Kontoor Brands Announces Third Quarter 2019 Results

Third Quarter 2019 GAAP EPS of $0.25, Adjusted EPS of $0.95

Restructuring and cost-savings initiatives on track, fueling gross margin gains

GREENSBORO, N.C.–(BUSINESS WIRE)–$KTB–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 third quarter ended September 28, 2019.

“Third quarter 2019 results were in line with our expectations, as we continued to execute on our strategy of setting the foundation for long-term operational success,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “We’re beginning to realize the benefits of the previously announced restructuring and cost-savings initiatives, while we continue to stabilize and globalize our organization. And, we’re improving the quality of our sales, including exiting unprofitable points of distribution, changing business models and rationalizing underperforming SKUs. These actions create the building blocks for healthy, sustainable future growth.”

Third 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, 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 paragraph below. All per share amounts are presented on a diluted basis.

Revenue decreased 9 percent year-over-year to $638 million on a reported basis in the third quarter of 2019 and was down 8 percent in constant currency. Compared to third quarter 2018 adjusted revenue, revenue declined 6 percent in the quarter.

Revenue declines during the quarter, compared with third quarter 2018 adjusted revenues, were primarily driven by three factors:

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

During the third quarter, U.S. revenue was $457 million, down 9 percent on a reported basis. U.S. revenue declined 6 percent compared with 2018 adjusted revenues, including the impact of a major U.S. retailer bankruptcy, which was approximately 3 points of the decline. Our strategic actions, including exiting less profitable points of distribution and select programs also weighed on U.S. revenues. International revenue was $181 million, down 11 percent on a reported basis and down 8 percent in constant currency, driven primarily by exiting unprofitable points of distribution in India and other planned country exits and business model changes. These factors were partially offset by growth in China and favorable timing of shipments in Europe. International revenues declined 8 percent compared with third quarter 2018 adjusted revenues, sequentially improving from second quarter results.

Wrangler® brand global revenue decreased 7 percent to $367 million on a reported basis and in constant currency. Global revenues declined 6 percent and U.S. revenue declined 4 percent compared with third quarter 2018 adjusted revenue, with approximately 2 points of the decline due to the customer bankruptcy. Of note, the Wrangler® brand’s U.S. wholesale performance is down 2 percent year-to-date compared with 2018 adjusted revenue, driven by the customer bankruptcy. We anticipate global revenues of the brand to improve in the fourth quarter of 2019.

As expected, Lee® brand global revenues sequentially moderated in the third quarter, decreasing 8 percent to $232 million on a reported basis, down 6 percent in constant currency. The customer bankruptcy impacted the results by 3 points, while quality-of-sales actions tempered revenues, as well. Of note, on a constant currency basis, Lee® brand revenue increased 8 percent in China during the third quarter, with broad-based strength across all channels of distribution, including a 10 percent comp store increase and 41 percent increase in our Digital business.

Other global revenue (including non-branded VF Outlet™ and Rock & Republic®) decreased to $39 million.

Gross margin increased 30 basis points to 40.1 percent on a reported basis. On an adjusted basis, gross margin was up 20 basis points to 40.9 percent. Increases were primarily due to the impacts of restructuring and quality-of-sales initiatives, as well as favorable channel mix, which more than offset the negative impact of strategic actions taken in India and the pressure from foreign currency. As anticipated, we’ve seen year-over-year comparison improvements in gross margin in each of the past three quarters.

Selling, General & Administrative (SG&A) expenses were $192 million on a reported basis. On an adjusted basis, SG&A was $178 million, up 80 basis points to 27.9 percent of revenues, driven primarily by higher demand creation, higher bad debt expense in India and fixed cost de-leverage due to revenue declines. These increases were partially offset by tight expense control and restructuring benefits.

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

Operating income on a reported basis was $31 million. On an adjusted basis, operating income was $83 million, down 11 percent. Operating margin on a reported basis declined to 4.9 percent of revenues. Adjusted operating margin decreased 60 basis points to 13.0 percent.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $37 million. Adjusted EBITDA was $90 million, down 10 percent. EBITDA margin on a reported basis declined to 5.7 percent of revenues. Adjusted EBITDA margin decreased 50 basis points to 14.1 percent. Actions taken in India drove an approximate $8 million unfavorable adjusted EBITDA impact in the quarter.

Earnings per share was $0.25 on a reported basis. Adjusted earnings per share was $0.95. Actions taken in India drove an approximate $0.09 unfavorable adjusted earnings per share impact in the quarter.

