Kontoor Brands Inc

Previous wording

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Cautionary Statement On Forward-Looking Statements” included later in Part I, Item 2 of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" in our 2023 Annual Report on Form 10-K.

Current wording

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in “Cautionary Statement On Forward-Looking Statements” included later in Part I, Item 2 of this Quarterly Report on Form 10-Q, in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" in our 2023 Annual Report on Form 10-K.

Previous wording

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 second quarter of the Company's fiscal year ending December 28, 2024 ("fiscal 2024"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended June 2024, December 2023 and June 2023 correspond to the fiscal periods ended June 29, 2024, December 30, 2023 and July 1, 2023, respectively.

Current wording

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 third quarter of the Company's fiscal year ending December 28, 2024 ("fiscal 2024"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended September 2024, December 2023 and September 2023 correspond to the fiscal periods ended September 28, 2024, December 30, 2023 and September 30, 2023, respectively.

Previous wording

Global macroeconomic conditions that continued to impact the Company include elevated interest rates, inflation, recessionary concerns, fluctuating foreign currency exchange rates, supply chain issues and inconsistent consumer demand, particularly in China. These factors continue to contribute to uncertain global economic conditions and consumer spending patterns, which are impacting retailers' and the Company's operations. Additionally, the conflicts in Ukraine and the Middle East are causing disruption in the surrounding areas and greater uncertainty in the global economy. Inflationary pressures have moderated in recent quarters, and although these pressures continue to impact us, current period results reflect continued favorability from lower product costs compared to the second quarter of 2023.

Current wording

Global macroeconomic conditions that continued to impact the Company include ongoing elevated interest rates, moderating inflation, fluctuating foreign currency exchange rates, supply chain issues and inconsistent consumer demand. These factors continue to contribute to uncertain global economic conditions and consumer spending patterns, which are impacting retailers' and the Company's operations. Additionally, the conflicts in Ukraine and the Middle East are causing disruption in the surrounding areas and greater uncertainty in the global economy. Inflationary pressures have moderated in recent quarters, and although these pressures continue to impact us, current period results reflect continued favorability from lower product costs compared to the third quarter of 2023.

Previous wording

The macroeconomic factors discussed above, primarily elevated interest rates, inflation and recessionary concerns, continued to impact consumer spending patterns leading to retailer actions to proactively manage inventory levels, which impacted our results during the six months ended June 2024.

Current wording

The macroeconomic factors discussed above, primarily interest rates and inflation, contributed to retailer actions to manage inventory levels, which impacted our results during the nine months ended September 2024.

Previous wording

Recent disruptions to key trade routes, such as the Red Sea and Panama Canal, affected our global supply chain during the second quarter of 2024 but did not have a significant impact on second quarter results. Although we continue to proactively manage our shipping carriers and routes to minimize costs and delays, these disruptions will impact freight costs during 2024.

Current wording

Ongoing disruptions to key trade routes such as the Red Sea and Panama Canal, as well as political unrest in Bangladesh, affected our global supply chain during the third quarter of 2024 but did not have a significant impact on results. Additionally, we do not anticipate that these disruptions, as well as recent port strikes on the East and Gulf Coasts of the U.S., will have a significant impact on freight costs or operations in the fourth quarter of 2024.

Previous wording

In addition, our capital allocation strategy allows us the option to (i) pay down debt, (ii) provide for a superior dividend payout, (iii) effectively manage our share repurchase authorization and (iv) act on strategic investment opportunities that may arise.

Current wording

In addition, our capital allocation strategy allows us the option to (i) invest in our business, (ii) pay down debt, (iii) provide for a superior dividend payout, (iv) effectively manage our share repurchase authorization and (v) act on strategic acquisition opportunities that may arise.

