Q1 2024 Kontoor Brands Inc Earnings Call

Participants

Michael Karapetian; VP - Corporate Development, Strategy, and IR; Kontoor Brands Inc

Scott Baxter; Chairman of the Board, President, & CEO; Kontoor Brands Inc

Joe Alkire; CFO & EVP; Kontoor Brands Inc

Jim Duffy; Analyst; Stifel Financial Corp.

Bob Drbul; Analyst; Guggenheim Partners, LLC

Brooke Roach; Analyst; The Goldman Sachs Group, Inc.

Mauricio Serna; Analyst; UBS Group AG

Laurent Vasilescu; Analyst; BNP Paribas

Will Gaertner; Analyst; Wells Fargo Bank

Paul Kearney; Analyst; Barclays Bank

Presentation

Operator

Greetings and welcome to the Kontoor Brands First Quarter 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Karapetian, Vice President, Corporate Development Strategy and Investor Relations. Thank you, Michael, you may begin.

Michael Karapetian

Thank you, operator, and welcome to Kontoor Brands First Quarter 2024 earnings conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language and other disclosures contained in those reports amounts referred to on today's call will often be on an adjusted basis, which we clearly defined in the news release that was issued earlier this morning. Our outlook is presented on an adjusted dollar basis. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website at Kontoor Brands.com. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Unless otherwise noted, amounts referred to on this call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates.
Joining me on today's call are Kontoor Brands, President, Chief Executive Officer, and Chair, Scott Baxter and Chief Financial Officer, Joe Alkire, following our prepared remarks, we will open the call for questions. And we anticipate this call will last about one hour. Scott?

Scott Baxter

Thanks, Mike, and thank you to everybody joining us on today's call, we are pleased with our better than expected start to the year compared to our own outlook provided in February, we saw broad-based upside from revenue, gross margin and earnings Joe will unpack the details, but our relative strength in the quarter combined with improving visibility gives us confidence to raise our full year guidance.
I will step through the highlights in a bit. But first, let me start with the organizational announcements we made in March. As we discussed last quarter, we have commenced project genius to transform our organization. This multiyear project is focused on driving three things. First, create a global best-in-class multi-brand platform, second, simplify the organization to increase speed and efficiency, and third, freeing up investment capacity to accelerate growth and increase profitability. As part of these actions, Tom Waldron has been appointed COO. You've had a chance to hear from Tom during our year-end calls. He is an incredibly talented leader who has led the return to growth and strong profitability for Wrangler from 19 to 23, Wrangler has grown revenue at a mid-single digit kegger and expanded reported profit margins by over 300 basis points in his new role. Tom will amplify our strategic playbook across both brands to drive improvements throughout the organization from our commercial and go-to-market teams to global operations we have also elevated Jenny boils to EDP. and global brands, President of Wrangler and Lee in SEO, Garcia Mendez to EVP and Chief Supply Chain Officer. Congratulations to both Jenny and SEO who have joined our executive leadership team team we have in place, has a proven track record of success at every position, and I am confident we'll drive the next leg of our value creation journey.
Now let me touch on highlights from the quarter. Wrangler momentum continues with product and demand-creation platforms that are elevating the brand like never before while wholesale pressures are impacting the near term. As expected, strength of our DTC business and point-of-sale outperformance are real proof points. Wrangler is winning with the consumer. During the quarter. Wrangler U.S. global DTC business grew 8% and we gained 60 basis points of market share in denim launch according to Cercon. This marks the eighth consecutive quarter of market share gains for the brand to support this momentum. Wrangler continues to diversify beyond denim. In fact, approximately half of the business is now outside of denim bottoms, reflecting the success we have had expanding into new categories. Outdoor is a great example, which is now an approximately $200 million business. The investments we are making in the team in our product development capabilities are helping to drive further penetration in this large and growing category leading to successes like the outdoor performance cargo, which is one of the fastest growing pants in Condor's history and Wrangler. Atg is elevating the brand into newer channels of distribution such as specialty sporting goods, supported by new launches like the ATG. Keno and Cliffside utility this fall as we are on track for another year of double digit growth in outdoor. We are also advancing our consumer insights and research capabilities as part of our evolution to a more data-driven organization, allowing us to better align with changing consumer buying habits and behaviors. This behind-the-scenes work is a great example of how we are becoming a more efficient organization with targeted investments that generate higher returns.
And finally, we have a strong pipeline of demand creation platforms and collaborations. Eleni Wilsons first collection launches later this year and based on early reads is on track to become the largest global collaboration to date. We are also continuing our very successful collaboration with start in the second quarter, which is helping to bring the right balance of newness while reaching a younger, female consumer. And we are amplifying the brand with events at the ACM awards and stage Coach where we are the official denim sponsor. These are great examples of how we are building momentum throughout the year with demand creation, investments that fit together and deepen the connection with our consumers.
Turning to LHi, similar to Wrangler Lee experienced softness at wholesale as retailers tightly managed inventory levels. As we discussed last quarter, the business was also impacted by conservatism on seasonals. That said, we are seeing green shoots from our innovation platforms and with our younger female consumer.
On the men's side, we continue to advance our innovations focused on comfort. These platforms now account for two thirds of our US men's business and are a genuine distinction in the market. And within female, our Heritage Collection and iconic rider platform is expanding the brand's reach while being supported by new equity campaigns. This is translating to share gains in growth at point of sale during the quarter, TOS. in the US increased 2% in market share in denim, long scale, 40 basis points as measured by Sarcom.
Looking ahead, we have several initiatives that give us confidence. First, our improving product development capabilities are enabling category expansion. Our tops business has been a great success story is on track to deliver strong double digit growth for the year and legal launches in the second quarter with innovative fabrications that are appealing to a broad range of male consumers. We are excited about the potential in this growing category as part of Lee's office to outdoor evolution.
Second, our innovation pipeline is getting the most significant addition in years Li X will launch later this year and combines elite comfort with world-class assets. This will be a true platform across denim and non-denim tops and bottoms at a price point that simply does not exist for this level of performance. And last but not least, we are getting sharper with our brand positioning in the marketplace is foundational level work is a significant focus for the second half of the year. And as part of the new multi-brand platform we are developing, we are conducting an end to end assessment to ensure alignment with our refreshed consumer segmentation, brand investments and product development. We are confident this will pay significant dividends in the years ahead.
Before I turn it over to Joe, let me close with perspective on the balance of the year. Since we spoke in February, point-of-sale has improved for both brands. We have continued to gain share. The wholesale channel has found better balance and gross margin expansion exceeded our expectations. We also made further progress working down our inventory position, ending the quarter 24% below prior year levels, combined with our better than expected profitability we now expect to generate more than $335 million in cash from operations this year. As a result, our capital allocation optionality continues to improve, allowing us to return $48 million to shareholders during the quarter, including $20 million in share repurchases under our new $300 million authorization. Longer-term project Genius planning is well underway with impacts expected to start in the fourth quarter, we have a line of sight to the higher end of the $50 million to $100 million of annualized run rate savings, none of which are included in our guidance that will structurally raise our profitability ceiling while significantly increasing our investment capacity to drive more profitable growth over time. While the near-term environment remains dynamic, we are operating from an offensive position. We are off to a better than expected start and have improving visibility to the balance of the year. I am confident we are on a path to drive strong value creation for all stakeholders. Joe?

