Kontoor Brands Reports First Quarter 2021
Q1 Reported EPS of $1.09; Adjusted EPS of $1.43
Q1 Reported Revenue of $652 million increased 29 percent compared to the prior year
Q1 Reported Gross Margin increased 830 basis points to 46.1 percent compared to the prior year
Strong cash generation supported discretionary debt repayments totaling $100 million in the first quarter
Fiscal 2021 guidance raised; Adjusted EPS is now expected to be $3.70 to $3.80, up from the prior range of $3.50 to $3.60
GREENSBORO, N.C.--(BUSINESS WIRE)-- Kontoor Brands, Inc. (NYSE: KTB), a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, today reported financial results for its first quarter ended April 3, 2021.
“We started 2021 with solid momentum, as our first quarter results came in above our expectations. The strong performance in the quarter was broad-based, as evidenced by improving growth across regions, channels and categories. We continue to execute the strategic playbook we’ve communicated, as structural margin gains support focused investments in demand creation, infrastructure and technologies. These critical investments are driving accelerating fundamentals that are expected to unlock further value for all KTB stakeholders,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands.
“As we transition into our next horizon, the stage is set for us to pivot to growth. I want to thank our teams around the world for their incredible efforts over the last few years to position Kontoor for future success. We are in the very early days of our journey and remain determined to deliver on the tremendous opportunities ahead. We look forward to sharing more details on our strategic vision at our upcoming Investor Day on May 24, 2021,” added Baxter.
This release refers to “adjusted” amounts and “constant currency” amounts, which are further described in the Non-GAAP Financial Measures section below. All per share amounts are presented on a diluted basis.
In addition, due to the significant impact of COVID-19 on prior year figures, this release will also include periodic comparisons to 2019 for additional context.
First Quarter 2021 Income Statement Review
Revenue increased to $652 million, a 29 percent increase on a reported basis and 27 percent in constant currency over the same period in the prior year. Compared to adjusted revenue in the first quarter of 2019, reported revenue increased 3 percent.
Revenue increases compared to the prior year were primarily driven by strength in Digital, including own.com and digital wholesale, as well as improved performance across the U.S. wholesale business and accelerating trends in international markets. As expected and discussed on the fourth quarter 2020 earnings call, first quarter revenue benefited from a shift in the timing of shipments from the second quarter to the first quarter ahead of the Company’s North American ERP implementation. Gains in the quarter were somewhat offset by the previously announced strategic actions related to VF OutletTM store closures and the transition to a new licensed business model in India. Additionally, COVID-19 continued to negatively impact the Company’s first quarter 2021 results in select markets and channels.
U.S. revenue was $488 million, increasing 29 percent over the same period in the prior year driven by growth in U.S. wholesale, new business development wins and strength in Digital. Compared to adjusted revenue in the first quarter of 2019, reported revenue increased 11 percent, with own.com increasing 70 percent and digital wholesale increasing 132 percent.
International revenue was $163 million, a 30 percent increase over the same period in the prior year on a reported basis and 21 percent in constant currency. Improvement was driven by the China business that increased 109 percent over the same period in the prior year in constant currency and increased 20 percent in constant currency over the same period in 2019. Despite ongoing headwinds from COVID-19, the Europe business, led by Digital, increased 4 percent over the same period in the prior year on a reported basis and was down 5 percent in constant currency. Compared to adjusted revenue in the first quarter of 2019, International revenue decreased 14 percent driven primarily from impacts associated with the business model change in India.
Wrangler brand global revenue increased to $399 million, a 31 percent increase over the same period in the prior year on a reported basis and 30 percent in constant currency. Compared to adjusted revenue in the first quarter of 2019, Wrangler brand global reported revenue increased 10 percent. Wrangler U.S. revenue increased 38 percent compared to the same period last year, driven by increases in Digital and strength in the core U.S. wholesale and Western businesses. Compared to revenue in the first quarter of 2019, Wrangler U.S. reported revenue increased 18 percent.
Lee brand global revenue increased to $250 million, a 37 percent increase over the same period in the prior year on a reported basis and 33 percent in constant currency. Compared to adjusted revenue in the first quarter of 2019, Lee brand global reported revenue increased 4 percent. Lee U.S. revenue increased 28 percent compared to the same quarter last year with strength from improving sell through of new programs and increases in Digital. Compared to revenue in the first quarter of 2019, Lee U.S. reported revenue increased 16 percent.