Previous wording

During the second quarter of 2024, the Company incurred total restructuring and transformation charges of $4.5 million related to actions to streamline and transfer select production within our internal manufacturing network and other business optimization activities. Certain of the restructuring and transformation costs incurred during the second quarter of 2024 related to Project Jeanius, a comprehensive end-to-end business model transformation focused on simplifying the organization and creating significant investment capacity to accelerate growth and increase profitability. We are progressing in the detailed planning phase of Project Jeanius, and have started to execute on certain initiatives. We anticipate additional costs and benefits in future periods as we execute on this multi-year initiative. Refer to Note 15 to the Company's financial statements for additional information related to restructuring charges.

Current wording

During the third quarter of 2024, the Company incurred total restructuring and transformation charges of $8.4 million, of which $2.1 million related to actions to streamline and transfer select production within our internal manufacturing network and $6.3 million related to business optimization activities associated with the detailed planning and initial execution phases of Project Jeanius. This comprehensive end-to-end business model transformation is focused on simplifying the organization and creating significant investment capacity to accelerate growth and increase profitability. We anticipate additional costs and benefits in future periods as we continue to execute on this multi-year initiative. Refer to Note 14 to the Company's financial statements in this Form 10-Q for additional information related to restructuring charges.

Previous wording

SECOND QUARTER OF FISCAL 2024 SUMMARY

Current wording

THIRD QUARTER OF FISCAL 2024 SUMMARY

Previous wording

•Direct-to-Consumer revenues increased 3% compared to the three months ended June 2023, and represented 12% of total revenues in the current period.

Current wording

•Direct-to-Consumer revenues increased 3% compared to the three months ended September 2023, and represented 11% of total revenues in the current period.

Previous wording

•Gross margin increased 410 basis points to 44.7% compared to the three months ended June 2023.

Current wording

•Gross margin increased 320 basis points to 44.7% compared to the three months ended September 2023.

Previous wording

•Selling, general and administrative expenses as a percentage of net revenues increased to 32.3% compared to 30.3% for the three months ended June 2023.

Current wording

•Selling, general and administrative expenses as a percentage of net revenues increased to 30.0% compared to 28.4% for the three months ended September 2023.

Previous wording

•Net income increased 42% to $51.8 million compared to the three months ended June 2023.

Current wording

•Net income increased 19% to $70.5 million compared to the three months ended September 2023.

Previous wording

•Diluted earnings per share was $0.92 in the second quarter, compared to $0.64 in the same period last year.

Current wording

•Diluted earnings per share was $1.26 in the third quarter, compared to $1.05 in the same period last year.

Previous wording

Additionally, the following table presents a summary of the changes in net revenues for the three and six months ended June 2024 as compared to June 2023:

Current wording

Additionally, the following table presents a summary of the changes in net revenues for the three and nine months ended September 2024 as compared to September 2023:

Previous wording

Net revenues decreased 1%, driven by an 8% decrease in Non-U.S. Wholesale revenues primarily attributable to lower sales in China and EMEA. U.S. Wholesale revenues decreased 1%, driven by retailer inventory management actions and a decrease in revenue from seasonal product, partially offset by growth in our digital wholesale business and a 2% benefit from a shift in the timing of certain shipments from the third quarter into the second quarter of 2024. Global Direct-to-Consumer revenues increased 3% with growth in e-commerce sales partially offset by declines in retail store sales, due in part to store closures.

Current wording

Net revenues increased 2%, driven by a 5% increase in U.S. Wholesale revenues primarily attributable to growth in our digital wholesale business, expanded distribution and category growth, partially offset by retailer actions to manage inventory levels. Non-U.S. Wholesale revenues decreased 7%, driven predominantly by lower sales in EMEA and Mexico. Global Direct-to-Consumer revenues increased 3% with growth in e-commerce sales partially offset by declines in retail store sales.

Previous wording

Gross margin increased 410 basis points, primarily related to 560 basis points of favorability from product costs, product mix and lower downtime from internal manufacturing. These benefits were partially offset by 130 basis points from pricing adjustments and channel mix along with a 10 basis point decrease due to restructuring and transformation charges.

