Kontoor Brands : Conference Call Transcript Q4 & FY 2021 Year End Results

Kontoor Brands' Q4 and 2021 Year End Earnings Conference Call Transcript

March 1, 2022

Kontoor Brands Corporate Participants:

Eric Tracy - Senior Director, Investor Relations

Scott Baxter - President, Chief Executive Officer and Chair of the Board

Tom Waldron - Global Brand President of Wrangler

Chris Waldeck - Global Brand President of Lee

Rustin Welton- EVP, Chief Financial Officer

Operator

Greetings, and welcome to Kontoor Brands' Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press "*0" on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Tracy, vice president of Corporate Finance and Investor relations. Thank you. And over to you, sir.

Eric Tracy

Thank you, Operator, and welcome to Kontoor Brands' fourth quarter and fiscal 2021 earnings conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports.

Amounts referred to on today's call will often be on an adjusted-dollar basis, which we clearly defined in the news release that was issued earlier this morning. Adjustments during the fourth quarter and fiscal years 2021 and 2020 primarily represent costs associated with a company's global ERP implementation and information technology infrastructure build-out. Adjustments during the fourth quarter of fiscal year of 2019 primarily represent restructuring and separation costs, a non-cash impairment charge related to a Rock & Republic, trademark, and other adjustments.

Reconciliation of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website at kontoorbrands.com. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Unless otherwise stated, growth rates are in constant currency compared to the fourth quarter of 2020. Also, given the impacts of COVID-19 had on our prior year results, we will

provide select references to the same period in 2019 for additional context where appropriate.

Joining me on today's call are Kontoor Brands' president, chief executive officer and chair of the board, Scott Baxter and chief financial officer, Rustin Welton. In addition, we will also be joined by Tom Waldron, global brand president of Wrangler, and Chris Waldeck, global brand president of Lee. Following our prepared remarks, we'll open the call for questions. We anticipate this call will last about an hour.

Scott?

Scott Baxter

Thanks, Eric. And thank you all for joining us today. As Eric mentioned, our global brand presidents, Tom Waldron and Chris Waldeck, will be joining us for this year in review. We believe these urine polls provide a great opportunity to have them share insights from the past year, as well as go-forward strategies for each of their respective brands. You'll hear more from them in a bit.

Let me first provide some thoughts at a Kontoor level, as I'm pleased to share our strong results for the fourth quarter and full year. And I'm even more excited to discuss the building momentum of our brands and how our Horizon Two strategy begins to take hold, which gives me great confidence in what lies ahead.

Our solid fundamental performance during 2021 was driven by the incredible spirit, perseverance, and effort of our teams around the world. I want to thank each and every one of our Kontoor colleagues whose resilience and dedication to excellence allowed us to not only deliver near-term results, despite the ongoing macroeconomic challenges, but also set the foundation for a brighter future ahead. Kontoor is not immune to the obstacles facing companies in individuals around the world. But I wouldn't want to face these tests with any other team. At Kontoor we truly do win together.

I said this on our last call, and I have even greater confidence today. Kontoor and our Wrangler and Lee brands are now uniquely positioned to win in the marketplace, to drive more sustainable and profitable long-term growth, and to create future value for all of our stakeholders. What gives me this confidence? First, the proof points from our fourth quarter and full-year '21 performance. If you look at our results relative to our initial '21 guidance, we delivered significant upside for the year on all fundamental metrics. Revenue of $2.48 billion represented roughly $150 million or seven points of upside to our original guide, even while supply chain challenges weighed on the top line. Gross Margin of 44.6% came in almost 200 basis points ahead of our original guidance, despite incurring higher transitory freight costs, as we taste strong demand. As a result, our EPS of $4.28 for fiscal '21 was 73 cents, or 21% above our initial guide.

And what I love is that this outperformance was really broad-based and accelerated from the first half to the second half of the year compared to 2019. Total Kontoor reported revenue increased 6% for the full year and 13% in Q4, excluding the impacts of our proactive strategic actions taken with our VFO in India businesses late last year. Investments in innovation, demand creation, and elevated design helps to drive significant share gains in both the Wrangler and Lee brands versus 2019 with increasing AURs domestically. This is a tremendous sign that our strategies to enhance our core US wholesale business are working, allowing us to elevate brand equity, mixing into higher price points, and having greater permission to take incremental price.

To augment this core, we continue to extend our reach into new creative channels of distribution, including premium specialty, outdoor, sporting goods, and the rapid evolution of our digital platform. Compared to 2019, our digital wholesale business grew 85% and our own dot com grew 74%. Here again too, AUR gains, our powerful story of increasing brand health, experiencing low double-digit growth over '19 in US-owned dot com. At year-end, our own dot com reached 6% penetration, nearly doubling from just two years ago and is well on track to hit our investor day target of 10% penetration.

The evolution of our digital ecosystem is a direct function of the incredible talent we've added to the organization and enhanced demand creation for our brands. Further diversifying our product portfolio, new category expansion continues to play a huge role in catalyzing top-line growth. Again, it's really important to understand the breadth of category strength beyond our core across outdoor, with our performance ATG line, work, tops and tees, as well as female, and western, just an incredible range of product momentum. With respect to our western business, Tom will provide more detailed insights. But we believe this is more than just a trend. Similar to our view on denim not just being a cycle, but part of a larger casualization movement, we see our western business not just participating in, but driving a movement towards freedom of expression, authenticity, and connection to the outdoors.