Joe Alkire

Thanks, Scott, and thank you all for joining us today. Let me start by providing perspective on our first quarter results relative to the outlook we provided in late February. Our results were stronger than expected, driven by higher revenue, gross margin, earnings and cash flow. Our brands continue to drive market share gains in our largest points of distribution and POS and inventory levels at retail improved modestly late in the quarter. Gross margin expansion was stronger than expected, driven mainly by lower product costs and favorable mix and when combined with further inventory reductions supported robust cash generation and the capital allocation optionality, as evidenced by the $48 million of cash returned to shareholders through share repurchases and dividends in the quarter. Overall, we're pleased with our start to the year. Let's unpack the quarter in more detail. First, POS strengthened as we progressed through the quarter and we saw a better balance between sell in and sell through as inventory levels at retail modestly improved and replenishment order patterns normalized. If you recall, we did not assume an improvement in either POS or inventory levels in our outlook as we continue to plan the business conservatively. So these results were above our expectations and drove the majority of the revenue upside in the quarter. Second, gross margin expansion exceeded our expectations, driven by lower product costs and the structural benefits from mix relative to our assumptions. We also realized a smaller than expected impact from pricing, the majority of which is timing related and will begin to impact our gross margin more meaningfully in the second quarter.
Our gross margin visibility has improved relative to 60 days ago. And we now expect our full year adjusted gross margin to match our previous high of 44.6% reached in 2021.
Lastly, we continued to drive strong cash generation through improved profitability and reductions in net working capital, including a 24% decline in inventory. We are opportunistically working through our excess inventory and driving improvements in supply chain execution through higher fill rates and more efficient demand-supply matching. We continue to take a conservative approach to planning the year, but based on our better-than-expected first quarter results and improved visibility, we are raising our full year gross margin, earnings and cash flow outlook. I'll dive deeper into our updated outlook in a moment. But first, let's review the additional details of our first quarter results, starting with Wrangler. Global revenue decreased 4%. The decline was primarily driven by U.S. wholesale, offset by growth in DTC, including 7% growth in digital and 10% growth in brick and mortar retailer. Inventory management actions continue to impact the business near term. However, underlying brand momentum remains strong as evidenced by improving POS, ongoing market share gains and DTC strength. Nowhere is the brand's momentum more evident than in the success in diversifying into new categories.
Wrangler U.S. outdoor business led by ATG. continues to scale as we advance our product development capabilities and reach new consumers. During the first quarter, Wrangler outdoor grew 5%, nearly 50% of the global Wrangler business is now in categories outside of denim bottoms. And we expect the non-denim business, including outdoor tops and non-denim bottoms to grow at a mid-single digit rate this year.
Wrangler International revenue decreased 13%. European wholesale remains under pressure due to challenging macro conditions. However, this was partially offset by double digit DTC growth supported by investments in owned stores and our digital platform.
Turning to Leaf, global revenue decreased 9%. As expected, reduced shipments in U.S. wholesale and a decline in the seasonal business negatively impacted the quarter. That said, revenue for the Lee brand was above our expectations. Similar to Wrangler, Lee is having success expanding beyond denim, particularly in tops. During the quarter, tops grew 20% and now comprise over 10% of the total business. We expect strong growth in these categories to continue for the balance of the year.
Lee International revenue decreased 5% and Europe revenue declined 9% driven by ongoing macro pressure in A-Pac, revenue declined 2% as the market recovery remains uneven, and we work to further improve the quality and health of our retail network. We continue to anticipate growth in A-Pac for the full year.
Turning to gross margin, adjusted gross margin expanded 270 basis points to 45.7%, driven by the benefits of channel mix and lower product costs. This was partially offset by targeted pricing actions, which went into effect late in the first quarter relative to our expectations, we saw greater than expected favorability from mix and lower input costs in addition to a smaller than expected impact from pricing, resulting in an adjusted gross margin exceeding our expectations by approximately 160 basis points. Adjusted SG&A expense was $195 million. Investments in demand creation, technology and DTC. were partially offset by disciplined management of expenses and lower distribution and freight and adjusted earnings per share was $1.16, consistent with the prior year.