Current wording

Gross margin increased 320 basis points, primarily related to 290 basis points of favorability from product costs and channel mix and 200 basis points due to the out-of-period duty expense recorded in 2023. These benefits were partially offset by 120 basis points from lower pricing, proactive inventory management actions and product mix and 30 basis points from restructuring and transformation charges.

Previous wording

Net revenues decreased 4%, driven by a 3% decrease in U.S. Wholesale revenues primarily attributable to retailer inventory management actions and a decrease in revenue from seasonal product, partially offset by growth in our digital wholesale business. Non-U.S. Wholesale revenues decreased 8%, primarily driven by lower sales in EMEA and China. Global Direct-to-Consumer revenues increased 1% with growth in e-commerce sales partially offset by declines in retail store sales.

Current wording

Net revenues decreased 2%, driven by an 8% decrease in the Non-U.S. Wholesale channel due to lower sales in EMEA and China. U.S. Wholesale revenues decreased 1%, primarily attributable to retailer actions to manage inventory levels and a decrease in revenue from seasonal product, partially offset by an increase in our digital wholesale business and category growth. Global Direct-to-Consumer revenues increased 2% with growth in e-commerce sales partially offset by declines in retail store sales.

Previous wording

Additional details on changes in net revenues for the six months ended June 2024 as compared to June 2023 are provided in the section titled “Information by Business Segment.”

Current wording

Additional details on changes in net revenues for the nine months ended September 2024 as compared to September 2023 are provided in the section titled “Information by Business Segment.”

Previous wording

Gross margin increased 310 basis points, primarily related to 440 basis points of favorability from product costs and lower downtime from internal manufacturing. These benefits were partially offset by 80 basis points from pricing adjustments and 30 basis points from restructuring and transformation charges compared to the prior period.

Current wording

Gross margin increased 320 basis points, primarily related to 380 basis points of favorability from product costs and 70 basis points due to the out-of-period duty expense recorded in 2023. These benefits were partially offset by 110 basis points from lower pricing and restructuring and transformation charges.

Previous wording

Selling, general and administrative expenses increased $18.2 million, from 29.5% to 32.1% of net revenues, driven by a $10.8 million increase in certain incentive compensation-related expenses and a $7.0 million increase in investments in our direct-to-consumer business, demand creation and information technology, partially offset by a $2.6 million decrease in distribution and freight costs.

Current wording

Selling, general and administrative expenses increased $33.4 million, from 29.1% to 31.3% of net revenues, driven by a $14.4 million increase in incentive compensation expense, $10.2 million of higher investments in our direct-to-consumer business, demand creation and information technology and a $6.6 million increase in restructuring and transformation charges, partially offset by a $2.1 million reduction in distribution and freight costs.

Previous wording

The effective income tax rate for the six months ended June 2024 was 20.0% compared to 23.4% in the 2023 period. The six months ended June 2024 included a net discrete tax benefit primarily related to stock-based compensation which decreased the effective income tax rate by 1.2%. The six months ended June 2023 included a net discrete tax expense primarily related to a remeasurement of deferred tax assets associated with a tax holiday granted from local income taxes in a foreign jurisdiction which increased the effective income tax rate by 3.9%. The effective tax rate without discrete items for the six months ended June 2024 was 21.2% compared to 19.5% in the 2023 period. This increase was primarily due to changes in our jurisdictional mix of earnings.

Current wording

The effective income tax rate for the nine months ended September 2024 was 19.5% compared to 21.4% in the 2023 period. The nine months ended September 2024 included a net discrete tax benefit primarily related to stock-based compensation which decreased the effective income tax rate by 0.7%. The nine months ended September 2023 included a net discrete tax expense primarily related to a remeasurement of deferred tax assets associated with a tax holiday granted from local income taxes in a foreign jurisdiction which increased the effective income tax rate by 2.4%. The effective tax rate without discrete items for the nine months ended September 2024 was 20.2% compared to 19.0% in the 2023 period. The increase was primarily due to changes in our jurisdictional mix of earnings.

