Kontoor Brands Reports Second Quarter 2021 Results; Raises Outlook for Fiscal 2021

• Q2 Reported EPS of $0.40; Adjusted EPS of $0.70
• Q2 Reported Revenue of $491 million increased 41 percent compared to the prior year
• Q2 Reported Gross Margin of 46.1 percent increased 760 basis points compared to the prior year
• The Company’s Board of Directors has authorized a $200 million share repurchase program
• Fiscal 2021 guidance raised; Adjusted EPS is now expected to be $3.90 to $4.00, up from the prior range of $3.70 to $3.80

GREENSBORO, N.C.–(BUSINESS WIRE)–$KTB–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 second quarter ended July 3, 2021.

“Kontoor’s strong second quarter results, which came in above our expectations, and our improving fundamentals give us confidence to raise full year guidance. As discussed at our recent Investor Day, we expect to catalyze sustained, profitable growth across channels, categories and geographies, fueled by investments in key enablers within talent, demand creation, digital and sustainability,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands.

“Additionally, we are well positioned to take advantage of increasing optionality in our capital allocation strategy. Today’s announcement of a $200 million share repurchase program exemplifies this enhanced optionality, and reflects the strong cash flow generation of our business.”

“I want to thank all of our Kontoor colleagues around the globe for their continued focus on operational execution. Our incredible people, dedicated to excellence and taking care of one another, will drive Kontoor’s bright future ahead,” 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.

Second Quarter 2021 Income Statement Review

Revenue increased to $491 million, a 41 percent increase on a reported basis and 37 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 accelerating trends in international markets. As expected and discussed on the first quarter 2021 earnings call, second quarter revenue was negatively impacted by a shift in the timing of shipments from the second quarter to the first quarter ahead of the Company’s North American ERP implementation. Additionally, gains in the quarter were somewhat offset by the impacts of the previously announced strategic actions related to VF Outlet store closures, discontinuing the sale of third-party branded merchandise in all stores, and the transition to a new licensed business model in India. Finally, in select markets and channels, COVID-19 also negatively impacted the Company’s second quarter 2021 results. Compared to adjusted revenue in the second quarter of 2019, reported revenue decreased 19 percent due to the aforementioned factors.

U.S. revenue was $365 million, increasing 27 percent over the same period in the prior year driven by growth in U.S. wholesale, new business development wins and strength in Digital, with own.com increasing 28 percent and digital wholesale increasing 49 percent.

International revenue was $126 million, a 106 percent increase over the same period in the prior year on a reported basis and 87 percent in constant currency. China increased 10 percent over the same period in the prior year in constant currency. Despite ongoing headwinds from COVID-19, the European business increased 254 percent over the same period in the prior year in constant currency. Second quarter revenue in the region benefited from a shift in the timing of shipments from the third quarter to the second quarter ahead of the Company’s European ERP implementation.

Wrangler brand global revenue increased to $311 million, a 24 percent increase over the same period in the prior year on a reported basis and 22 percent in constant currency. Wrangler U.S. revenue increased 14 percent compared to the same period last year, driven by increases in Digital, Western and new product categories.

Lee brand global revenue increased to $176 million, a 105 percent increase over the same period in the prior year on a reported basis and 96 percent in constant currency. Lee U.S. revenue increased 118 percent compared to the same quarter last year with strength from improving sell through of new programs, retailer re-openings and increases in Digital.

Other global revenue declined 70 percent on a reported basis compared to the same period in the prior year to $3 million driven by impacts from the strategic actions related to VF Outlet stores.

Gross margin increased 760 basis points to 46.1 percent of revenue, compared to the same period in the prior year. Favorable channel, customer and product mix were the primary drivers of gross margin gains in the quarter. In addition, the current period benefited from COVID-19 impacts associated with downtime in owned manufacturing in 2020, as well as lower distressed sales. Compared to the second quarter of 2019, gross margin increased 750 basis points.

Selling, General & Administrative (SG&A) expenses were $191 million on a reported basis. Adjusted SG&A was $168 million, or 34.1 percent of revenue, down 270 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 and digital investments in support of 2021 and future revenue offset, in part, better fixed cost leverage on improving revenues and restructuring benefits.

Operating income on a reported basis was $35 million. Adjusted operating income was $59 million, increasing 957 percent compared to the same period in the prior year. Adjusted operating margin increased 1,040 basis points to 12.0 percent of revenue, reflecting the benefits of gross margin improvements and fixed cost leverage on better revenues.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was $44 million. Adjusted EBITDA was $67 million, increasing 433 percent compared to the same period in the prior year. Adjusted EBITDA margin increased 1,010 basis points to 13.7 percent of revenue.