Balance Sheet

The Company ended third quarter 2019 with $41 million in cash and equivalents, and approximately $1 billion in total debt.

Consistent with our capital allocation strategy, during the third quarter of 2019, we paid our first regular quarterly cash dividend of $0.56 per share. Additionally, on October 23, 2019, the Company announced that the Kontoor Brands’ Board of Directors declared a regular quarterly cash dividend of $0.56 per share payable on December 20, 2019, to shareholders of record at the close of business on December 10, 2019.

Inventory at the end of third quarter 2019 was $545 million, up 1 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, reflecting an estimated $75 million inventory reduction from the third quarter to the fourth quarter.

Full-Year 2019 Outlook

“We’ve made great progress and our strategic actions are on track,” Baxter said. “We remain confident that we will continue to drive improved profitability and generate significant cash flow in support of achieving our long-term annualized total shareholder return goal of 8 to 10 percent.”

In the back half of the year, actions in India are expected to drive an adverse adjusted EBITDA impact of approximately $16 million, which includes $8 million in the fourth quarter. Despite the magnitude of actions in India, the Company anticipates delivering on the lower half of the previously announced adjusted EBITDA outlook for fiscal 2019 of $340 million to $360 million. While favorable mix from restructuring and strategic quality-of-sales actions will benefit gross margin in the fourth quarter, unfavorable mix in India will temper the underlying strength.

Kontoor Brands’ outlook for the fiscal year ended December 28, 2019, is as follows:

  • Adjusted EBITDA is now expected to be in the lower half of our previously announced range of $340 million to $360 million, reflecting a high-single digit to low-double digit decline compared with full-year 2018 adjusted EBITDA.
  • Revenue is still 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. The Company continues to expect second half revenue to improve relative to the first half of 2019, with the fourth quarter benefiting the most from strategic actions and the fourth quarter 2018 customer bankruptcy comparison.
  • Capital Expenditures are still 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.
  • We anticipate the total reduction in long-term debt for fiscal 2019 will be approximately $100 million.

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 two-year period.

Webcast Information

Kontoor Brands will host its third quarter 2019 conference call beginning at 8:30 a.m. Eastern Time today, November 7, 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

Adjusted Amounts – 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.

Constant Currency – This release refers to “reported” amounts in accordance with 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.

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 non-GAAP information is useful to investors. While management believes that these non-GAAP measures are useful in evaluating the business, this information should be viewed in addition to, and not as an alternate for, reported results under GAAP. The non-GAAP measures used by the Company in this release may be different from similarly titled 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. For more information about Kontoor Brands, please visit www.KontoorBrands.com.

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,” “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. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as required under the U.S. federal securities laws. 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.

 

KONTOOR BRANDS, INC.

Condensed Consolidated and Combined Statements of Income

(Unaudited)

 

 

 

Three Months Ended

September

 

%

 

Nine Months Ended

September

 

%

(dollars in thousands)

 

2019

 

2018

 

Change

 

2019

 

2018

 

Change

Net revenues

 

$

638,138

 

 

$

704,246

 

 

(9)%

 

$

1,896,228

 

 

$

2,037,765

 

 

(7)%

Costs and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

382,181

 

 

424,053

 

 

(10)%

 

1,157,383

 

 

1,203,259

 

 

(4)%

Selling, general and administrative expenses

 

192,293

 

 

184,909

 

 

4%

 

596,466

 

 

571,080

 

 

4%

Non-cash impairment of intangible asset

 

32,636

 

 

 

 

*

 

32,636

 

 

 

 

*

Total costs and operating expenses

 

607,110

 

 

608,962

 

 

0%

 

1,786,485

 

 

1,774,339

 

 

1%

Operating income

 

31,028

 

 

95,284

 

 

(67)%

 

109,743

 

 

263,426

 

 

(58)%

Interest income from former parent, net

 

 

 

2,104

 

 

(100)%

 

3,762

 

 

5,415

 

 

(31)%

Interest expense

 

(14,140

)

 

(200

)

 

*

 

(21,876

)

 

(981

)

 

*

Interest income

 

712

 

 

1,508

 

 

(53)%

 

3,543

 

 

4,176

 

 

(15)%

Other expense, net

 

(1,456

)

 

(2,084

)

 

(30)%

 

(3,797

)

 

(4,522

)

 

(16)%

Income before income taxes

 

16,144

 

 

96,612

 

 

(83)%

 

91,375

 

 

267,514

 

