goals,” said Baxter. “These improvements start to gain traction in the second half of 2019 as our business model changes and cost improvement initiatives begin to take hold.”

Kontoor Brands’ outlook for the fiscal year ended December 28, 2019, remains unchanged:

• Revenue is expected to exceed $2.5 billion, reflecting a mid-single digit decline compared with full year 2018 adjusted revenue. Excluding the negative impact of foreign currency exchange rates, impacts of a prior year U.S. retailer bankruptcy, and strategic business exits, full year 2019 revenue is expected to be relatively consistent with full year 2018 adjusted revenue. First half reported revenue declined mid-single digits and the company expects second half revenue to improve, with the fourth quarter benefiting the most from strategic actions and the Q4 2018 customer bankruptcy comparison.
• Adjusted EBITDA is expected to range between $340 million and $360 million, reflecting a mid-single digit to low double-digit decline compared with full year 2018 adjusted EBITDA. As anticipated, the impacts of strategic actions and the prior year U.S. retailer bankruptcy weighed on our second quarter performance. We expect to see improved second half performance as benefits from restructuring and cost savings initiatives begin to more fully manifest. As planned, inventory levels are expected to remain elevated during the third quarter of the year due to the inventory built during the second quarter in anticipation of plants closed. The company expects second half adjusted EBITDA to be more weighted to the fourth quarter.
• Capital Expenditures are expected to range between $55 million and $65 million, including approximately $30 million to $40 million to support the design and implementation of a global enterprise resource planning (ERP) system. As previously announced, the global ERP system implementation is expected to require approximately $80 million to $90 million of capital investment during a two-to-three year period and is expected to result in significant efficiencies and cost savings, once fully implemented.
• Other full year assumptions include an effective tax rate of approximately 24 percent. Interest expense should be approximately $40 million in 2019, or $60 million on an annualized basis.

Reaffirmed 2020 to 2021 Financial Roadmap

• Revenue is expected to increase at a low-single digit compound annual growth rate (CAGR) over the period.
• Adjusted EBITDA is expected to increase at a mid-single digit CAGR over the period.
• Capital Expenditures are expected to range between $105 million and $110 million in aggregate over the period.

Webcast Information

Kontoor Brands will host its second quarter 2019 conference call beginning at 8:30 a.m. Eastern Time today, August 8, 2019. The conference will be broadcast live via the internet, accessible at https://www.kontoorbrands.com/investors. For those unable to listen to the live broadcast, an archived version will be available at the same location for three months.

Non-GAAP Financial Measures

Constant Currency - This release refers to “reported” amounts in accordance with U.S. GAAP, which include translation and transactional impacts from changes in foreign currency exchange rates. This release also refers to “constant currency” amounts, which exclude the translation impact of changes in foreign currency exchange rates.

Adjusted Amounts - This release refers to adjusted amounts that exclude the impact of restructuring and separation costs, changes in our business model and other adjustments.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures are presented in the supplemental financial information included with this release that identifies and quantifies all reconciling adjustments and provides management’s view of why this information is useful to investors. Such non-GAAP measures should be viewed in addition to, and not as an alternative for, reported results under GAAP. The non-GAAP measures used by Kontoor Brands in this press release may be different from the measures used by other companies.

About Kontoor Brands

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.

