Description of Business
Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global
lifestyle apparel company headquartered in the United States ("U.S."). We
completed a spin-off transaction from VF Corporation ("VF" or "former parent")
on May 22, 2019 (the "Separation") and began to trade as a standalone public
company (NYSE: KTB) on May 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 the U.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 the Europe, Middle East and
Africa ("EMEA") and Asia-Pacific ("APAC") regions, through department,
specialty, company-operated, concession retail and independently-operated
partnership stores and online.
Fiscal Year and Basis of Presentation
The Company operates and reports using a 52/53 week fiscal year ending on the
Saturday closest to December 31 of each year. Accordingly, this Form 10-Q
presents the third quarter of the Company's fiscal year ending January 1, 2022
("fiscal 2021"), which is a 52-week fiscal year. For presentation purposes
herein, all references to periods ended September 2021, December 2020 and
September 2020 correspond to the fiscal periods ended October 2, 2021,
January 2, 2021 and September 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 into U.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 late January 2020 in
China and mid-March 2020 in the U.S. and Europe, 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.


23 Kontoor Brands, Inc. Q3 FY21 Form 10-Q
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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 our India and VF
Outlet businesses. We recently transitioned our India business to a licensed
model. Additionally, we performed a strategic review of the VF Outlet store
fleet. Based on our assessment of store productivity, we exited approximately 40
of our VF 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 ended
September 2020, driven by growth in all channels as discussed below.
•U.S. Wholesale revenues increased 15% compared to the three months ended
September 2020, primarily due to growth in our U.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 ended
September 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 ended September 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 underperforming VF 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
ended September 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 underperforming VF 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
ended September 2020, primarily due to the business results discussed above.

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