Previous wording

The Company's two reportable segments are Wrangler® and Lee®. Refer to Note 3 to the Company's financial statements for additional information.

Current wording

The Company's two reportable segments are Wrangler® and Lee®. Refer to Note 3 to the Company's financial statements in this Form 10-Q for additional information.

Previous wording

The following tables present a summary of the changes in segment revenues and segment profit for the three and six months ended June 2024 as compared to the three and six months ended June 2023:

Current wording

The following tables present a summary of the changes in segment revenues and segment profit for the three and nine months ended September 2024 as compared to the three and nine months ended September 2023:

Previous wording

Global revenues for the Wrangler® brand decreased 1%, due to declines in the U.S. Wholesale and Non-U.S. Wholesale channels, partially offset by growth in the Direct-to-Consumer channel.

Current wording

Global revenues for the Wrangler® brand increased 4%, due to growth in the U.S. Wholesale and Direct-to-Consumer channels, partially offset by a decline in the Non-U.S. Wholesale channel.

Previous wording

•Revenues in the Americas region increased 1%, primarily due to growth in our direct-to-consumer and wholesale businesses. Growth in our direct-to-consumer business was primarily driven by higher e-commerce sales. Growth in wholesale was driven by Non-U.S. Americas wholesale, primarily due to higher sales in Canada, partially offset by a decline in our U.S. wholesale channel. The U.S. wholesale channel decline was attributable to retailer inventory management actions, partially offset by an increase in our digital wholesale business.

Current wording

•Revenues in the Americas region increased 5%, primarily due to growth in our wholesale and direct-to-consumer businesses. Growth in wholesale was driven by an increase in our U.S. digital wholesale business, expanded distribution and category growth, partially offset by retailer actions to manage inventory levels. Growth in our direct-to-consumer business was primarily driven by higher e-commerce sales.

Previous wording

Global revenues for the Wrangler® brand increased 1%, due to growth in the Direct-to-Consumer and Non-U.S. Wholesale channels, partially offset by a decline in the U.S. Wholesale channel.

Current wording

Global revenues for the Wrangler® brand increased 1%, due to growth in the Direct-to-Consumer and U.S. Wholesale channels, partially offset by a decline in the Non-U.S. Wholesale channel.

Previous wording

•Revenues in the Americas region decreased 1%, primarily due to a decline in our wholesale business, partially offset by growth in our direct-to-consumer business. The decline in our wholesale business was driven by the U.S. wholesale channel, primarily due to retailer inventory management actions, partially offset by an increase in our digital wholesale business. Growth in our direct-to-consumer business was primarily driven by higher e-commerce sales.

Current wording

•Revenues in the Americas region increased 1%, primarily due to growth in our wholesale and direct-to-consumer businesses. Growth in wholesale was driven by an increase in our U.S. digital wholesale business and category growth, partially offset by retailer actions to manage inventory levels. Growth in our direct-to-consumer business was primarily driven by higher e-commerce sales.

Previous wording

Operating margin increased to 20.6%, compared to 16.7% for the 2023 period, driven by lower product costs, favorable product mix and lower downtime associated with proactive actions taken in the prior year to manage internal production. These improvements were partially offset by pricing adjustments, increases in investments in our direct-to-consumer business and information technology, increases in restructuring and transformation charges compared to the prior period and higher incentive compensation-related expense.

Current wording

Operating margin increased to 20.0%, compared to 17.3% for the 2023 period, primarily attributable to favorability from lower product costs, the out-of-period duty expense recorded in 2023, product mix and downtime in our manufacturing plants taken in the prior year. These improvements were partially offset by higher investments in our direct-to-consumer business, demand creation and information technology, as well as lower pricing, increases in restructuring and transformation charges and higher incentive compensation expense.