Now turning to the balance sheet. Inventory decreased 24% to $501 million compared to our initial expectations of a 20% decline. We remain intensely focused on improving net working capital to supplement our strong operating earnings growth and drive enhanced cash generation and support of our capital allocation framework. We finished the quarter with net debt or long-term debt, less cash of $564 million and $215 million of cash on hand. Our net leverage ratio or net debt divided by trailing 12 months adjusted EBITDA was 1.6 times within our targeted range during the quarter, we repurchased $20 million of stock under our current authorization and as previously announced, our Board declared a regular quarterly cash dividend of $0.5 per share.
Finally, on a trailing 12 month basis, our adjusted return on invested capital was 25%.
Now turning to our outlook. Revenue is still expected to be in the range of $2.57 billion to $2.63 billion, reflecting a decrease of 1% to an increase of 1%. We are encouraged by our better than expected start to the year and the improvement we saw in both POS and inventory levels at retail across the first quarter.
So how are we thinking about the remainder of the year? First, we continue to plan the business conservatively with the majority of the year still ahead of us, retailers remain in a conservative posture and we are cautious on the environment as the consumer, while resilient remains under pressure around the globe. We continue to assume no meaningful improvement in overall POS or retail inventory positions for the balance of the year.
Second, we have good visibility to category expansion and distribution gains, including expansion of our tops and outdoor businesses, as well as new innovation platforms in the second half of the year. And we expect ongoing growth in our DTC business, reflecting investments in our digital platform, improve product segmentation and a more robust demand creation pipeline. Taken together, we continue to anticipate first half revenue to decline at a mid-single digit rate, followed by mid-single digit growth in the second half of the year. Beyond the first quarter, we expect revenue growth of approximately 2% for the year-ago period. Moving the gross margin. Based on our stronger first quarter results and improved visibility, we are raising our outlook to approximately 44.6% from our prior range of 44.2% to 44.4%. Our updated outlook represents an increase of 210 basis points compared to adjusted gross margin of 42.5% in 2023. Excluding the out-of-period duty charge in the first half of the year, we now anticipate more than 300 basis points of gross margin expansion compared with our previous outlook of more than 250 basis points. Our gross margin outlook includes the following assumptions. First, we will continue to benefit from the structural drivers of mix. This is expected to contribute approximately 30 to 40 basis points to the full year. Longer-term, we expect the benefits of mix to continue as we scale DTC and international.
Second we have good visibility on input costs with cost locked into the third quarter on manufacturing and into the fourth quarter on sourced product. Our visibility for the balance of the year has improved. And when combined with the proactive actions to optimize our supply chain footprint, we anticipate over 200 basis points of benefit for the year from lower product costs and finally, we assume a modest headwind from lower pricing promotions and the disruption from the Red Sea. Collectively, these inputs are expected to negatively impact our margin by less than a point I have high confidence in our ability to drive gross margin expansion beyond our previous expectations over time, supported by project genius. But we'll share additional details on that in the coming quarters, SG&A is still expected to increase at a low to mid-single digit rate. We will continue to make investments in demand-creation DTC. and technology as well as product development capabilities to support our growing innovation platforms and category expansion plans. Operating income is now expected to be in the range of $377 million to $387 million, reflecting growth of 8% to 11% compared to the prior year, excluding the duty charge. This compares to our previous outlook of $372 million to $382 million. Eps is now expected in the range of $4.70 to $4.80, representing growth of approximately 6% to 8% compared to adjusted EPS in the prior year, excluding the out-of-period duty charge. This compares to our prior outlook range of $4.65 to $4.75 full year EPS growth, it will be negatively impacted by about five percentage points from a higher tax rate. First half EPS is now expected to increase at a mid digit rate compared to our prior outlook for EPS to be consistent with prior year levels. In the second quarter, we expect EPS of approximately $0.85, representing 10% growth.
Finally, we now expect cash from operations to exceed $335 million, primarily as a result of stronger earnings growth. This compares to our previous outlook of cash from operations to exceed $325 million.
Before opening it up for questions, I'd like to reiterate the confidence we have in our ability to deliver our 2024 objectives, we are off to a better than expected start to the year. The fundamental profile of the business is accelerating and our brands are winning in the marketplace and continue to drive market share gains. We are on track to generate significant cash from operations this year, which combined with our strong balance sheet, provides us with considerable capital allocation optionality we are operating from a position of strength, and I am confident in our commitment to deliver superior returns for all stakeholders.
This concludes our prepared remarks, and I will now turn the call back to our operator.

