Retail & Brands
Kontoor Brands reports reports rising figures and improved outlook for 2023
Third Quarter 2023 Highlights
• Q3’23 revenue of $655 million increased 8 percent (7 percent in constant currency) compared to Q3'22
• Q3’23 gross margin of 41.5 percent decreased 200 basis points compared to Q3’22, including an unanticipated 200 basis point charge from duty expense related to prior periods, as well as the impact of proactive inventory management actions
• Q3’23 EPS of $1.05 compared to Q3'22 reported EPS of $0.90 and adjusted EPS of $1.11. Q3’23 EPS includes an unanticipated $0.17 charge from duty expense related to prior periods; excluding the duty charge, EPS was $1.22, increasing 10 percent compared to adjusted EPS in the same period last year
• Q3’23 inventory of $605 million decreased 11 percent compared to Q3’22
• As previously announced, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.50 per share, a 4 percent increase compared to Q2’23
Full Year 2023 Financial Outlook
• FY’23 revenue is now expected to increase approximately 1 percent compared to FY’22; this compares to the prior outlook of a low-single digit percentage increase
• FY’23 adjusted gross margin is now expected to approximate 42.5 percent compared to the prior outlook of 43.5 percent to 44.0 percent; this updated outlook includes a 40 basis point charge from duty expense related to prior periods, as well as the impact of proactive inventory management actions
• FY’23 adjusted EPS is now expected to approximate $4.35, compared to the prior outlook of $4.55 to $4.75; this updated outlook includes a $0.15 charge from duty expense related to prior periods; excluding the duty charge, FY’23 EPS is expected to approximate $4.50
• Expect full year cash flow from operations of approximately $335 million and year end FY’23 cash and cash equivalents of approximately $200 million; inventory is expected to approximate $500 million by year end FY’23, representing a more than 15 percent decline compared to FY’22
“In the third quarter, we delivered strong revenue growth and profitability that was ahead of our expectations, excluding the duty charge, reflecting the broad-based strength of our business. Supported by strategic investments in our brands, U.S. POS strength continued, driving further market share gains in core U.S. wholesale. And we delivered another solid quarter in DTC, a critical growth pillar of our diversified, accretive growth strategy,” said Scott Baxter, President, Chief Executive Officer and Chair of Kontoor Brands.
“While we continue to anticipate a challenging macroenvironment, we expect our investments in innovation and demand creation to further cement competitive separation in the marketplace and fuel the continued momentum of our brands. We are prudently managing our inventory and are focused on reducing inventory levels further as we establish an even stronger foundation for next year. Beginning with the fourth quarter, we expect gross margin expansion to drive accelerated earnings growth into 2024. And, given the strength of our balance sheet and cash flow generation, we have the opportunity to further enhance shareholder value through capital allocation optionality,” added Baxter.
This release refers to “adjusted” amounts from 2023 and 2022 and “constant currency” amounts, which are further described in the Non-GAAP Financial Measures section below. All per share amounts are presented on a diluted basis. Unless otherwise noted, “reported” and “constant currency” amounts are the same. Amounts as presented herein may not recalculate due to the use of unrounded numbers.
Late in the third quarter of 2023, management identified inaccuracies in processing certain transactions with U.S. Customs and Border Protection (“U.S. Customs”) arising from the implementation of the Company’s ERP system. These inaccuracies resulted in underpayment of certain duties owed to U.S. Customs for the 2021 to 2023 periods. The current period results include an estimated additional $13 million duty charge related to prior periods.
Third Quarter 2023 Income Statement Review
Revenue was $655 million, increasing 8 percent (7 percent increase in constant currency) compared to the same period in the prior year. Revenue increases were primarily driven by strength in U.S. wholesale and DTC, partially offset by decreases in International, mainly China.
U.S. revenue was $506 million, increasing 12 percent over the same period in the prior year. U.S. wholesale increased 12 percent compared to the third quarter 2022, driven by broad-based strength across categories, distribution channels and additional market share gains. Growth in U.S. wholesale was augmented by continued strength in DTC, with U.S. own.com revenue increasing 11 percent compared to the same period last year.