Previous wording

Global revenues for the Lee® brand decreased 7%, due to declines in all regions and channels.

Current wording

Global revenues for the Lee® brand decreased 6%, due to declines in all regions and channels.

Previous wording

•Revenues in the Americas region decreased 4%, driven by decreases in our wholesale and direct-to-consumer businesses. The decrease in wholesale revenues was due to declines in the U.S. wholesale channel and our Non-U.S. wholesale business. The decline in the U.S. wholesale channel was primarily due to retailer inventory management actions and a decrease in revenue from seasonal product, partially offset by growth in our digital wholesale business. The decline in our direct-to-consumer business was due to lower retail store and e-commerce sales.

Current wording

•Revenues in the Americas region decreased 6%, driven by declines in our wholesale and direct-to-consumer businesses. The decrease in wholesale revenues was due to a decline in the U.S. Wholesale channel, as well as our non-U.S. wholesale business, primarily due to lower sales in Mexico. The decline in the U.S. Wholesale channel was primarily due to retailer actions to manage inventory levels and a decrease in seasonal product sales, partially offset by growth in digital wholesale. The decline in our direct-to-consumer business was due to lower retail store and e-commerce sales.

Previous wording

•Revenues in the APAC region decreased 11%, primarily resulting from decreases in wholesale revenue and retail store sales in China and a 4% unfavorable impact from foreign currency, partially offset by growth in e-commerce sales.

Current wording

•Revenues in the APAC region decreased 7%, primarily resulting from declines in wholesale revenue and retail store sales in China and a 2% unfavorable impact from foreign currency, partially offset by growth in e-commerce sales.

Previous wording

•Revenues in the EMEA region decreased 8%, attributable to a decrease in our wholesale business, partially offset by growth in our digital wholesale business.

Current wording

•Revenues in the EMEA region decreased 8%, attributable to a decline in our wholesale business, partially offset by growth in our digital wholesale business and e-commerce sales.

Previous wording

Operating margin decreased to 7.6%, compared to 9.1% for the 2023 period. Benefits from lower product costs were more than offset by unfavorable product mix, pricing adjustments, increases in investments in our direct-to-consumer business and deleverage of fixed expenses on lower revenues.

Current wording

Operating margin decreased to 12.0%, compared to 12.2% for the 2023 period. Benefits from lower product costs and the out-of-period duty expense recorded in 2023 were more than offset by unfavorable product mix, lower pricing, higher investments in our direct-to-consumer business and deleverage of fixed expenses on lower revenues.

Previous wording

Interest expense increased $0.7 million, primarily due to the higher effective interest rate as a result of the expiration of interest rate swap agreements in April 2024, partially offset by the effect of lower average debt outstanding during the three months ended June 2024 compared to the three months ended June 2023.

Current wording

Interest expense increased $0.7 million, primarily due to the maturity of the 2019 Swap Agreements in April 2024, partially offset by the effect of lower average debt outstanding during the three months ended September 2024 compared to the three months ended September 2023. In addition, the three months ended September 2023 included interest attributable to the out-of-period duty expense recorded in 2023.

Previous wording

Corporate and other expenses increased $0.7 million, primarily due to increases in incentive compensation-related expense, partially offset by a decrease in restructuring and transformation charges compared to the prior period.

Current wording

Corporate and other expenses increased $16.9 million, primarily due to increases in incentive compensation expense and restructuring and transformation charges compared to the prior period.

Previous wording

Interest expense decreased $0.3 million, primarily due to the effect of lower average debt outstanding during the six months ended June 2024 compared to the six months ended June 2023, partially offset by the higher effective interest rate as a result of the expiration of interest rate swap agreements in April 2024.

Current wording

Interest expense increased $0.5 million, primarily due to the maturity of the 2019 Swap Agreements in April 2024, partially offset by the effect of lower average debt outstanding during the nine months ended September 2024 compared to the nine months ended September 2023. In addition, the nine months ended September 2023 included interest attributable to the out-of-period duty expense recorded in 2023.