Question and Answer Session

Operator

(Operator Instructions) Jim Duffy, Stifel.

Jim Duffy

Good morning, sir. And I wanted to start pardon my voice for fighting a cold here. I wanted to start by asking for more perspective on solid quarter and your thoughts on the year end of all since late February, there are some moving parts. It sounds like you saw further improvement in POS and retailer inventories in March. Revenue gross margin came in better for the quarter, but the full year doesn't pass through the revenue upside in you buy the earnings, it increase was just a fraction of the Q1 earnings upside. So I'm curious, is there something you're seeing or hearing from channel partners, it's making you more cautious on Q2 and the back half of the year.

Joe Alkire

Hey, Jim, good morning. It's Joe. I'll start. And then Scott may want to provide some some thoughts on the environment.
So yes, we beat Q1. We beat the outlook by approximately 25 million, largely driven by improved POS and inventory levels at retail in March. This was largely driven by our major customers in the US. So this drove the majority of the upside in the quarter from a gross margin standpoint, also above our expectations by about 160 basis points. That was mainly due to lower product costs and a small delay in the pricing actions that we're implementing, which which is a bigger Q2 impact versus our original plan. Look, as we said in February, we're planning the business conservatively in light of the environment. We've got the toughest quarter behind us now and the business fundamentals are positioned to accelerate across the balance of the year from here, which we're highly confident in. I'd say from a from a full year outlook, we raised the first half, we raised the full year largely as a result of stronger than expected Q1. We increased our gross margin assumption modestly for the balance of the year based on our increased visibility from a from an overall revenue standpoint. We've got good visibility into the improvements for the balance of the year, again, largely driven by new programs and distribution gains but from my perspective, nothing that we're seeing in the environment just being cautious on the outlook for the year.

Scott Baxter

And Jim, I would just add that the environment we've got modestly a little bit better than we thought in Q4. Really nice balance from our big customers from an inventory standpoint that worked itself well through pretty good. We remain optimistic for the rest of the year. We do have some programs that Joe mentioned, both, you know, channel and category that we're excited about that we've talked a little bit about. So a little bit conservative, but want to make sure that we go ahead and hit our commitments going forward.

Jim Duffy

Great, thanks. And a couple of related questions on the guide. Joe, the inventory progress in Q1 was meaningful. Can you speak about this in the context of the full year cash flow from operations guide?
It will be a really good reduction in the inventories. You increase the cash flow from ops by about 10 million. Does that assume some reinvestment in inventory later in the year? And then I'm also curious if you could just give us an update on the seasonal business? Is the headwind from seasonals business as those categories normalize? Are those headwinds behind you?