Forward-Looking Statements

Certain statements included in this release and attachments are "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting Kontoor Brands and therefore involve several risks and uncertainties. You can identify these statements by the fact that they use words such as “will,” “anticipate,” “estimate,” “expect,” “should,” and “may” and other words and terms of similar meaning or use of future dates. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of Kontoor to differ materially from those expressed or implied by forward-looking statements in this release include, but are not limited to: risks associated with Kontoor Brands’ spin-off from VF Corporation, including the risk of disruption to Kontoor’s business in connection with the spin-off and that Kontoor could lose revenue as a result of such disruption; the risk that Kontoor does not realize all of the expected benefits of the spin-off; the risk that the spin-off will not be tax-free for U.S. federal income tax purposes; and the risk that there will be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of Kontoor. Other risks for Kontoor include foreign currency fluctuations; the level of consumer demand for apparel; disruption to distribution systems; reliance on a small number of large customers; the financial strength of customers; fluctuations in the price, availability and quality of raw materials and contracted products; disruption and volatility in the global capital and credit markets; response to changing fashion trends, evolving consumer preferences and changing patterns of consumer behavior, intense competition from online retailers, manufacturing and product innovation; increasing pressure on margins; ability to implement its business strategy; ability to grow its international and direct-to-consumer businesses; Kontoor’s and its vendors’ ability to maintain the strength and security of information technology systems; the risk that Kontoor’s facilities and systems and those of third-party service providers may be vulnerable to and unable to anticipate or detect data security breaches and data or financial loss; ability to properly collect, use, manage and secure consumer and employee data; stability of manufacturing facilities and foreign suppliers; continued use by suppliers of ethical business practices; ability to accurately forecast demand for products; continuity of members of management; ability to protect trademarks and other intellectual property rights; possible goodwill and other asset impairment; maintenance by licensees and distributors of the value of Kontoor’s brands; ability to execute and integrate acquisitions; changes in tax laws and liabilities; legal, regulatory, political and economic risks; the risk of economic uncertainty associated with the pending exit of the United Kingdom from the European Union ("Brexit") or any other similar referendums that may be held; and adverse or unexpected weather conditions. More information on potential factors that could affect Kontoor’s financial results is included from time to time in Kontoor’s public reports filed with the SEC and Kontoor Brands’ Registration Statement on Form 10 also filed with the SEC.

Basis of presentation: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 each year. For presentation purposes herein, all references to periods ended June 2019 and June 2018 relate to the 13-week and 26-week fiscal periods ended June 29, 2019 and June 30, 2018, respectively. References to December 2018 relate to the balance sheet as of December 29, 2018.

* Calculation not meaningful

(a) Refer to constant currency definition on the following pages.

(b) Other is included for purposes of reconciliation of revenues and profit, but it is not considered a reportable segment. Other includes sales (i) of VF-branded products (other than Wrangler® and Lee® branded products which are reported in the respective segments above) and third-party branded merchandise at VF Outlet™ stores, (ii) of Rock and Republic® branded apparel, (iii) to VF for products manufactured in our plants and use of our transportation fleet and, (iv) from fulfilling a transition services agreement related to VF's sale of its Nautica® brand business in mid-2018.

* Calculation not meaningful

Constant Currency Financial Information

The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company from translating its foreign revenues and expenses into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results. As a supplement to our reported operating results, we present constant currency financial information, which is a non-GAAP financial measure that excludes the impact of translating foreign currencies into U.S. dollars. We use constant currency information to provide a framework to assess how our business performed excluding the effects of changes in the rates used to calculate foreign currency translation. Management believes this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses.

To calculate foreign currency translation on a constant currency basis, operating results for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

These constant currency performance measures should be viewed in addition to, and not as an alternative for, reported results under GAAP. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.

Basis of presentation: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to the March, June, September and December quarters of 2018 relate to the 13-week fiscal periods ended March 31, 2018, June 30, 2018, September 29, 2018, and December 29, 2018, respectively. The Company presented its 2018 unaudited condensed combined statements of income by quarter in its press release dated June 20, 2019 in order to provide investors with comparable financial information. Selling, general and administrative expenses in the June and September 2018 quarters presented above have been revised to correct the allocation of a $3.5 million pre-tax pension curtailment charge from the September 2018 quarter to the June 2018 quarter.

Non-GAAP Financial Information

The financial information above has been presented on a GAAP basis and on an adjusted basis. These adjusted presentations are non-GAAP measures.

Management uses the above financial measures internally in its budgeting and review process and, in some cases, as a factor in determining compensation. In addition, Adjusted EBITDA is a key financial measure for the Company's shareholders and financial leaders, since the Company's current debt financing agreements require the measurement of adjusted EBITDA, along with other measures, in connection with the Company's compliance with debt covenants. While management believes that these non-GAAP financial measures are useful in evaluating the business, this information should be considered as supplemental in nature and should be viewed in addition to, and not as an alternate for, reported results under GAAP. In addition, these non-GAAP measures may be different from similarly titled measures used by other companies.