Kontoor Brands Inc (KTB) Q1 2024 Earnings Call Transcript Highlights: Strong Start with ...

• Revenue: Higher than expected, driven by market share gains and improved POS.

• Gross Margin: Expanded by 270 basis points to 45.7%, exceeding expectations due to lower product costs and favorable mix.

• Net Income: Adjusted EPS consistent with prior year at $1.16.

• Free Cash Flow: Strong generation, with cash from operations expected to exceed $335 million.

• Market Share: Continued gains in key categories, with Wrangler and Lee brands showing strength.

• Inventory Levels: Ended the quarter 24% below prior year levels.

• Capital Allocation: Returned $48 million to shareholders through dividends and share repurchases.

• Product Development: Notable growth in non-denim categories, with outdoor and tops performing well.

• Adjusted Gross Margin Outlook: Raised to match previous high of 44.6% from 2021.

• Full Year Guidance: Raised for gross margin, earnings, and cash flow based on Q1 performance.

• Warning! GuruFocus has detected 5 Warning Signs with VNT.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Kontoor Brands Inc reported a strong start to the year with better-than-expected revenue, gross margin, and earnings, leading to an increase in full-year guidance.

• The company successfully gained market share for the eighth consecutive quarter, with notable growth in its direct-to-consumer (DTC) business and market share gains in denim.

• Kontoor Brands Inc is making strategic organizational changes, including the appointment of new executive roles and the launch of Project Genius, aimed at enhancing operational efficiency and profitability.

• The company is diversifying its product offerings beyond denim, with significant growth in outdoor and non-denim categories, contributing to revenue diversification and market expansion.

• Kontoor Brands Inc demonstrated strong cash generation and robust capital allocation, returning $48 million to shareholders through dividends and share repurchases in the quarter.

Negative Points

• Despite overall positive performance, Kontoor Brands Inc experienced softness in wholesale channels, particularly impacting the Lee brand due to conservative inventory management by retailers.

• The company faces ongoing macroeconomic challenges in Europe, affecting the performance and growth potential in this significant market.

• Kontoor Brands Inc's inventory levels, although improved, still require optimization to align with long-term operational goals.

• The company's seasonal business faced headwinds due to cooler weather, although management remains optimistic about recovery.

• While Kontoor Brands Inc is making progress in its strategic initiatives, the near-term environment remains dynamic and uncertain, prompting conservative planning for the remainder of the year.

Q & A Highlights

Q: Can you provide more perspective on the solid quarter and your thoughts on the year-end evolution since late February, especially considering the improvements in POS and retailer inventories in March? A: (Joe Alkire, CFO & EVP, Kontoor Brands Inc) - We exceeded Q1 expectations by about $25 million, primarily due to improved POS and inventory levels at retail in March, driven by major customers in the US. Gross margin also exceeded expectations due to lower product costs and a small delay in pricing actions. We're planning conservatively given the environment, but we're positioned to accelerate business fundamentals across the year. We've raised our first half and full-year outlook as a result of a stronger than expected Q1.

Q: Regarding the inventory progress in Q1, can you discuss this in the context of the full-year cash flow from operations guide? A: (Joe Alkire, CFO & EVP, Kontoor Brands Inc) - The first quarter saw our largest year-over-year inventory decline. We expect declines throughout the year, contributing to cash flow. However, we will lean back into some inventory in the second half, but overall, inventory will contribute to our cash flow for the year.

Q: Can you expand on the organizational structural changes being made and discuss the new category growth and expansion? A: (Scott Baxter, Chairman of the Board, President, & CEO, Kontoor Brands Inc) - The structural changes streamline decision-making and speed, moving us towards the organization we aim to be. Regarding category growth, outdoor and tees are significant accelerators, with outdoor growing from $100 million to $200 million in four years. These categories, along with our core denim, are driving new distribution and contributing to our growth.

Q: What is the outlook for the U.S. denim market, and have you seen any benefits from recent Western cultural moments? A: (Scott Baxter, Chairman of the Board, President, & CEO, Kontoor Brands Inc) - The U.S. denim market remains strong, benefiting from the casualization trend and our core business. We're seeing new distribution in core denim categories and experiencing growth in Western trends, not just in the U.S. but starting to touch Europe as well.

Q: How should we think about the investments being made for back-half innovation and channel launches, and the allocation of marketing spend? A: (Scott Baxter, Chairman of the Board, President, & CEO, Kontoor Brands Inc) - We've increased our marketing spend intelligently since the spin-off, focusing on areas where consumer insights show promise, such as the newly launched Lee golf pants. This targeted approach helps us allocate our marketing spend more effectively, driving growth in specific categories and channels.

Q: Can you discuss the performance and expectations for China, given the market conditions and your strategic adjustments there? A: (Joe Alkire, CFO & EVP, Kontoor Brands Inc) - China was slightly down in Q1 but ahead of our plans. We expect growth for the full year, with digital increasing at a double-digit rate. We're improving the health and quality of our retail partners in China and see significant long-term opportunities in the region.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.