International revenue was $149 million, a 4 percent decrease (8 percent decrease in constant currency) over the same period in the prior year with strength in DTC more than offset by a decline in wholesale. International DTC increased 7 percent (5 percent increase in constant currency) compared to the same period last year. China decreased 23 percent (19 percent decrease in constant currency) compared to the third quarter 2022. Europe increased 4 percent (4 percent decrease in constant currency) over the same period last year.
Wrangler brand global revenue was $445 million, a 9 percent increase from the same period in the prior year. Wrangler U.S. revenue increased 10 percent compared to the same period last year, driven by U.S. wholesale core denim and category diversification including non-denim bottoms, Outdoor and Western. Wrangler U.S. own.com increased 11 percent compared to the same period last year. Wrangler international revenue increased 8 percent (2 percent increase in constant currency) compared to the third quarter 2022, driven by increases in both wholesale and DTC.
Lee brand global revenue was $208 million, a 5 percent increase (3 percent increase in constant currency) from the same period in the prior year. Lee U.S. revenue increased 20 percent compared to the same period last year, with strength in both wholesale and own.com. Lee U.S. own.com increased 11 percent compared to the same period last year. Lee international revenue decreased 10 percent (13 percent decrease in constant currency) compared to the third quarter 2022, driven primarily by softness in China.
Gross margin decreased 200 basis points to 41.5 percent compared to the same period in the prior year. Gross margin in the quarter included an unanticipated 200 basis point charge from duty expense related to prior periods, as well as proactive inventory management actions. Excluding the duty charge and inventory management actions, gross margin increased compared to the prior-year period, consistent with expectations. Benefits from strategic pricing, channel mix and lower transitory costs such as air freight were offset by inflationary pressures on input costs and geographic mix.
Selling, General & Administrative (SG&A) expenses were $186 million or 28.4 percent of revenue in the third quarter, decreasing 30 basis points compared to adjusted SG&A for the same period in the prior year. Amplified investments in demand creation and DTC in addition to an increase in distribution costs were somewhat offset by disciplined management of discretionary expenses.
Operating income was $85 million in the third quarter and included the approximate $13 million duty charge. Excluding the duty charge, operating income was $99 million and increased 10 percent compared to adjusted operating income in the same period in the prior year. Operating margin of 13.1 percent decreased 170 basis points compared to adjusted operating margin for the same period in the prior year, including a 200 basis point impact from the duty charge. Excluding the duty charge, operating margin increased 30 basis points to 15.1 percent.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) was $91 million in the third quarter and includes the approximate $13 million duty charge. EBITDA margin of 13.9 percent decreased 200 basis points compared to adjusted EBITDA margin during the same period in the prior year. Excluding the duty charge, EBITDA margin was consistent with the prior year adjusted EBITDA margin.
Earnings per share (EPS) was $1.05 in the third quarter, compared to reported EPS of $0.90 and adjusted EPS of $1.11 in the same period last year. EPS in the quarter included an unanticipated $0.17 charge for duty expense related to prior periods. Excluding the duty charge, earnings per share was $1.22, increasing 10 percent compared to adjusted EPS in the same period last year.
September 30, 2023, Balance Sheet and Liquidity Review
The Company ended the third quarter 2023 with $78 million in cash and cash equivalents, and approximately $0.8 billion in long-term debt.
Inventory at the end of Q3’23 was $605 million, down 11 percent compared to the prior-year period.
As of September 2023, the Company had no outstanding borrowings under the Revolving Credit Facility and $488 million available for borrowing against this facility.
As previously announced, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.50 per share, payable on December 18, 2023, to shareholders of record at the close of business on December 8, 2023.
2023 Outlook
Although the impacts from near-term macroeconomic factors are uncertain, the Company remains focused on execution to deliver continued strong market share gains in the U.S., to accelerate DTC growth, and to drive gross margin improvement. The Company remains confident in its strategy and expects to continue investing in its brands and capabilities in support of accretive growth and anticipates accelerating cash generation as inventory continues to normalize in 2023.