Joe Alkire

Yes, I'll start with the inventory, Jim and Scott can take seasonal. So yes, from a inventory standpoint, really good progress. The first quarter will be our largest year-over-year decline. We expect declines pretty much for the balance of the year, somewhere in that low double digit range. This is contributing to the cash flow. But yes, the gross gross, the growth in flex in the second half, we will lean back into into some inventory. But for the for the year as a whole, inventory will be a contributor to our to our cash. So overall, Jim, we still have about 130 days of inventory on the balance sheet are, I would say steady state for us continues to be somewhere in that plus or minus 100 day range. So there's still a considerable amount of cash on the balance sheet that will come that will release at some point. But no, in terms of composition of our inventory, we still feel pretty good somewhere in that 75% to 80% range is core. And so the inventory is in good shape.

Scott Baxter

And Jim, just a couple of comments on seasonals. After 20 plus years of writing the seasonal way up and down and weather and all kinds of patterns, you know, in geographies, it's very typical. We've seen this. We've seen this play before. It's a little cool right now, but all of a sudden here where we are in part of this area and this year, geography got really hot yesterday supposed to get really hot this weekend and we really like our position. We like our product this year. We like our distribution. We think we're in a really good spot and just because it was a little bit cool at the beginning of the season doesn't really bother us. We've been through that before. So no issues.

Jim Duffy

Thank you, guys.

Scott Baxter

Thank you.

Operator

Bob Drbul, Guggenheim Partners.

Bob Drbul

Hey, guys, good morning and Scott. 85 in New York today. So it's happening by all the areas. So there is a softball. And so I have just a couple of things I'd like to focus on and talk about. Can you expand a bit more just on the organizational structural changes that you're making and sort of really how we should think about that? And then there's just a lot of you guys talked a lot about the new category growth and expansion can you just talk about like when you size them up, which ones should we really be focused on which ones are needle movers that you have the most optimism around that would be helpful.

Scott Baxter

Sure. Thanks for the questions. We always had a plan to go down to one COO, and it was part of what we did, but everyone remembers we spun off and we did it in 10 quick months and it was a clone and growth structure and we probably would have gotten to this position sooner if it weren't for the pandemic kind of slowed things down, what have you. But when we decided and finished our ERP and decided that we need to go ahead and you don't have what the exact model that we need to be successful as a company versus when you do spin off and after being together some of the years, you do a lot of things. The same and then you have to work through where you want to be. And we're at that place where we know exactly where we want to be. So we rolled off Genius finished our ERP. It was the perfect time to put in place the organizational structure that we needed to be successful. So this streamlines our decision making foot and Tom and the COO role, immuno success breeds success. And Thomas had a tremendous amount of success in what he's done with the team in Wrangler. So we're real excited to put part-time and that elevated position. And then about two years ago, Tom took the operational piece to our supply chain team has done an exceptional job there. So combining those, I think, has been instrumental in our success. So our decision making now is much more streamlined. It's moving faster. It's part of what we're doing from a genius standpoint. It moves us to the organization. We want to be.
I think the one thing that I want to make sure that everybody does realize, though, is that the fact that we do have two separate go-to-market teams right they funnel up to Tom at some point, but we have a lead team from a go-to-market standpoint. We have a Wrangler team that are separate from a go-to-market standpoint, but what happens, though, is they collectively come together on the back end and that also funnels up to Tom. But we combine that back-end piece, you know, from a synergy standpoint and a cost saving standpoint. And that's really, really helpful. So that's kind of the background and the thinking about it. But how we're going to go to market and who we want to be in all part of our Project Genius work.
And then from a category standpoint, yes, we we've been talking a lot about the categories that we entered in over the last few years when we spun, we entered outdoor, we entered teas. We entered work in a more significant way, although we were there in outdoor and work to a degree, but you think about like outdoor and last for four years, we've gone from 100 to 200 million and you talked about which ones are still accelerators. Outdoor is definitely an accelerator for us. We're just we're just getting better at it and smarter at it. And we've hired some talent and our product looks better and with time to learn some things when you learn about your consumer and we really like the new product that's coming out or So feel really good about that. And our tea business has been accelerating really, really nicely so we think about those two and right now our work is a little bumpy for us. So we'll continue to work through that and get that in a place that it needs to be, but we still love that channel. You know, it's a big channel for us as a company already. And we think that it was just a business that we're going to be in for a long term, and it's got real structural tailwinds for us. So we're excited about that, too. But that's kind of where I would focus and emphasis on from those newer categories that we enter.

Bob Drbul

Thanks, Scott.

Scott Baxter

Thanks, Bob.

Operator

Brooke Roach, Goldman Sachs.

Brooke Roach

Good morning and thank you for taking our question. Scott, you've talked a lot about the optimism that you have on new categories and the growth of the business in non-denim today. I was hoping you could give us your view on the health and the outlook for growth of the U.S. dental market. Have you seen any benefit from some of the recent Western cultural moments.
And are you seeing accelerating April POS as a result of the recent pricing changes that have that have been put in place at some of your key.

