Kontoor Brands Reports Third Quarter 2020 Results
Q3 Reported Revenue of $583 million declined 9 percent compared with the prior year
Q3 Reported EPS of $1.05; Adjusted EPS of $1.33 increased 40 percent compared with the prior year
Q3 Reported Gross Margin increased 410 bps to 44.2 percent compared with the prior year; Adjusted Gross Margin increased 240 bps to 43.3 percent
Strong cash generation supported additional discretionary debt repayments totaling $100 million in the third quarter, achieving lowest net debt level since spin-off in May 2019
The Company’s Board of Directors declared a quarterly cash dividend of $0.40 per share payable in December 2020
FY'20 Adjusted EPS is expected to be in the range of $2.25 to $2.35
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 third quarter ended September 26, 2020.
“Our strategic actions delivered strong results in the quarter and are enhancing the Kontoor operating model focused on more profitable and sustainable long-term growth,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “Investments in our brands, people and partnerships drove significant sequential top line improvement, while restructuring, quality-of-sales initiatives and accretive mix shifts supported solid gross margin increases. And, importantly, our robust cash flow generation allowed us to continue to aggressively pay down debt, while also providing the opportunity to reinstate a quarterly dividend in the fourth quarter of 2020, a key tenet of our total shareholder return model.”
“Our accomplishments during the third quarter are a direct reflection of our colleagues’ incredible efforts, and I want to thank them for their tremendous contributions throughout these dynamic times,” 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.
Third Quarter 2020 Income Statement Review
Revenue decreased to $583 million, a 9 percent year-over-year decline on a reported and constant currency basis.
Revenue declines during the quarter were primarily driven by COVID-19 impacts, offset in part by increases in Digital, new business development wins, and a $33 million shift in the timing of U.S. Wrangler® shipments from the second quarter to the third quarter of 2020.
During the third quarter, U.S. revenue was $455 million, flat year-over-year on a reported basis. The impacts of COVID-19 were in part offset by growth in Digital, with U.S. digital wholesale increasing 68 percent and U.S. owned.com increasing 43 percent, as well as new business development wins and the previously mentioned timing shift.
International revenue was $128 million, down 30 percent on a reported basis and down 31 percent in constant currency, primarily driven by COVID-19 impacts. Despite the decline, both the Europe and China businesses experienced a gradual recovery during the quarter, with continued sequential revenue improvements in both regions expected in the fourth quarter.
Wrangler® brand global revenue decreased to $347 million, a 6 percent decline on a reported and constant currency basis. Wrangler® U.S. revenue increased 2 percent, driven by increases in Digital, strength in the Western business and the previously mentioned timing shift into the third quarter.
Lee® brand global revenue decreased to $214 million, down 8 percent on a reported and constant currency basis, driven primarily by COVID-19 impacts. Lee® U.S. revenue increased 10 percent, a result of new business development wins and increases in Digital during the quarter.
Other global revenue declined 43 percent to $22 million on a reported and constant currency basis driven by COVID-19 impacts to the Company’s VF Outlet™ stores, as well as planned reductions in the sale of goods manufactured for third parties and the Rock & Republic® brand.
Gross margin increased 410 basis points to 44.2 percent of revenue on a reported basis. On an adjusted basis, gross margin increased 240 basis points to 43.3 percent of revenue. Benefits of product costs as well as favorable channel and product mix were the primary drivers of the increase in adjusted gross margin.
Selling, General & Administrative (SG&A) expenses were $175 million on a reported basis. On an adjusted basis, SG&A was $150 million, or 25.6 percent of revenue, down 230 basis points year-over-year. Adjustments primarily represent costs associated with the global ERP implementation and information technology infrastructure build-out. Tight expense control and restructuring benefits helped offset fixed cost de-leverage due to revenue declines.
Operating income on a reported basis was $83 million, increasing 167 percent compared with the prior year. On an adjusted basis, operating income was $103 million, increasing 24 percent from $83 million in the same period in 2019. Adjusted operating margin increased 460 basis points to 17.6 percent of revenue, reflecting the benefits of gross margin improvements and tight expense control, which more than offset the significant impacts of COVID-19.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $91 million. Adjusted EBITDA was $109 million, increasing 22 percent from $90 million in the prior year. EBITDA margin on a reported basis increased to 15.7 percent of revenue. Adjusted EBITDA margin increased 470 basis points to 18.8 percent of revenue.
Earnings per share was $1.05 on a reported basis compared with $0.25 in the prior year. Adjusted earnings per share was $1.33 compared with $0.95 in the prior year.
September 26, 2020, Balance Sheet and Liquidity Review
The Company ended the third quarter of 2020 with $285 million in cash and equivalents, and approximately $1.0 billion in long-term debt. At the end of the third quarter of 2020, the Company achieved its lowest net debt level and strongest liquidity position since becoming an independent, publicly traded company in May 2019.
Due to the Company's strong cash generation, during the third quarter of 2020, the Company made additional discretionary repayments on its revolver totaling $100 million. As of September 2020, the Company had $125 million of outstanding borrowings under the Revolving Credit Facility and $368 million available for borrowing against this facility. The Company was in compliance with the terms of its amended credit facility at the end of the third quarter. Strong cash generation is expected to support continued aggressive debt paydown during the fourth quarter of 2020.
Inventory at the end of the third quarter of 2020 was $432 million, down $113 million or 21 percent compared to the prior-year period.
Quarterly Dividend Reinstated and Declared
Given the Company’s continued improving operational performance and strong cash flow generation, the Company today announced its Board of Directors has declared a regular quarterly cash dividend of $0.40 per share of its common stock. The cash dividend will be payable on December 18, 2020, to shareholders of record at the close of business on December 10, 2020.
While the impacts from the COVID-19 pandemic and macroeconomic factors remain uncertain, the Company is providing full-year 2020 Adjusted EPS guidance and additional perspective on its fourth quarter outlook, including the following:
The Company continues to take the necessary, proactive steps to accommodate a prolonged COVID-19 operating environment.
Revenue in the fourth quarter of 2020 is expected to show continued sequential improvement from third quarter 2020 results, with revenue anticipated to be flat to down modestly.
Adjusted gross margin in the fourth quarter of 2020 is anticipated to be above the 40.9 percent achieved in the prior year, reflecting continued benefits from ongoing restructuring and quality-of-sales initiatives, as well as higher anticipated growth in more accretive channels such as Digital and improving mix within international.
Fourth quarter adjusted SG&A is expected to increase year-over-year, driven by strategic decisions to amplify investments in demand creation and DTC in support of both the fourth quarter and long-term revenue.
Full-year 2020 Adjusted EPS is anticipated to be in the range of $2.25 to $2.35.
Strong cash generation is expected to support continued aggressive debt paydown, which is anticipated to be at least $100 million during the fourth quarter.
About Kontoor Brands
Kontoor Brands, Inc. (NYSE: KTB) is a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands: Wrangler® and Lee®. Kontoor designs, manufactures and distributes superior high-quality products that look good and fit right, giving people around the world the freedom and confidence to express themselves. Kontoor Brands is a purpose-led organization focused on leveraging its global platform, strategic sourcing model and best-in-class supply chain to drive brand growth and deliver long-term value for its stakeholders. For more information about Kontoor Brands, please visit www.KontoorBrands.com.
Author: Kontoor Brands