 

(66)%

Income taxes

 

1,642

 

 

25,594

 

 

(94)%

 

23,474

 

 

56,342

 

 

(58)%

Net income

 

$

14,502

 

 

$

71,018

 

 

(80)%

 

$

67,901

 

 

$

211,172

 

 

(68)%

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

$

1.25

 

 

 

 

$

1.20

 

 

$

3.73

 

 

 

Diluted

 

$

0.25

 

 

$

1.25

 

 

 

 

$

1.19

 

 

$

3.73

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

56,694

 

 

56,648

 

 

 

 

56,663

 

 

56,648

 

 

 

Diluted

 

57,401

 

 

56,648

 

 

 

 

56,989

 

 

56,648

 

 

 

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 September 2019 and September 2018 relate to the 13-week and 39-week fiscal periods ended September 28, 2019 and September 29, 2018, respectively. References to December 2018 relate to the balance sheet as of December 29, 2018.

* Calculation not meaningful

 

KONTOOR BRANDS, INC.

Condensed Consolidated and Combined Balance Sheets

(Unaudited)

 

(in thousands)

 

September 2019

 

December 2018

 

September 2018

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and equivalents

 

$

40,804

 

 

$

96,776

 

 

$

93,135

 

Accounts receivable, net

 

302,582

 

 

252,966

 

 

318,071

 

Due from former parent, current

 

 

 

547,690

 

 

267,605

 

Notes receivable from former parent

 

 

 

517,940

 

 

546,740

 

Inventories

 

545,426

 

 

473,812

 

 

540,936

 

Other current assets

 

73,162

 

 

52,014

 

 

48,906

 

Total current assets

 

961,974

 

 

1,941,198

 

 

1,815,393

 

Due from former parent, noncurrent

 

 

 

611

 

 

1,100

 

Property, plant and equipment, net

 

126,963

 

 

138,449

 

 

141,346

 

Operating lease assets

 

96,590

 

 

 

 

 

Intangible assets, net

 

17,530

 

 

53,059

 

 

54,186

 

Goodwill

 

212,834

 

 

214,516

 

 

214,587

 

Other assets

 

169,874

 

 

110,632

 

 

116,698

 

TOTAL ASSETS

 

$

1,585,765

 

 

$

2,458,465

 

 

$

2,343,310

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Short-term borrowings

 

$

6,028

 

 

$

3,215

 

 

$

5,617

 

Current portion of long-term debt

 

7,500

 

 

 

 

 

Accounts payable

 

149,685

 

 

134,129

 

 

163,375

 

Due to former parent, current

 

 

 

16,140

 

 

69,542

 

Notes payable to former parent

 

 

 

269,112

 

 

269,112

 

Accrued liabilities

 

190,353

 

 

194,228

 

 

178,109

 

Operating lease liabilities, current

 

35,992

 

 

 

 

 

Total current liabilities

 

389,558

 

 

616,824

 

 

685,755

 

Operating lease liabilities, noncurrent

 

64,328

 

 

 

 

 

Other liabilities

 

95,701

 

 

118,189

 

 

112,393

 

Long-term debt

 

980,607

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Total liabilities

 

1,530,194

 

 

735,013

 

 

798,148

 

Total equity

 

55,571

 

 

1,723,452

 

 

1,545,162

 

TOTAL LIABILITIES AND EQUITY

 

$

1,585,765

 

 

$

2,458,465

 

 

$

2,343,310

 

 

KONTOOR BRANDS, INC.

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September

(in thousands)

 

2019

 

2018

OPERATING ACTIVITIES

 

 

 

 

Net income

 

$

67,901

 

 

$

211,172

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

23,020

 

 

23,669

 

Stock-based compensation

 

19,192

 

 

14,012

 

Non-cash impairment of intangible asset

 

32,636

 

 

 

Due from former parent

 

548,301

 

 

(47,090

)

Due to former parent

 

(16,065

)

 

31,525

 

Other, net

 

(95,210

)

 

(188,119

)

Cash provided by operating activities

 

579,775

 

 

45,169

 

INVESTING ACTIVITIES

 

 

 

 

Capital expenditures

 

(11,750

)

 

(17,627

)

Collection of notes receivable from former parent

 

517,940

 

 

1,000

 

Other, net

 

729

 

 

3,647

 

Cash provided (used) by investing activities

 

506,919

 

 

(12,980

)

FINANCING ACTIVITIES

 

 

 

 

Proceeds from issuance of long-term debt

 

