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 and
footwear 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 first 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 March 2021, December 2020 and March 2020
correspond to the fiscal periods ended April 3, 2021, January 2, 2021 and
March 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 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
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 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 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 in Europe, has caused the re-implementation of government
restrictions, including the temporary

                                       Kontoor Brands, Inc. Q1 FY21 Form 10-Q 22

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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 our India and VF
Outlet™ businesses. We decided to transition our India 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 ended
March 2020, driven by growth in all channels as discussed below.
•U.S. Wholesale revenues increased 37% compared to the three months ended March
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 our U.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 ended
March 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 our India 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 ended March 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
ended March 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 ended March 2020, primarily due to the business results discussed
above.

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