Scott Baxter

Yes, good morning, Brooke. Thanks for the question. And no question. We are we have a significant business. Obviously, it's critically important to us and we call it our core business. And we see that denim is in fashion has been in fashion the casualization of the world. One of the things that was really interesting was that we went through this casualization when we went through the pandemic. And then when we came out, people said that we'll probably return to normal and people dressed like they used to it just never happens people, state casual or continuing to be casual, and we fit right into that in a really perfect way around the globe. So feel really good about that. And then we do have some new distribution coming even in our core denim categories here for the second half of the year, which is pretty exciting with a big retailer that we've talked about. So you couple those two things and then you know, when you go to Western, the one thing I always think about trying to remind people is that, you know, we've been on a Western trend since 1947 when we brought out the first really great cowboy GRMWZ. 30 seats, and we've been working that in London that for a long time and we are Western.
If you think about Western, you think about the Cowboys, you think about the mountains, you think about that lifestyle. The first thing you think about is Wrangler jeans and Wrangler tops. So we are a huge part of that business and it just continues to grow and it's been really nice. And I think it's skills really spiritual for some people to be part of that in the West and what it stands for and what it stood for for us as a country. And it's it's interesting to know that for the first time in a long time, we did have this many, many, many years ago, but the Western piece is starting to hit Europe a little bit now, so which is really interesting for us. So we're enthusiastic about it and we'll see what happens there. But we are seeing some green shoots in that respect over in the European area, but we continue to bring new products to market in our Western business. And I don't know if everybody saw or heard the new Miranda Lambert song that came out about Wrangler jeans that debuted in here today, I think can Miranda's the all-time winning U.S. ACM award winner ever. So it's pretty interesting that, you know, things like that happen and they're completely organic for us as a company.

Joe Alkire

And it just goes to show you when people think about that Western business, they think about Wrangler first, Brett, just on that on April specifically, we actually saw April POS soft open a little bit versus Q1. Nothing dramatic. Nothing that concerns us. It did improve sequentially over the course of the month. That's continued into the first couple of days of May here, and that's all reflected in our outlook, but it was a little softer than Q1.

Brooke Roach

Great. And if I could just follow up on international, it appears that Europe wholesale continues to be a little weaker than we would have expected. I was wondering if you could discuss relative to your outlook for Europe and Asia provided in February. What are you forecasting for growth in both wholesale and DI be in those markets for the remainder of the year?

Scott Baxter

Yes. Look, I'll go ahead and start and then kick it over to Joe. But yes, you're right. Europe is still a little bit lumpy. So the business there is kind of up and down, and we've been writing that like a lot of other folks. We're certainly hopeful that that economy starts to pick up here over time. We are seeing some things that are that are beneficial on our product is still resonating in a pretty significant way. And we've got a really good team on the ground there. And our new project Genius work should help that from a global standpoint as we go ahead and accelerate our global product development under one person. So I do have some optimism, but we do need to see the economy improve and we're hopeful that that happens and strengthens throughout the rest of the year.

Joe Alkire

But truly, we think it's going to pick up a little bit more steam in 25 than in 24 yes, just in terms of this year, Brett, we actually came through Q1 a little better than our plan, both Europe and Asia. Again, we've just to the to the point I made earlier, we plan the business pretty conservatively. So no real change in terms of how we're thinking about the business you're up will be tougher than Asia.
We still expect growth more in that mid to high single-digit range on a full year basis, much stronger in the second half. Within that, we expect stronger growth from from D to C, which you've seen from both regions pretty consistently.

Brooke Roach

Thanks so much. I'll pass it on.

Operator

Mauricio Serna, UBS.

Mauricio Serna

Hi, good morning and thanks for taking my questions.
Yes, I just wanted to confirm first on the sales guidance, but Q1, like the sales beat, there wasn't really any any shift in shipments from Q walk from deals from Q2 to Q1? And if that's the case, just to understand again, like why is that not being flown through to So in order for the say, sales guidance.
Second on that, and I was thinking about the full year of sales guidance. Maybe if you could like provide some type of bridge or kind of explanation similar to what you you mentioned in the gross margin outlook in terms of like how much you're getting from roughly contribution from the new distribution gains or channel expansion and particularly interested on the other on the launch in the second half, what a Wrangler denim, like how much do you think that could contribute to your our sales growth Thanks.

Joe Alkire

Same ratio. It's Joe. I'll start. So on the on the first half guidance specifically, we kept it the same. So no real change. We raised the outlook. So at least from a revenue standpoint, no change for first half or full year from I'd say we're just being a little bit cautious just given the environment, but no real change. We continue to not assume any real improvement or any improvement in either POS trends or inventory levels at retail?
We held the year as well, down one to up one. And on the on the top line and the growth we assume in the back half is really all your non-comp distribution gains, category expansion, DTC in China. So from a from a top line standpoint, there's really no change to our to our outlook for the year. There's been some movement between the quarters, but nothing significant in the context of the full year.

