Kontoor Brands, Inc., a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, reported a 41 percent increase in revenue compared to the prior year for its second quarter ended on 3rd July, 2021.
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“Kontoor’s strong second quarter results, which came in above our expectations, and our improving fundamentals give us confidence to raise full year guidance. As discussed at our recent Investor Day, we expect to catalyze sustained, profitable growth across channels, categories and geographies, fueled by investments in key enablers within talent, demand creation, digital and sustainability,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands.
“Additionally, we are well positioned to take advantage of increasing optionality in our capital allocation strategy. Today’s announcement of a $200 million share repurchase program exemplifies this enhanced optionality, and reflects the strong cash flow generation of our business,” continued Baxter.
“I want to thank all of our Kontoor colleagues around the globe for their continued focus on operational execution. Our incredible people, dedicated to excellence and taking care of one another, will drive Kontoor’s bright future ahead,” added Baxter.
Kontoor Brands reported its revenue in the second quarter increased to US$491 million, a 41 percent increase on a reported basis and 37 percent in constant currency over the same period in the prior year.
Revenue increases compared to the prior year were primarily driven by strength in Digital, including own.com and digital wholesale, as well as improved performance across the U.S. wholesale business and accelerating trends in international markets. As expected and discussed on the first quarter 2021 earnings call, second quarter revenue was negatively impacted by a shift in the timing of shipments from the second quarter to the first quarter ahead of the Company’s North American ERP implementation.
Additionally, gains in the quarter were somewhat offset by the impacts of the previously announced strategic actions related to VF Outlet store closures, discontinuing the sale of third-party branded merchandise in all stores, and the transition to a new licensed business model in India. Finally, in select markets and channels, COVID-19 also negatively impacted the Company’s second quarter 2021 results. Compared to adjusted revenue in the second quarter of 2019, reported revenue decreased 19 percent due to the aforementioned factors.
U.S. revenue was US$365 million, increasing 27 percent over the same period in the prior year driven by growth in U.S. wholesale, new business development wins and strength in Digital, with own.com increasing 28 percent and digital wholesale increasing 49 percent.
International revenue was US$126 million, a 106 percent increase over the same period in the prior year on a reported basis and 87 percent in constant currency. China increased 10 percent over the same period in the prior year in constant currency.
Despite ongoing headwinds from COVID-19, the European business increased 254 percent over the same period in the prior year in constant currency. Second quarter revenue in the region benefited from a shift in the timing of shipments from the third quarter to the second quarter ahead of the Company’s European ERP implementation.
Wrangler brand global revenue increased to US$311 million, a 24 percent increase over the same period in the prior year on a reported basis and 22 percent in constant currency. Wrangler U.S. revenue increased 14 percent compared to the same period last year, driven by increases in Digital, Western and new product categories.
Lee brand global revenue increased to US$176 million, a 105 percent increase over the same period in the prior year on a reported basis and 96 percent in constant currency. Lee U.S. revenue increased 118 percent compared to the same quarter last year with strength from improving sell through of new programs, retailer re-openings and increases in Digital.
Other global revenue declined 70 percent on a reported basis compared to the same period in the prior year to US$3 million driven by impacts from the strategic actions related to VF Outlet stores.
Gross margin increased 760 basis points to 46.1 percent of revenue, compared to the same period in the prior year. Favorable channel, customer and product mix were the primary drivers of gross margin gains in the quarter. In addition, the current period benefited from COVID-19 impacts associated with downtime in owned manufacturing in 2020, as well as lower distressed sales. Compared to the second quarter of 2019, gross margin increased 750 basis points.
Selling, General & Administrative (SG&A) expenses were US$191 million on a reported basis. Adjusted SG&A was US$168 million, or 34.1 percent of revenue, down 270 basis points compared to the same period in the prior year. Adjustments primarily relate to costs associated with the global ERP implementation and information technology infrastructure build-out. Higher demand creation and digital investments in support of 2021 and future revenue offset, in part, better fixed cost leverage on improving revenues and restructuring benefits.
Operating income on a reported basis was US$35 million. Adjusted operating income was US$59 million, increasing 957 percent compared to the same period in the prior year. Adjusted operating margin increased 1,040 basis points to 12.0 percent of revenue, reflecting the benefits of gross margin improvements and fixed cost leverage on better revenues.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was US$44 million. Adjusted EBITDA was US$67 million, increasing 433 percent compared to the same period in the prior year. Adjusted EBITDA margin increased 1,010 basis points to 13.7 percent of revenue.
Earnings per share was US$0.40 on a reported basis compared to a loss per share of (US$0.58) in the same period in the prior year. Adjusted earnings per share was US$0.70 compared to a loss of (US$0.22) in the same period in the prior year.
The Company ended the second quarter of 2021 with US$176 million in cash and equivalents, and approximately US$0.8 billion in long-term debt.
Due to strong cash generation during the first half of 2021, the Company made debt payments totaling US$25 million during the second quarter. As of 3rd July, 2021, the Company had no outstanding borrowings under the Revolving Credit Facility and US$488 million available for borrowing against this facility.
As previously announced, the Company’s Board of Directors declared a regular quarterly cash dividend of US$0.40 per share payable on September 20, 2021, to shareholders of record at the close of business on 10th September, 2021.
Inventory at the end of the second quarter of 2021 was US$403 million, down US$30 million or 7 percent compared to the prior-year period. Excluding balances related to VF Outlet and India, inventory at the end of the second quarter of 2021 increased 4 percent compared to the prior-year period, well positioned to support accelerating demand.
The Company’s Board of Directors has approved a share repurchase program. The program authorizes the repurchase of up to US$200 million of the Company’s outstanding common stock through open market or privately negotiated transactions. The timing and amount of repurchases will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors. The program does not have an expiration date but may be suspended, modified or terminated at any time without prior notice. The Company expects to fund repurchases through cash flow generated from operations.
The Company is raising its fiscal 2021 Outlook. While the impacts from the COVID-19 pandemic and macroeconomic factors remain uncertain, the Company is updating its fiscal 2021 guidance as follows:
Revenue is now expected to increase in the mid-teens range over 2020, to US$2.39 billion to US$2.42 billion, as compared to a low-teens range in the prior guidance, including a mid-single digit impact from the VF Outlet actions and India business model change.
Gross margin is now expected to increase by 330 to 380 basis points above the adjusted gross margin of 41.2 percent achieved in 2020 to 44.5 percent to 45.0 percent of revenue. This compares to prior guidance of a 230 to 270 basis points increase. The increase reflects higher anticipated growth in more accretive channels such as Digital and International.
SG&A investments will continue to be made in brands and capabilities. Due to the strengthening revenue and gross margin outlook, the Company expects to amplify SG&A investments in demand creation, Digital and International expansion to support second half 2021 revenue and accelerate momentum for 2022. These increases will be partially mitigated by ongoing tight expense controls and sustained, structural post-pandemic cost containment initiatives.
Adjusted EPS is now expected to be in the range of US$3.90 to US$4.00 as compared to US$3.70 to US$3.80 in the prior guidance. This EPS guidance does not assume the benefit of any share repurchases.
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Capital Expenditures are expected to be in the range of US$40 million to US$50 million, including US$25 million to US$30 million associated with the implementation of the Company’s new global ERP system.
For 2021, an effective tax rate of approximately 22 percent is expected, while interest expense is expected to be approximately US$40 million to US$45 million.