Earnings per share was $0.40 on a reported basis compared to a loss per share of ($0.58) in the same period in the prior year. Adjusted earnings per share was $0.70 compared to a loss of ($0.22) in the same period in the prior year.

July 3, 2021, Balance Sheet and Liquidity Review

The Company ended the second quarter of 2021 with $176 million in cash and equivalents, and approximately $0.8 billion in long-term debt.

Due to strong cash generation during the first half of 2021, the Company made debt payments totaling $25 million during the second quarter. As of July 3, 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 $0.40 per share payable on September 20, 2021, to shareholders of record at the close of business on September 10, 2021.

Inventory at the end of the second quarter of 2021 was $403 million, down $30 million or 7 percent compared to the prior-year period. Excluding balances related to VF Outlet and India, inventory at the end of the second quarter of 2021 increased 4 percent compared to the prior-year period, well positioned to support accelerating demand.

Authorization of $200 Million Share Repurchase Program

The Company’s Board of Directors has approved a share repurchase program. The program authorizes the repurchase of up to $200 million of the Company’s outstanding common stock through open market or privately negotiated transactions. The timing and amount of repurchases will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors. The program does not have an expiration date but may be suspended, modified or terminated at any time without prior notice. The Company expects to fund repurchases through cash flow generated from operations.

2021 Fiscal Outlook

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 in the mid-teens range over 2020, to $2.39 billion to $2.42 billion, as compared to a low-teens range in the prior guidance, including a mid-single digit impact from the VF Outlet actions and India business model change.

• Gross margin is now expected to increase by 330 to 380 basis points above the adjusted gross margin of 41.2 percent achieved in 2020 to 44.5 percent to 45.0 percent of revenue. This compares to prior guidance of a 230 to 270 basis points increase. The increase reflects higher anticipated growth in more accretive channels such as Digital and International.

• SG&A investments will continue to be made in brands and capabilities. Due to the strengthening revenue and gross margin outlook, the Company expects to amplify SG&A investments in demand creation, Digital and International expansion to support second half 2021 revenue and accelerate momentum for 2022. These increases will be partially mitigated by ongoing tight expense controls and sustained, structural post-pandemic cost containment initiatives.

• Adjusted EPS is now expected to be in the range of $3.90 to $4.00 as compared to $3.70 to $3.80 in the prior guidance. This EPS guidance does not assume the benefit of any share repurchases.

• 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 22 percent is expected, while interest expense is expected to be approximately $40 million to $45 million.

Webcast Information

Kontoor Brands will host its second quarter 2021 conference call beginning at 8:30 a.m. Eastern Time today, August 5, 2021. The conference will be broadcast live via the Internet, accessible at https://www.kontoorbrands.com/investors. For those unable to listen to the live broadcast, an archived version will be available at the same location.

Non-GAAP Financial Measures

Adjusted Amounts – This release refers to “adjusted” amounts. Adjustments during the second quarter of 2021 and 2020 primarily represent costs associated with the Company’s global ERP implementation and information technology infrastructure build-out. Adjustments during the second quarter of 2019 primarily represent restructuring and separation costs, business model changes and other adjustments. Additional information regarding adjusted amounts is provided in notes to the supplemental financial information included with this release.

Constant Currency – This release refers to “reported” amounts in accordance with GAAP, which include translation and transactional impacts from changes in foreign currency exchange rates. This release also refers to “constant currency” amounts, which exclude the translation impact of changes in foreign currency exchange rates.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures are presented in the supplemental financial information included with this release that identifies and quantifies all reconciling adjustments and provides management’s view of why this non-GAAP information is useful to investors. While management believes that these non-GAAP measures are useful in evaluating the business, this information should be viewed in addition to, and not as an alternate for, reported results under GAAP. The non-GAAP measures used by the Company in this release may be different from similarly titled measures used by other companies. A reconciliation of non-GAAP forward looking information to the corresponding GAAP measures cannot be provided without unreasonable efforts due to the challenge in quantifying various items including, but not limited to, the effects of foreign currency movements, ERP implementation expenses, gains or losses on sales of assets, taxes, and any future restructuring or impairment charges.

About Kontoor Brands

Kontoor Brands, Inc. (NYSE: KTB) is a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands: Wrangler^® and Lee^®. Kontoor designs, manufactures and distributes superior high-quality products that look good and fit right, giving people around the world the freedom and confidence to express themselves. Kontoor Brands is a purpose-led organization focused on leveraging its global platform, strategic sourcing model and best-in-class supply chain to drive brand growth and deliver long-term value for its stakeholders. For more information about Kontoor Brands, please visit www.KontoorBrands.com.