Mauricio Serna

Got it. And then just a quick follow-up and on the could you talk a little bit more about what you saw in China? Usually you mentioned that on the release, but I didn't see any comments on this quarter? And and maybe also like on how should we think about, you know, the meaningful cash flow generation that you have for this year? How should we think about, you know, the pulse of optionality in terms of returns to shareholders in terms of dividends and share repurchases.

Scott Baxter

I'll go ahead and start from a China standpoint, we took 23 to really spend some time to work with our partners and clean up our inventory, which our team. And I want to be very thankful to them for this, but they did an outstanding job there. So really appreciate that inventory levels really pleased because if you remember and I think everybody does, China came out of the pandemic, a little bit slower than everybody else. So as we go through these kind of inventory issues there at the kind of the tailwind of it. So really nice work there. Now we're going about and we're refreshing about 70% of our fleet over there, which is fairly significant over the next two years. But it's really good work and work that needed to be done, teams heavily engaged in that. We did a lot of resource work in there and the loss insight work in there. So we're in a really good place as we start that process going forward.
Some of the things that we're thinking about over there, we're leaning into the newer live streaming platforms, which have become really, really interesting and really powerful from us speech and speaking to the consumer standpoint. So that's kind of where that consumer has migrated a bit. So those are some of the things that we're doing, but don't really like where we are right now as we've come through, you know, a very difficult time there way back in 22 and 23 and your own little bit of inertia, I would say is a little bit of blocking and tackling that we're doing there and then just building some great product and doing what we do so look forward to the future there. And then I'll go ahead and start cap allocation and kick it over to Joe. You know, it is a fabulous position to be. We're creating a lot of cash. The business is doing well. We've got options in front of us. You know, you saw that we went ahead and bought back $20 million of stock this quarter under our new $300 million program that we have. In addition to that, our dividends are a very significant dividend that we pay and we're investing back in the businesses. If we want to do M&A, we're in a really good position to do M&A. Maybe I can make a few comments on that. From an M&A standpoint, I've said it before. I said it for years, we're not kind of surprising anything that we do. You would immediately get in anything we do. We would look to do something accretive. We would look for a very, very fast paydown and payback. So count on that to you know, we're very prudent, listen work. We're really serious about making sure that we continue to do what's best for our shareholders and stakeholders. And right now, we're in a really good position. You know, there's difficulty in the environment and there's difficulty in the sector, but we're not in that position. We're in a position of strength. So we can look at things from a position of strength, which is also really important. So we feel really good about where we are in the cash that we're generating as a company. And we've done a really prudent job as far as how we've gone ahead and giving it back to the shareholders.

Joe Alkire

Joe, I think the F payout ratio, I would say from a priority standpoint, the priorities are on unchanged. We want to prioritize reinvesting in the business. First, we're committed to growing the dividend over time. And then you've got share repo and M&A. Our cash flow is accelerating it stronger. We raised the outlook. The balance sheet is strong. We repurchased $20 million of stock in the first quarter to repurchase $30 million in the fourth quarter. So we're putting more capital on, you know, to work. The M&A environment is active as you know, we do think it's an opportunity for us, but we're going to stay. We're going to stay disciplined. We like our strategic plan. And so I'd say the bar is high relative to where we can invest in contour today. So again, a lot of optionality given the position we're in in project Genius further supports our flexibility going forward.

Mauricio Serna

Understood. Thank you very much.

Operator

Laurent Vasilescu, BNP Paribas.

Laurent Vasilescu

Both Good morning and thank you very much for taking my questions. Wanted to follow up on Rich's question on China. But last quarter, the transcript called out that China, we grew 25% in the fourth quarter and that leave China would accelerate. Curious to know how China actually performed for this quarter year over year, that would be great. And are you still expecting for China to accelerate throughout the year?

Joe Alkire

So China was down a little bit in the first quarter. It was a little ahead of our plan. We still expect growth for the full year and digital increased at a double digit rate. Brick-and-mortar was a little tougher. As you know, we had a larger presence from a brick-and-mortar retail standpoint and traffic trends were difficult in the quarter. Inventory levels just in the market are much improved versus a year ago. I'd say we're pretty much back at more normalized levels of inventory, and we continue to work on improving the health and quality of our of our retail partners. So no real change from what remains a pretty significant opportunity for us long term.

Laurent Vasilescu

Very helpful, Joe. And then I wanted to ask about the 1Q adjustments footnotes out streamlining and transferring selection production within your internal manufacturing network. Maybe could you provide a little bit more color to the audience what this means? And should we assume roughly $0.1 of adjustments per quarter over the next three quarters so we can get to it.
Our model GAAP net income.

