Description of BusinessKontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company headquartered inthe United States ("U.S."). We completed a spin-off transaction from VF Corporation ("VF" or "former parent") onMay 22, 2019 (the "Separation") and began to trade as a standalone public company (NYSE: KTB) onMay 23, 2019 . The Company designs, produces, procures, markets and distributes apparel primarily under the brand names Wrangler® and Lee®. The Company's products are sold in theU.S. through mass merchants, specialty stores, mid-tier and traditional department stores, company-operated stores and online. The Company's products are also sold internationally, primarily in theEurope ,Middle East andAfrica ("EMEA") andAsia-Pacific ("APAC") regions, through department, specialty, company-operated, concession retail and independently-operated partnership stores and online. Fiscal Year and Basis of PresentationThe Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest toDecember 31 of each year. Accordingly, this Form 10-Q presents the third quarter of the Company's fiscal year endingJanuary 1, 2022 ("fiscal 2021"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods endedSeptember 2021 ,December 2020 andSeptember 2020 correspond to the fiscal periods endedOctober 2, 2021 ,January 2, 2021 andSeptember 26, 2020 , respectively. References to fiscal 2021 foreign currency amounts herein reflect the changes in foreign exchange rates from the prior year comparable period and the corresponding impact on translating foreign currencies intoU.S. dollars and on foreign currency-denominated transactions. The Company's most significant foreign currency translation exposure is typically driven by business conducted in euro-based countries, the Chinese yuan and the Mexican peso. However, the Company conducts business in other developed and emerging markets around the world with exposure to other foreign currencies. Amounts herein may not recalculate due to the use of unrounded numbers. Impact of COVID-19 and Other Recent Developments The novel coronavirus ("COVID-19") pandemic continues to impact global economic conditions, as well as the Company's operations. The pandemic has resulted in a global economic slowdown which had a meaningful negative impact on our financial condition, cash flows and results of operations during 2020 and thus has a significant impact on the comparisons to 2021. In addition, prior year comparisons were affected by reduced spending in 2020 in light of COVID uncertainty. Net revenues and profits across all our segments and geographies decreased significantly due to the impact of COVID-19, beginning lateJanuary 2020 inChina andmid-March 2020 in theU.S. andEurope , as customer retail and owned door closures and governmental stay-at-home orders increased. These negative impacts on operating results continued into the second and third quarters of 2020. We began to see gradual improvement during the third and fourth quarters of 2020, reflecting positive trends in our digital wholesale business and owned e-commerce sites as consumer spending continued to shift towards digital shopping experiences due to the impact of COVID-19. We also saw positive trends in demand in most markets resulting from fewer customer store closures and increased retail store traffic in the second half of 2020. These positive trends continued into 2021. The Company took timely actions in 2020 to strengthen our financial flexibility and preserve adequate liquidity during the uncertain economic situation resulting from COVID-19, as further discussed in the section titled "liquidity and capital resources." Our top priority remains the health and safety of our employees and consumers, and we continue to implement and monitor safety protocols and health precautions as we reopen and operate our facilities. The Company's offices are open where permitted by local restrictions and deemed appropriate by management, but many associates continue to work remotely. The Company's manufacturing plants and distribution centers around the world are currently operating and fulfilling wholesale and direct-to-consumer orders. Additionally, we have experienced retail store closures and reduced traffic in various countries throughout the pandemic, some of which continued into 2021. Because a significant portion of the Company's sourced finished products originate from various countries that have been impacted by the pandemic, we continue to diligently monitor developments and work with these long-standing partners to prioritize production to best align with demand. We continue to experience delays in select product availability and are working with our customers to minimize any impact. In addition, global supply chain disruptions, primarily driven by port congestion and transportation delays, have resulted in incremental air freight costs, primarily during the third quarter of 2021. We anticipate that these increased air freight costs will continue for the remainder of fiscal 2021 and into fiscal 2022. The ultimate economic impact of the pandemic remains fluid. The resurgence of COVID-19 cases in various parts of the world has caused the re-implementation of government restrictions to prevent further spread of the virus. As the timing and availability of vaccines will be different around the world, we believe the pace of the recovery will vary by geography depending on vaccination rates as well as other macroeconomic factors. The Company anticipates, and continues to take necessary, proactive steps to accommodate, a prolonged COVID-19 operating environment. 