Kontoor Brands Reports Third Quarter 2021 Results
Q3 Reported EPS of $1.07; Adjusted EPS of $1.28
Q3 Reported Revenue of $652 million increased 12 percent compared to the prior year
Q3 Reported Gross Margin of 44.4 percent increased 20 basis points compared to the prior year; Q3 Adjusted Gross Margin of 44.1 percent increased 80 basis points compared to the prior year
Fiscal 2021 guidance raised; Adjusted EPS is now expected to be $4.15 to $4.20, up from the prior range of $3.90 to $4.00
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 October 2, 2021.
“Kontoor is uniquely positioned to win in the marketplace, as evidenced by another quarter of broad-based strength across segments, channels and regions. And we expect our momentum to continue building, as reflected in our raised fiscal year guidance. Our strategic investments in key TSR-bolstering enablers such as digital, demand creation and people should fuel our accelerating fundamentals,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands.
“Additionally, our balanced capital allocation strategy affords us enhanced optionality. We are continuing to invest in pillars of growth, while also delivering superior cash returns to our stakeholders. This is highlighted in the recently announced dividend increase and initial share repurchases during the third quarter,” 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.
Third Quarter 2021 Income Statement Review
Revenue increased to $652 million, a 12 percent increase on a reported basis and 11 percent in constant currency over the same period in the prior year.
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 positive trends in international markets. Gains in the quarter were somewhat offset by the impacts of the previously announced strategic actions related to VF Outlet store closures and the discontinuation of the sale of third-party branded merchandise in all stores. Compared to revenue in the third quarter of 2019, reported revenue increased 2 percent, or up 11 percent excluding the strategic actions.
U.S. revenue was $493 million, increasing 8 percent over the same period in the prior year driven by growth in U.S. wholesale, including new business development wins and strength in Digital, with own.com increasing 52 percent and digital wholesale increasing 90 percent. Compared to revenue in the third quarter of 2019, own.com and digital wholesale increased 118 percent and 237 percent, respectively.
International revenue was $159 million, a 25 percent increase over the same period in the prior year on a reported basis and 20 percent in constant currency. China increased 22 percent over the same period in the prior year on a reported basis and 14 percent in constant currency. The European business increased 19 percent over the same period in the prior year on both a reported and constant currency basis.
Wrangler brand global revenue increased to $422 million, a 22 percent increase over the same period in the prior year on a reported basis and 21 percent in constant currency. Wrangler U.S. revenue increased 20 percent compared to the same period last year, driven by increases in Digital, Western and Outdoor.
Lee brand global revenue increased to $228 million, a 6 percent increase over the same period in the prior year on a reported basis and 4 percent in constant currency. In the U.S., strength from improving sell through of new programs and increases in Digital was more than offset by the previously mentioned strategic actions, demand fulfillment challenges, and comparisons to a significant new distribution gain in the third quarter of 2020. Lee U.S. revenue decreased 4 percent compared to the same quarter last year, but is expected to return to strong growth in the fourth quarter.
Other global revenue declined to $3 million driven by impacts from the strategic actions related to VF Outlet operations.
Gross margin increased 20 basis points to 44.4 percent of revenue, compared to the same period in the prior year. Adjusted gross margin increased 80 basis points to 44.1 percent of revenue, compared to the same period in the prior year. Favorable channel, customer and product mix, as well as business model changes, were the primary drivers of gross margin gains in the quarter. Higher transitory air freight expenses in support of strong demand negatively impacted gross margin by 180 basis points in the quarter. Compared to the third quarter of 2019, adjusted gross margin increased 320 basis points.
Selling, General & Administrative (SG&A) expenses were $204 million on a reported basis. Adjusted SG&A was $186 million, or 28.5 percent of revenue, up 290 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. Higher demand creation, digital investments and compensation costs more than offset better fixed cost leverage on improving revenue and restructuring benefits. Prior year comparisons were affected by reduced spending in 2020 in light of COVID uncertainty.
Operating income on a reported basis was $86 million. Adjusted operating income was $102 million, down 1 percent compared to the same period in the prior year. Adjusted operating margin decreased 200 basis points to 15.6 percent of revenue, driven by normalizing of COVID-related expense, as well as higher transitory air freight expenses and amplified investments in demand creation to drive future accelerating revenue growth. These investments more than offset structural gross margin improvements and fixed cost leverage on improving revenue.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $94 million. Adjusted EBITDA was $111 million, increasing 1 percent compared to the same period in the prior year. Adjusted EBITDA margin decreased 190 basis points to 16.9 percent of revenue.
Earnings per share was $1.07 on a reported basis compared to $1.05 in the same period in the prior year. Adjusted earnings per share was $1.28 compared to $1.33 in the same period in the prior year.
October 2, 2021, Balance Sheet and Liquidity Review
The Company ended the third quarter of 2021 with $215 million in cash and equivalents, and approximately $0.8 billion in long-term debt.
As of October 2, 2021, the Company had no outstanding borrowings under the Revolving Credit Facility and $488 million available for borrowing against this facility.
As previously announced, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.46 per share, an increase of $0.06 or 15 percent. Consistent with a commitment to return cash to shareholders, the Company repurchased $10 million in common stock during the third quarter. When combined with the strong dividend, the Company has returned a total of $79 million to shareholders fiscal year-to-date. The Company plans on continuing to use its share repurchase program to offset dilution, while also opportunistically buying shares as market conditions warrant.
Inventory at the end of the third quarter of 2021 was $409 million, down 5 percent compared to the prior-year period. Excluding balances related to VF Outlet and India, inventory at the end of the third quarter of 2021 increased 4 percent compared to the prior-year period.
The Company is raising its fiscal 2021 Outlook. While the impacts from the COVID-19 pandemic and macroeconomic factors remain uncertain, the Company is updating its fiscal 2021 guidance as follows:
Revenue is now expected to increase at a high-teens percentage over 2020, to $2.47 billion to $2.48 billion, as compared to a mid-teens percentage in the prior guidance, including a mid-single digit adverse impact from the VF Outlet actions and India business model change.
Adjusted gross margin is now expected to increase at the high end of the prior guidance range of 44.5 percent to 45.0 percent of revenue, compared to 41.2 percent achieved in 2020. The increase is expected to be driven by growth in more accretive channels such as Digital and International, somewhat tempered by higher transitory air freight expenses in support of strong demand.
SG&A investments will continue to be made in brands and capabilities. Due to the strengthening revenue and gross margin outlook, during the fourth quarter, the Company expects to make incremental SG&A investments in demand creation and Digital to support expected accelerating revenue growth in 2022.
Adjusted EPS is now expected to be in the range of $4.15 to $4.20, as compared to $3.90 to $4.00 in the prior guidance, driven by operational performance. This EPS guidance includes a $0.20 impact from the incremental demand creation and Digital investments in the fourth quarter referenced above, somewhat offset by lower interest expense, a lower expected effective tax rate and year-to-date share repurchases, which in aggregate should benefit EPS by $0.19.
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.
For 2021, an effective tax rate of approximately 21 percent is expected, compared to 22 percent in the prior guidance. Interest expense is expected to be approximately $35 million to $40 million, compared to approximately $40 million to $45 million in the prior guidance.
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