Forward-Looking Statements

Certain statements included in this release and attachments are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements are made based on our expectations and beliefs concerning future events impacting the Company and therefore involve several risks and uncertainties. You can identify these statements by the fact that they use words such as “will,” “anticipate,” “estimate,” “expect,” “should,” “may” and other words and terms of similar meaning or use of future dates. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as required under the U.S. federal securities laws. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements in this release include, but are not limited to: risks associated with the COVID-19 pandemic, which could continue to result in closed factories and stores, reduced workforces, supply chain interruption, and reduced consumer traffic and purchasing; the level of consumer demand for apparel; intense industry competition; the Company’s ability to gauge consumer preferences and product trends, and to respond to constantly changing markets; the ability to accurately forecast demand for products; the Company’s ability to maintain the images of its brands; increasing pressure on margins; e-commerce operations through the Company’s direct-to-consumer business; the financial difficulty experienced by the retail industry; possible goodwill and other asset impairment; reliance on a small number of large customers; the ability to implement the Company’s business strategy; the stability of manufacturing facilities and foreign suppliers; fluctuations in wage rates and the price, availability and quality of raw materials and contracted products; the reliance on a limited number of suppliers for raw material sourcing and the ability to obtain raw materials on a timely basis or in sufficient quantity or quality; disruption to distribution systems; seasonality; unseasonal or severe weather conditions; operational difficulties and additional expenses related to the Company’s design and implementation of its enterprise resource planning software system; the Company’s and its vendors’ ability to maintain the strength and security of information technology systems; the risk that facilities and systems and those of third-party service providers may be vulnerable to and unable to anticipate or detect data security breaches and data or financial loss; ability to properly collect, use, manage and secure consumer and employee data; foreign currency fluctuations; the impact of climate change and related legislative and regulatory responses; legal, regulatory, political and economic risks; changes to trade policy, including tariff and import/export regulations; compliance with anti-bribery, anti-corruption and anti-money laundering laws by the Company and third-party suppliers and manufacturers; changes in tax laws and liabilities; the costs of compliance with or the violation of national, state and local laws and regulations for environmental, consumer protection, employment, privacy, safety and other matters; the Company’s ability to maintain effective internal controls; continuity of members of management; labor relations; the ability to protect trademarks and other intellectual property rights; the ability of the Company’s licensees to generate expected sales and maintain the value of the Company’s brands; disruption and volatility in the global capital and credit markets and its impact on the Company’s ability to obtain short-term or long-term financing on favorable terms; the Company maintaining satisfactory credit ratings; restrictions on the Company’s business relating to its debt obligations; volatility in the price and trading volume of the Company’s common stock; anti-takeover provisions in the Company’s organizational documents; the failure to declare future cash dividends; and the Company’s spin-off from VF Corporation, including not realizing all of the expected benefits from the spin-off; the representativeness of the historical financial information for the periods prior to the spin-off; the significant costs to the Company to perform certain functions (currently being performed by VF Corporation for the Company on a transitional basis) following the transition period; indemnification obligations related to the spin-off; having limited access to the insurance policies maintained by VF Corporation for events occurring prior to the spin-off; the actual or potential conflicts of interest of the Company’s directors and officers because of their equity ownership in VF Corporation; the tax treatment of the spin-off; and the significant restrictions on the Company’s actions in order to avoid triggering tax-related liabilities. Many of the foregoing risks and uncertainties will continue to be exacerbated by the COVID-19 pandemic and any continued worsening of the global business and economic environment as a result. More information on potential factors that could affect the Company’s financial results are described in detail in the Company’s most recent Annual Report on Form 10-K and in other reports and statements that the Company files with the SEC.

*Calculation not meaningful.

Basis of presentation for all financial tables within this release: The Company operates and reports using a 52/53 week fiscal year ending on the Saturday closest to December 31 each year. For presentation purposes herein, all references to periods ended June 2021 and June 2020 relate to the 13-week and 26-week fiscal periods ended July 3, 2021 and June 27, 2020, respectively. References to June 2021, December 2020 and June 2020 relate to the balance sheets as of July 3, 2021, January 2, 2021 and June 27, 2020, respectively. Amounts herein may not recalculate due to the use of unrounded numbers.

Contacts

Investors:
Eric Tracy, (336) 332-5205

Senior Director, Investor Relations

Eric.Tracy@kontoorbrands.com
or

Media:
Vanessa McCutchen, (336) 332-5612

Vice President, Corporate Communications

Vanessa.McCutchen@kontoorbrands.com

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