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 and footwear 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 first 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 endedMarch 2021 ,December 2020 andMarch 2020 correspond to the fiscal periods endedApril 3, 2021 ,January 2, 2021 andMarch 28, 2020 , respectively. References to fiscal 2021 foreign currency amounts herein reflect the changes in foreign exchange rates from fiscal 2020 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 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. 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 the first quarter of 2021. The Company took timely actions in 2020 to strengthen our financial flexibility and preserve adequate liquidity during this uncertain economic situation, which included draws on the Revolving Credit Facility, an amendment to the Credit Agreement providing a temporary Relief Period (as discussed in Note 6 to the Company's financial statements in this Form 10-Q), temporary suspension of the payment of a dividend, and other actions to reduce operating costs, capital expenditures and payroll costs. Due to our improving financial performance and cash flows, we were able to reverse many of these actions by the end of the fourth quarter of 2020. During the first quarter of 2021, the Company provided written notification to the administrative agent that it had terminated the temporary Relief Period, thus reverting to the original terms under the Credit Agreement prior to the amendment. However, we continue to maintain the disciplined cost control and other financial benefits from our proactive actions. The Company's offices have reopened 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, continuing into the first quarter of 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. Although we have not experienced significant service disruptions to customers, we have experienced some delays in product availability and continue to work to minimize any impact to our customers. 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 ultimate economic impact of the pandemic remains fluid. The recent resurgence of COVID-19 cases in various parts of the world, including some of our key markets inEurope , has caused the re-implementation of government restrictions, including the temporaryKontoor Brands, Inc. Q1 FY21 Form 10-Q 22
--------------------------------------------------------------------------------
closure of businesses deemed "non-essential," 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 both vaccine distribution and other macroeconomic factors. The Company anticipates, and continues to take necessary, proactive steps to accommodate, a prolonged COVID-19 operating environment. 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 and VF Outlet™ businesses. We decided to transition ourIndia business to a licensed model and are in process of implementing this change in 2021. Additionally, we performed a strategic review of the VF Outlet™ store fleet. Based on our assessment of store productivity, we chose to exit approximately 40 of our VF Outlet™ stores, convert all remaining locations to Lee Wrangler outlets and clearance centers and discontinue 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") implementation and information technology infrastructure build-out that are continuing into 2021. As expected, due to the timing of the Company's North American ERP implementation, many customers elected to shift the timing of certain shipments from the second quarter to the first quarter of 2021. FIRST QUARTER OF FISCAL 2021 SUMMARY •Net revenues increased 29% to$651.8 million compared to the three months endedMarch 2020 , driven by growth in all channels as discussed below. •U.S. Wholesale revenues increased 37% compared to the three months endedMarch 2020 , due to an expected shift in the timing of shipments from the second quarter to the first quarter of 2021 as discussed above, growth in ourU.S. digital wholesale business, new business growth and the less significant impact of COVID-19 compared with the prior year period.U.S. Wholesale revenues represented 70% of total revenues in the current period. •Non-U.S. Wholesale revenues increased 30% compared to the three months endedMarch 2020 , primarily due to the less significant impact of COVID-19 compared with the prior year period and growth in the EMEA digital wholesale business. These increases were partially offset by the transition of ourIndia business to a licensed model. Non-U.S. wholesale revenues included an 8% favorable impact from foreign currency and represented 21% of total revenues in the current period. •Direct-to-Consumer revenues increased 12% on a global basis compared to the three months endedMarch 2020 , primarily due to growth in the digital business through our owned e-commerce sites, partially offset by lower retail sales in the current year resulting from the Company's decision to exit certain VF Outlet™ stores in the fourth quarter of 2020. Direct-to-Consumer revenues included a 3% favorable impact from foreign currency and represented 9% of total revenues in the current period. •Gross margin increased 830 basis points to 46.1% compared to the three months endedMarch 2020 , primarily driven by favorable customer, product and channel mix, lower provisions for inventory losses in the current year, and benefits from product cost. •Selling, general & administrative expenses as a percentage of net revenues decreased to 31.8% compared to 37.8% for the 2020 period, primarily due to benefits from the Company's decision to exit certain underperforming VF Outlet™ stores in the fourth quarter of 2020, leverage of fixed costs on higher revenues, disciplined cost control and lower bad debt expense in the current year. These benefits were partially offset by increased costs related to the Company's global ERP implementation and information technology infrastructure build-out and increases in demand creation spending. •Net income was$64.5 million compared to a net loss of$2.7 million for the three months endedMarch 2020 , primarily due to the business results discussed above.
© Edgar Online, source