Previous wording

The Company's ability to fund our operating needs is dependent upon our ability to generate positive long-term cash flow from operations and maintain our debt financing on acceptable terms. The Company has historically generated strong positive cash flows from operations and continues to take proactive measures to manage working capital. During the six months ended June 2024, the Company repaid a total of $35.0 million of the principal outstanding on Term Loan A, including $25.0 million of voluntary early quarterly repayments during the second quarter of 2024. We believe cash flows from operations will support our short-term liquidity needs as well as any future liquidity and capital requirements, in combination with available cash balances and borrowing capacity from our revolving credit facility.

Current wording

The Company's ability to fund our operating needs is dependent upon our ability to generate positive long-term cash flow from operations and maintain our debt financing on acceptable terms. The Company has historically generated strong positive cash flows from operations and continues to take proactive measures to manage working capital. During the nine months ended September 2024, the Company repaid a total of $40.0 million of the principal outstanding on Term Loan A, including $25.0 million of voluntary early repayments which reduced future required quarterly repayments. We believe cash flows from operations will support our short-term liquidity needs as well as any future liquidity and capital requirements, in combination with available cash balances and borrowing capacity from our revolving credit facility.

Previous wording

The Company is party to a senior secured Credit Agreement, as amended and restated on November 18, 2021 (the “Credit Agreement”), which provides for (i) a five-year $400.0 million term loan A facility (“Term Loan A”) and (ii) a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”), collectively referred to as “Credit Facilities,” with the lenders and agents party thereto. Term Loan A requires quarterly repayments of $5.0 million through September 2026, and the remaining principal of $335.0 million is due at maturity in November 2026. Additionally, the Company has outstanding $400.0 million of unsecured 4.125% senior notes due 2029. Refer to Note 11 in the Company's 2023 Annual Report on Form 10-K and Note 7 to the Company's financial statements in this Form 10-Q for additional information regarding the Company’s debt obligations.

Current wording

The Company is party to a senior secured Credit Agreement, as amended and restated on November 18, 2021 (the “Credit Agreement”), which provides for (i) a five-year $400.0 million term loan A facility (“Term Loan A”) and (ii) a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”), collectively referred to as “Credit Facilities,” with the lenders and agents party thereto. Term Loan A requires quarterly repayments of $5.0 million through September 2026, and the remaining principal of $335.0 million is due at maturity in November 2026. Additionally, the Company has outstanding $400.0 million of unsecured 4.125% senior notes due 2029. The Company has "floating to fixed" interest rate swap agreements to mitigate exposure to volatility in reference rates on the Company's future interest payments. Refer to Note 11 in the Company's 2023 Annual Report on Form 10-K and Note 7 to the Company's financial statements in this Form 10-Q for additional information regarding the Company’s debt obligations, and refer to Note 9 to the Company's financial statements in this Form 10-Q for additional information regarding the Company's interest rate swap agreements.

Previous wording

At June 2024, the Company had $19.3 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. There were no outstanding balances under these arrangements at June 2024.

Current wording

At September 2024, the Company had $20.0 million of international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. There were no outstanding balances under these arrangements at September 2024.

Previous wording

During the six months ended June 2024, the Company repurchased 0.7 million shares of Common Stock for $45.0 million, including commissions, under its $300.0 million share repurchase program authorized by the Company's Board of Directors. All shares reacquired in connection with the repurchase program are treated as authorized and unissued shares upon repurchase. As of June 2024, $255.0 million remained available for repurchase under the program.

Current wording

During the nine months ended September 2024, the Company repurchased 1.2 million shares of Common Stock for $85.0 million, including commissions, under its $300.0 million share repurchase program authorized by the Company's Board of Directors. All shares reacquired in connection with the repurchase program are treated as authorized and unissued shares upon repurchase. As of September 2024, $215.0 million remained available for repurchase under the program.