A critical piece of our catalyzing growth playbook, extensions into new categories is well ahead of schedule in delivering outsized, incremental business for Kontoor. And while we love the strong US performance we are seeing, geographic expansion propels new diversified in a creative growth as well. Europe saw further wholesale improvement in the quarter as countries opened up, which supported the gains from our evolving digital platform in the region. Compared to 2019, Europe was up 12% for the quarter. In China, despite the much-discussed uneven market conditions, we once again experienced nice growth in the region with Q4 reported revenue up 25% compared to 2019, or 13% in constant currency. We will continue to monitor macro complexities going forward, seeking to optimize productivity in the region near term while positioning both brands to capture the significant market opportunities long term.

Before I turn it over to Tom and Chris, let me close with this, Kontoor is increasingly well positioned to win. This is demonstrated by our fourth quarter in 2021 results and even more buy or building momentum, as evidenced by our fiscal '22 guidance in which we expect high, single-digit,top-line growth. Rustin will provide further details, but this guidance assumes prolonged macro headwinds continue into '22. Said another way, our solid outlook would have been even stronger if not for expected ongoing transitory impacts from demand outstripping supply in inflationary pressures.

These accelerating fundamentals include '22 revenue of around $2.7 billion, which as a reminder was our fiscal year '23 target established an investor day so we expect to achieve this goal of full a year ahead of our initial plan, even as we assume continued macro challenges. We are in fact catalyzing growth. And we're doing this by investing in critical growth enablers, including demand creation, ESG, innovation, and an increasingly purpose led, consumer-centric organizational mindset, all of which are incrementally different from how these brands were previously run.

Importantly, this future growth should be more profitable, driven by enhanced AURs in mixed shifts to creative areas such as digital and international. This improving operating model when combined with our increasing cash flow optionality should allow us to continue to deliver superior returns to all of our stakeholders.

Before I turn it over to Tom, on behalf of all of us at Kontoor, we want to acknowledge the deeply saddening events that have unfolded in Ukraine over the last week and sincerely hope that you and your families around the globe are safe and healthy.

Tom?

Tom Waldron

Thanks, Scott. It's great to have the opportunity to speak with you all today. I've got a lot to cover, so let's get to it.

This time last year, I stated the Wrangler brand was positioned better than it ever had been. And that was true. But it's even more accurate today. As we begin our 75th- anniversary year, demand for the brand has never been stronger. It would be easy to assume that recent strength has been driven by fiscal stimulus supporting consumer spending. And no doubt the health of the US consumer has contributed. But that would significantly underestimate what is new and incremental to our business. And it would certainly underestimate the breadth of our product portfolio. Whether compared to five years ago, or one year ago, the evolution of our brand has been tremendous. And we are just beginning stages of harnessing strategic investment to catalyze future growth.

As evidenced that our investments are yielding superior returns, let me take you through some highlights of our fourth quarter and full year. For fiscal '21, Wrangler global revenue increased 4% first 2019. But excluding our strategic actions, we even saw stronger up 8% and our business only accelerated in the fourth quarter versus the year- to-date trend with global revenues up 10% versus '19, excluding our strategic actions. In Q4, PLS outpaced shipments as well, in North America across planned accounts worth approximately 60% of our shipments to US increased 11% versus '19. Further demonstrating strength in our core US wholesale business during '21, the Wrangler brand in men's bottoms drove over 100 points of share gains compared to 2019.

Augmenting our core denims bottoms' business, we are seeing broad strength with category, channel, and geographic growth. First within category expansion, Wrangler is rapidly evolving the product assortment becoming much more of a lifestyle brand. Our ATG outdoor line using highly-differentiated performance innovation diversifies our portfolio, both from a product and distribution standpoint. Compared to '19 revenue in our outdoor business and US increased 45% during '21. A great proof point of our building momentum in the category, our recent ATG test in Academies Sports was extremely successful, affording us additional expansion in '22.

ATG is driving incremental penetration of the sporting goods and outdoor specialty channels, allowing us to extend the Wrangler brand to new consumers domestically and internationally. In fact, globally, ATG is now selling through nearly 900 retailers within just three years since the line launched. Within work, we are seeing great sell-through with our recently launched programs at a key US retail partner, and we expect to build with new styles and expanded to more doors during 2022.

Looking at our female category, elevated design and marketing continues to have tremendous halo effect that cascades across the brand, but it's also scaling with long- term opportunities for much greater volume. In fiscal '21, our female business in the US grew 84% over last year. As evidence of this recent success, female achieved the number one style on wrangler.com for the fourth quarter, the first time in history female represented the top spot. This is a great reflection on how the team is elevating design and enhancing demand creation.

Within Western, let me echo what Scott said earlier, we truly believe what we are seeing is much bigger than category trend but a larger movement centered on authentic freedom of expression and adventurous spirit. As a premier Western apparel brand, we are unequivocally leading this movement. During '21, our US Western business grew 30% Compared to 2019 and this momentum has continued with our strong fall '22 order book.