Joe Alkire

Yes. So in the first quarter, what you saw in the gross margin line was a little bit of a spillover from the fourth quarter restructuring charge we took on the supply chain that was really exiting our Arden manufacturing in Nicaragua and consolidating into Mexico. I'd say the majority of the one-time costs in the first quarter were more Genius related As we highlighted last quarter disclosed last quarter, we will have some one-time costs related to that program as we activated over the next couple of quarters. But I'd say going forward outside of project genius and the impact of which we'll just we'll disclose appropriately, I'd expect our our onetime costs to be pretty minimal, if any. So you should start to see a much clearer picture for the business going forward.

Laurent Vasilescu

Very helpful. Thank you much for all the color, Joe

Joe Alkire

Welcome, Larry.

Operator

Will Gaertner, Wells Fargo.

Will Gaertner

Hey, guys, thanks for taking my question. So I just wanted to talk about the U.S. lower product costs. How sustainable is that past this year. You I think you broke you parsed out the impact this year. Just maybe talk a little bit about what's going to happen once you lap those foods, those protocols, those protocols?

Joe Alkire

Well, so we said about 200 basis points benefit for the year from lower product costs. That's more front-half loaded than back half as we get to the fourth quarter, we'll start to lap those. But for the second half as a whole, our outlook implies over 100 basis points of gross margin expansion. So that's that's 2024. I'd say just as you think about the gross margin algorithm going forward, we basically have our structural mix, which we think is somewhere in that 30 to 40 basis points range, I'd say for everything else, FX cost pricing overtime, that tends to neutralize for us, and that's been our model historically. And I'd say there's no structural reason why that would change for us going forward. But we do have project Genius just as we think about evolving our supply chain that will layer on some additional opportunity on the gross margin side, but more to come on that over the next few quarters.

Will Gaertner

Great. And just maybe talk a little bit about the share gains. What's driving that? Are you selling into new doors at existing retailers are at new retailers? And are you gaining shelf space with core product or is this driven more by category?

Scott Baxter

This is Scott. I will. I'll tell you exactly what's doing a great product. Our team is designing and building fantastic product that our consumers want and you combine that great quick with things like a new lady Wilson collection, our new stout collaboration that we've continued and just those things that we're doing on, it's just driving the consumer to our brand. It's a really exciting time lots of lots of just excitement and enthusiasm about both brands. And that's just adding to what's going on here at our company.
So again, I go back to a fairly simple formula. You build really great product to market. It really well. You treat your consumers really well. We sell our product at a very fair price, a lot of value and people love our brands. It's a great combination combination for us.

Will Gaertner

Got it. So so is it are you expanding into new sellers or is it or is it more existing doors? Can you just kind of give a little bit more color there that we think Sure.

Scott Baxter

We've expanded into some new retailers for sure. And then in the second half of this year, we do have some new business that we've talked a little bit about, which is part of the reason that we're going to have a little acceleration in our revenue and that is happening both at existing customers and also add new customers on in some of our new areas that we talked about earlier, like outdoor and tees are really working and they're picking up new distribution too. So it is a combination of all of those.

Will Gaertner

Thank you.

Operator

Paul Kearney, Barclays.

Paul Kearney

Thanks for taking my questions. Most of them have been answered, but maybe can you talk about the investments you're making for the back half innovation and channel launches, where are you allocating marketing? And how should we think about that spend longer term on the SG&A line? Thanks.

Scott Baxter

We have done a really nice job. Morning, Paul. We've done a really nice job of accelerating our marketing spend since the spin, and we continue to do that. But I think the most important thing is we've actually been very intelligent on how we've done that going forward.
I think one of the things that's been really important for us here is our new consumer insights focus. When we built our new ERP system that gave us an opportunity to go ahead and build out our consumer insights group for both Wrangler and Lee, which really wasn't very robust before. And let me give you a really great example of how that's worked. We found out here recently, not that long ago through our new consumer insights groups that are Lee male consumer, he's playing and also watching more golf than you know, the average consumer. So we went ahead and went to the market with a newly golf pant short, and that just kicked off in the marketplace and it's actually kicked off in a really nice way. We've been really pleased with the performance of it already, but that's a great example of how we're looking at these different opportunities utilizing our new ERP system and investing in consumer insights going forward.

Paul Kearney

Perfect. Thank you.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Scott Baxter for any closing remarks.

Scott Baxter

Well, so I just wanted to thank you for all your questions and thank you for your interest in our company. And certainly appreciate that and have a wonderful beginning of the summer, and we'll look to touch base with you in July about mid summer and getting the update on our progress and everything we talked about today. Again, thank you for your participation today, and we'll talk to you soon.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time and enjoy the rest of your day.