1,050,000

 

 

 

Payment of debt issuance costs

 

(12,993

)

 

 

Principal payments of long-term debt

 

(50,000

)

 

 

Repayment of notes payable to former parent

 

(269,112

)

 

 

Net transfers to former parent

 

(1,814,682

)

 

(19,373

)

Dividends paid

 

(31,763

)

 

 

Proceeds from issuance of Common Stock, net of shares withheld for taxes

 

(1,908

)

 

 

Other, net

 

(10,868

)

 

1,733

 

Cash used by financing activities

 

(1,141,326

)

 

(17,640

)

Effect of foreign currency rate changes on cash and cash equivalents

 

(1,340

)

 

(2,225

)

Net change in cash and cash equivalents

 

(55,972

)

 

12,324

 

Cash and cash equivalents – beginning of period

 

96,776

 

 

80,811

 

Cash and cash equivalents – end of period

 

$

40,804

 

 

$

93,135

 

 

KONTOOR BRANDS, INC.

Supplemental Financial Information

Reportable Segment Information

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended September

 

% Change

 

% Change

Constant

Currency (a)

(dollars in thousands)

 

2019

 

2018

 

 

Segment revenues:

 

 

 

 

 

 

 

 

Wrangler

 

$

367,206

 

 

$

395,613

 

 

(7)%

 

(7)%

Lee

 

232,221

 

 

251,510

 

 

(8)%

 

(6)%

Other (b)

 

38,711

 

 

57,123

 

 

(32)%

 

(32)%

Total segment revenues

 

$

638,138

 

 

$

704,246

 

 

(9)%

 

(8)%

Segment profit:

 

 

 

 

 

 

 

 

Wrangler

 

$

61,070

 

 

$

65,104

 

 

(6)%

 

(6)%

Lee

 

30,156

 

 

36,107

 

 

(16)%

 

(13)%

Other (b)

 

843

 

 

(1,339

)

 

163%

 

163%

Total segment profit

 

$

92,069

 

 

$

99,872

 

 

(8)%

 

(6)%

Non-cash impairment of intangible asset (c)

 

(32,636

)

 

 

 

*

 

*

Corporate and other expenses

 

(29,861

)

 

(6,672

)

 

348%

 

348%

Interest income from former parent, net

 

 

 

2,104

 

 

(100)%

 

(100)%

Interest expense

 

(14,140

)

 

(200

)

 

*

 

*

Interest income

 

712

 

 

1,508

 

 

(53)%

 

(53)%

Income before income taxes

 

$

16,144

 

 

$

96,612

 

 

(83)%

 

(82)%

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September

 

% Change

 

% Change

Constant

Currency (a)

 

 

2019

 

2018

 

 

Segment revenues:

 

 

 

 

 

 

 

 

Wrangler

 

$

1,101,133

 

 

$

1,158,341

 

 

(5)%

 

(4)%

Lee

 

680,660

 

 

731,244

 

 

(7)%

 

(4)%

Other (b)

 

114,435

 

 

148,180

 

 

(23)%

 

(23)%

Total segment revenues

 

$

1,896,228

 

 

$

2,037,765

 

 

(7)%

 

(5)%

Segment profit:

 

 

 

 

 

 

 

 

Wrangler

 

$

141,715

 

 

$

195,720

 

 

(28)%

 

(34)%

Lee

 

61,536

 

 

90,161

 

 

(32)%

 

(30)%

Other (b)

 

(437

)

 

(1,725

)

 

*

 

*

Total segment profit

 

$

202,814

 

 

$

284,156

 

 

(29)%

 

(33)%

Non-cash impairment of intangible asset (c)

 

(32,636

)

 

 

 

*

 

*

Corporate and other expenses

 

(64,232

)

 

(25,252

)

 

154%

 

155%

Interest income from former parent, net

 

3,762

 

 

5,415

 

 

(31)%

 

(31)%

Interest expense

 

(21,876

)

 

(981

)

 

*

 

*

Interest income

 

3,543

 

 

4,176

 

 

(15)%

 

(15)%

Income before income taxes

 

$

91,375

 

 

$

267,514

 

 

(66)%

 

(70)%

Contacts

Investors:
Eric Tracy, (336) 332-5205

Senior Director, Investor Relations

Eric.Tracy@kontoorbrands.com

or

Media:
Vanessa McCutchen, (336) 332-5612

Senior Director, Corporate Communications

Vanessa.McCutchen@kontoorbrands.com

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