Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kontoor Brands Inc (KTB, Financial) delivered second-quarter results above expectations, driven by market share gains, gross margin expansion, and strong earnings growth.
- Wrangler revenue grew by 1%, with growth in nearly every channel and region, and a 14% increase in the non-denim business.
- POS trends in the US accelerated through the second quarter, with a 4% increase in June, the strongest month year-to-date.
- The company raised its full-year gross margin, earnings, and cash flow guidance based on improving visibility and a stronger profit outlook.
- Kontoor Brands Inc (KTB) expects to generate over $350 million in cash from operations, reflecting significant capital allocation optionality.
Negative Points
- Lee's revenue decreased by 6% in the quarter, reflecting a decline in US wholesale and macro pressures in Europe and Asia.
- Retailers remain in a conservative posture with regard to inventory management, impacting the cadence of sell-in.
- The macro environment in Europe remains challenging, contributing to cautious retailer behavior.
- APAC revenue declined by 13%, with varied performance by channel and ongoing efforts to improve the quality and health of the retail network.
- The company faces an uncertain operating environment, which remains challenging and has been for the last five years.
Q & A Highlights
Q: How are you feeling about the state of the business today versus six months ago from a macro perspective across the globe? Also, what is driving the decision for the $6 million investment, and where are those dollars going?
A: (Scott Baxter, CEO) The state of the consumer is very similar to six months ago, with resilience in the U.S. and challenges in Europe. The $6 million investment is driven by strong POS trends and will be used for marketing, including a new TV commercial and digital investments for Lee in the U.S., Europe, and Asia. (Joseph Alkire, CFO) We are operating from a position of strength, with strong share gains, gross margin improvement, and cash generation.
Q: Can you provide more visibility on Project Jeanius and its expected savings?
A: (Scott Baxter, CEO) Project Jeanius is progressing well, and we have increased the expected savings to $100 million. The project will simplify our business model and free up cash for investment. (Joseph Alkire, CFO) The savings will be more gross profit-driven than SG&A-driven, with a two-thirds to one-third split. We will reinvest a portion of the savings back into the business.
Q: What are the drivers of your confidence in Lee's performance improvement in the second half, particularly in the U.S. and Asia?
A: (Scott Baxter, CEO) We have made significant changes to the organization, focusing on product, consumer insights, and team building. Early signs are encouraging, with significant share and POS increases. (Joseph Alkire, CFO) In Asia, we have improved the quality of our retail network and expect high single-digit growth in the second half, driven by strong digital performance and improved wholesale business.
Q: Can you talk about the market share momentum at the consumer level and your expectations for the second half?
A: (Scott Baxter, CEO) We have seen strong market share gains due to great product and pricing. We are investing an additional $6 million in marketing to continue this momentum. (Joseph Alkire, CFO) POS outpaced shipments in Q2, and we expect better balance between sell-in and sell-through in the second half.
Q: How are you thinking about capital allocation, including investments, shareholder returns, and potential M&A?
A: (Scott Baxter, CEO) We are focused on making prudent decisions and not forcing M&A. We have returned $200 million to shareholders year-to-date and continue to invest in the business. We will only pursue M&A if it makes sense and is accretive.
Q: Can you elaborate on the timing shift impacting Q2 and Q3 revenue and the drivers behind the improved gross margin guidance?
A: (Joseph Alkire, CFO) The timing shift was about $12 million or 2 points of growth in Q2, driven by better-than-expected POS and inventory levels. The improved gross margin guidance is due to stronger-than-expected performance in Q2, with no changes to our second-half assumptions.
Q: What actions are you taking in APAC, and what gives you confidence in high single-digit growth in the second half?
A: (Joseph Alkire, CFO) We have been clearing excess inventory and consolidating partners to improve the retail network. We expect continued strong digital performance and a rebound in wholesale business in the second half.
Q: Can you provide more details on Project Jeanius and the drivers behind the improved cash flow outlook?
A: (Joseph Alkire, CFO) We will provide more details on Project Jeanius in the next quarter or two. The improved cash flow outlook is driven by stronger earnings and better net working capital management.
Q: Will Lee grow year-over-year in the second half, and what are the expectations for Project Jeanius' impact on Q4?
A: (Joseph Alkire, CFO) Yes, we expect Lee to grow year-over-year in the second half, with stronger growth in Wrangler. Project Jeanius' benefits will start to be seen late this year and scale more meaningfully into next year.
Q: Can you elaborate on the drivers of your confidence in the second half acceleration for both brands?
A: (Joseph Alkire, CFO) We have good visibility into category expansion, distribution gains, and new innovation platforms. We are investing an additional $6 million in demand creation to support this growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
