Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Quarterly Report on Form 10-Q.

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."). The Company designs, produces, procures, markets and distributes apparel, footwear and accessories, 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 second quarter of the Company's fiscal year ending December 31, 2022 ("fiscal 2022"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended June 2022, December 2021 and June 2021 correspond to the fiscal periods ended July 2, 2022, January 1, 2022 and July 3, 2021, respectively.

References to fiscal 2022 foreign currency amounts herein reflect the impact of 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 and related supply chain and market disruptions continue to adversely impact global economic conditions, as well as the Company's operations. Additionally, although we do not have any significant operations within Russia or Ukraine, the conflict in these regions has caused disruption in the surrounding areas and greater uncertainty in the global economy.

We experienced store closures and disruptions in distribution in certain regions of China during the latter part of the first quarter of 2022 and throughout the second quarter of 2022 due to the resurgence of COVID-19 and the related lockdowns and restrictions, which had a significant impact on sales in APAC during the second quarter of 2022. We took actions to manage these impacts including the expansion of our credit lines in the region to ensure sufficient liquidity. Although many regions in China had generally returned to normal operations by the end of the second quarter of 2022, lockdowns and restrictions in certain regions and jurisdictions will continue to impact store closures and consumer behavior during the second half of 2022.

We continue to experience global supply chain disruptions, which have resulted in delays in product availability and higher freight and distribution costs, including air freight to expedite shipments to meet customer demand. We continue to work with our customers and vendors to minimize any impact. In addition, inflationary pressures increased key input costs and softened consumer demand late in the second quarter of 2022, and we expect these will continue to impact the second half of 2022.

While we anticipate continued disruption and volatility during the remainder of 2022, we believe that we are appropriately positioned to successfully manage through any known operational challenges.

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.

We made significant investments to support the design and implementation of our global enterprise resource planning ("ERP") system and information technology infrastructure build-out, which was completed in 2021. Certain prior year comparisons are affected by ERP implementation costs incurred in the first half of 2021, as well as a shift in the timing of certain shipments from the second quarter to the first quarter of 2021 related to the Company's ERP implementation in North America and from the third quarter to the second quarter of 2021 related to the Company's ERP implementation in EMEA. These timing shifts will primarily have an impact on year-over-year quarterly comparisons but will not impact the full year.

Kontoor Brands, Inc. Q2 FY22 Form 10-Q 22

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We have now transitioned into our Horizon 2 multi-year strategic vision, "Catalyzing Growth" which outlines four growth catalysts: (i) expansion of our core U.S. Wholesale business, (ii) category extensions such as outdoor, tees and work, (iii) geographic expansion of our Wrangler® and Lee® brands, most notably in China, and (iv) channel expansion focused on the digital platforms in our U.S. Wholesale and Direct-to-Consumer channels. We are focused on driving brand growth and delivering long-term value to our stakeholders including our consumers, customers, shareholders, suppliers and communities around the world. To support our growth initiatives, we approved plans in July 2022 to globalize our operating model and relocate our EMEA headquarters to Switzerland, for which we will incur an estimated $18.0 million in restructuring charges during the second half of 2022. In addition to continued organic investments in our brands and capabilities, the options in our capital allocation strategy are to (i) pay down debt; (ii) provide for a superior dividend payout; (iii) effectively manage our share repurchase authorization and (iv) act on strategic investment opportunities that may arise.

SECOND QUARTER OF FISCAL 2022 SUMMARY

•Net revenues increased 25% to $613.6 million compared to the three months ended June 2021, driven by growth in the U.S. Wholesale channel, partially offset by a decline in the Non-U.S. Wholesale and Direct-to-Consumer channels as discussed below.

•U.S. Wholesale revenues increased 44% compared to the three months ended June 2021, primarily due to a shift in the timing of shipments from the second quarter to the first quarter of 2021 due to the ERP implementation in North America, as well as growth in new business and our digital wholesale business. U.S. Wholesale revenues represented 77% of total revenues in the current period.

•Non-U.S. Wholesale revenues decreased 17% compared to the three months ended June 2021, due to a decline in our EMEA business driven 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 EMEA, a decline in our APAC business due to COVID-19 restrictions in China and a 7% unfavorable impact from foreign currency. Non-U.S. Wholesale revenues represented 13% of total revenues in the current period.

•Direct-to-Consumer revenues decreased 6% on a global basis compared to the three months ended June 2021, driven by a decline in retail store sales and a 3% unfavorable impact from foreign currency, partially offset by growth in our U.S. owned e-commerce sites. Direct-to-Consumer revenues represented 10% of total revenues in the current period.

•Gross margin decreased 260 basis points to 43.5% compared to the three months ended June 2021, primarily driven by increased product costs, higher air freight for expedited shipments to meet demand and unfavorable geographic mix impacts, primarily from the COVID-19 restrictions in China and ERP timing shifts in EMEA. These decreases were partially offset by benefits from strategic pricing.

•Selling, general & administrative expenses as a percentage of net revenues decreased to 29.0% compared to 38.9% for the three months ended June 2021, primarily due to lower compensation-related expense, as well as decreased costs related to the Company's global ERP implementation and information technology infrastructure build-out. These decreases were partially offset by increases in demand creation, digital spending and distribution expense in the current period.

•Net income was $62.0 million compared to $23.6 million for the three months ended June 2021, due to the results discussed above.

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