Other global revenue declined 85 percent compared to the same period in the prior year to $3 million driven by impacts from the strategic actions related to VF Outlet stores, as well as planned reductions in Rock & Republic®.
Gross margin increased 830 basis points to 46.1 percent of revenue, compared to gross margin during the same period in the prior year, or 820 basis points on an adjusted basis. Favorable channel, customer and product mix, as well as quality-of-sales initiatives, were the primary drivers of gross margin gains in the quarter. In addition, the current period benefited from product cost enhancements, as well as lower inventory provisions and higher production volumes than the prior year. Compared to the first quarter of 2019, gross margin increased 800 basis points or 500 basis points on an adjusted basis.
Selling, General & Administrative (SG&A) expenses were $207 million on a reported basis. Adjusted SG&A was $181 million, or 27.8 percent of revenue, down 580 basis points compared to the same period in the prior year. Adjustments primarily relate to costs associated with the global ERP implementation and information technology infrastructure build-out. Better fixed cost leverage on improving revenues, tight expense control and restructuring benefits helped offset higher demand creation investments in support of 2021 revenue.
Operating income on a reported basis was $93 million. Adjusted operating income was $119 million, increasing 437 percent compared to the same period in the prior year. Adjusted operating margin increased 1,390 basis points to 18.3 percent of revenue, reflecting the benefits of gross margin improvements, fixed cost leverage on better revenue and tight expense control. Adjusted operating margin increased 750 basis points compared to the first quarter of 2019.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $102 million. Adjusted EBITDA was $127 million, increasing 325 percent compared to the same period in the prior year. Adjusted EBITDA margin increased 1,360 basis points to 19.5 percent of revenue. Adjusted EBITDA margin increased 750 basis points compared to the first quarter of 2019.
Earnings per share was $1.09 on a reported basis compared to a loss per share of $(0.05) in the same period in the prior year and compared to earnings per share of $0.27 in the same period in 2019. Adjusted earnings per share was $1.43 compared to $0.27 in the same period in the prior year and compared to $0.96 in the same period in 2019.
April 3, 2021, Balance Sheet and Liquidity Review
The Company ended the first quarter of 2021 with $230 million in cash and equivalents, and approximately $0.8 billion in long-term debt.
Due to strong cash generation during the first quarter of 2021, the Company made additional discretionary debt payments totaling $100 million. As of April 3, 2021, the Company had no outstanding borrowings under the Revolving Credit Facility and $493 million available for borrowing against this facility.
As previously announced, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.40 per share payable on June 18, 2021, to shareholders of record at the close of business on June 8, 2021.
Inventory at the end of the first quarter of 2021 was $350 million, down $139 million or 28 percent compared to the prior-year period.
2021 Fiscal Outlook
The Company is raising its 2021 Fiscal Outlook. As previously highlighted, the ERP implementation will have timing impacts on quarterly revenue and profitability, but should have no impact on full-year 2021. While the impacts from the COVID-19 pandemic and macroeconomic factors remain uncertain, the Company is updating its fiscal 2021 guidance, including the following:
Revenue is now expected to increase in the low-teens range over 2020, as compared to a low-double digit range in the prior guidance, including a mid-single digit impact from the VF Outlet actions and India business model change.
Gross Margin is now expected to increase by 230 to 270 basis points, as compared to 150 to 200 basis points in the prior guidance, above the Adjusted Gross Margin of 41.2 percent achieved in 2020. The increase reflects continued benefits from ongoing restructuring and quality-of-sales initiatives, as well as higher anticipated growth in more accretive channels such as Digital and International.
SG&A investments will continue to be made in brands and capabilities. Due to the strengthening revenue and gross margin outlook, the Company expects to amplify SG&A investments in demand creation, Digital and International expansion. These increases will be partially mitigated by ongoing tight expense controls and sustained, structural post-pandemic cost containment initiatives.
Adjusted EPS is now expected to be in the range of $3.70 to $3.80 as compared to $3.50 to $3.60 in the prior guidance.
Capital Expenditures are expected to be in the range of $40 million to $50 million, including $25 million to $30 million associated with the implementation of the Company’s new global ERP system.
An effective tax rate of approximately 22 percent is expected for 2021. Interest expense is expected to be approximately $40 million to $45 million in 2021.
The Company will host a virtual Investor Day on Monday, May 24, 2021.