23Kontoor Brands, Inc. Q3 FY21 Form 10-Q -------------------------------------------------------------------------------- Business Overview We have undergone transformational change to improve operational performance, address internal and external factors and set the stage for long-term profitable growth. We have launched significant initiatives to refine a global go-to-market approach that will sustain our long-term commitment to total shareholder return, some of which were accelerated due to the COVID-19 environment. During 2020, we continued to implement proactive strategic programs to improve quality-of-sales, including two key initiatives related to ourIndia andVF Outlet businesses. We recently transitioned ourIndia business to a licensed model. Additionally, we performed a strategic review of theVF Outlet store fleet. Based on our assessment of store productivity, we exited approximately 40 of ourVF Outlet stores, which represented approximately half of those stores, converted all remaining locations to Lee Wrangler OutletTM and Lee Wrangler Clearance CenterTM retail stores and discontinued the sale of third-party branded merchandise. Our remaining stores only carry Wrangler® and Lee® branded products. Additionally, we have made significant investments to support the design and implementation of a global enterprise resource planning ("ERP") system and information technology infrastructure build-out that continued into 2021. Following the implementation in the EMEA region during the third quarter, we have now implemented our ERP system in all regions. As expected, due to the timing of the Company's ERP implementation, certain European customers elected to shift the timing of certain shipments from the third quarter to the second quarter of 2021. THIRD QUARTER OF FISCAL 2021 SUMMARY •Net revenues increased 12% to$652.3 million compared to the three months endedSeptember 2020 , driven by growth in all channels as discussed below. •U.S. Wholesale revenues increased 15% compared to the three months endedSeptember 2020 , primarily due to growth in ourU.S. digital wholesale and Western businesses, new business growth and the less significant impact of COVID-19 compared with the prior year period. These comparisons were negatively impacted by a shift in the timing of Fall shipments from the second quarter to the third quarter of 2020.U.S. Wholesale revenues represented 69% of total revenues in the current period. •Non-U.S. Wholesale revenues increased 26% compared to the three months endedSeptember 2020 , primarily due to the less significant impact of COVID-19 compared with the prior year period, partially offset by a shift in the timing of certain shipments from the third quarter to the second quarter of 2021 due to the ERP implementation in the EMEA region. Non-U.S. wholesale revenues included a 5% favorable impact from foreign currency and represented 21% of total revenues in the current period. •Direct-to-Consumer revenues increased 2% on a global basis compared to the three months endedSeptember 2020 , primarily due to growth in our owned e-commerce sites and the less significant impact of COVID-19 compared with the prior year period, partially offset by lower retail sales in the current period resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. Direct-to-Consumer revenues included a 2% favorable impact from foreign currency and represented 10% of total revenues in the current period. •Gross margin increased 20 basis points to 44.4%, compared to the three months endedSeptember 2020 , primarily driven by the favorable impact of strategic business model changes, channel mix and benefits from product cost. These increases were partially offset by higher air freight costs incurred in the current period to support demand. •Selling, general & administrative expenses as a percentage of net revenues increased to 31.2% compared to 30.0% for the 2020 period, primarily due to increases in demand creation and digital spending, and compensation expense in the current period. These increases were partially offset by lower retail store expenses resulting from the exit of certain underperformingVF Outlet stores in the fourth quarter of 2020. Prior year comparisons were also affected by reduced spending in 2020 in light of COVID uncertainty. •Net income was$63.4 million compared to$60.8 million for the three months endedSeptember 2020 , primarily due to the business results discussed above.
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