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Kontoor Brands Reports Second Quarter 2020 Results

Updated: Sep 7


* Q2 2020 Reported Revenue of $349 million

* Q2 2020 GAAP EPS of $(0.58), Adjusted EPS of $(0.22)

* Q2 2020 Reported Gross Margin declined 10 bps to 38.5 percent compared with the prior year; Adjusted Gross Margin declined 160 bps to 38.4 percent

* Q2 2020 inventory declined $105 million, or 20 percent, compared with the prior year

* Strong cash generation supported an additional discretionary debt paydown of $75 million in the second quarter, in addition to the $175 million paid in conjunction with the amended credit facility


GREENSBORO, N.C.--(BUSINESS WIRE)-- Kontoor Brands, Inc. (NYSE: KTB), a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, today reported financial results for its second quarter ended June 27, 2020.


“In a rapidly changing operating environment, we remain focused on navigating near-term impacts associated with the COVID-19 pandemic, while also positioning Kontoor for future success,” said Scott Baxter, President and Chief Executive Officer, Kontoor Brands. “During the second quarter, we successfully balanced managing through short-term challenges while taking proactive measures to drive competitive separation in the global marketplace. We strengthened our liquidity position, improved our financial flexibility and paid down debt, all while investing in growth and new business development opportunities.”


“I want to thank our colleagues around the world for their perseverance and resolve during these dynamic times. Our accomplishments throughout the second quarter are a direct reflection of their tireless efforts. I am confident the strength of our global team positions us to best serve the needs of all of our stakeholders,” 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.


Second Quarter 2020 Income Statement Review


Revenue decreased to $349 million, a 43 percent year-over-year decline on a reported basis and 42 percent decline in constant currency.

Revenue declines during the quarter were primarily the result of COVID-19 related wholesale and owned door closures and stay-at-home orders, as well as an approximate $33 million timing shift of shipments from the second quarter to the third quarter. Revenue on a year-over-year basis sequentially improved each month as the quarter progressed.


During the second quarter, U.S. revenue was $288 million, down 41 percent on a reported basis, driven primarily by the COVID-19 impacts and aforementioned timing shift. These declines were partially offset by growth in digital, with U.S. owned.com increasing 48 percent and U.S. digital wholesale increasing 36 percent.


International revenue was $61 million, down 51 percent on a reported basis and down 48 percent in constant currency, primarily as a result of COVID-19 impacts. Europe revenue was the most impacted, while the recovery in China continued to improve.


Wrangler® brand global revenue decreased to $252 million, a 31 percent decline on a reported and constant currency basis. Wrangler® U.S. revenue declined 27 percent. Impacts from COVID-19 and the aforementioned timing shift, out of the second quarter and into the third quarter, were the primary drivers of the U.S. decline.


Lee® brand global revenue decreased 58 percent to $86 million on a reported and constant currency basis, driven primarily by COVID-19 impacts. Lee® U.S. revenue declined 66 percent driven by more prolonged retailer door closures.


Other global revenue declined 70 percent to $12 million on a reported and constant currency basis driven by the temporary Company-owned VF Outlet™ store closures related to COVID-19, as well as planned reductions in the sale of goods manufactured for third parties, and Rock & Republic®.


Gross margin decreased 10 basis points to 38.5 percent of revenue on a reported basis. On an adjusted basis, gross margin decreased 160 basis points to 38.4 percent of revenue. COVID-19 impacts associated with downtime in owned manufacturing and inventory reserves drove a 450 basis point net decline. Geographic mix contributed another 60 basis points of headwind. These factors more than offset approximately 350 basis points of improvement from restructuring, quality-of-sales initiatives, pricing, product cost enhancements and improving channel mix.


Selling, General & Administrative (SG&A) expenses were $156 million on a reported basis. On an adjusted basis, SG&A was $129 million, or 36.8 percent of revenue, down $38 million from second quarter adjusted 2019. Adjustments primarily represent costs associated with the global ERP implementation and information technology infrastructure build-out. Tight expense control and restructuring benefits helped offset fixed cost de-leverage due to revenue declines and increased credit losses.


Operating loss on a reported basis was $22 million. On an adjusted basis, operating income was $6 million, down from $74 million in the same period in 2019 reflecting the significant impacts of COVID-19. Adjusted operating margin decreased to 1.6 percent of revenue, driven by fixed cost de-leverage of lower sales and increased credit losses, more than offsetting restructuring benefits, cost savings and quality-of-sales initiatives.


Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) on a reported basis was a loss of $14 million. Adjusted EBITDA was $13 million, down from $82 million in the prior year. EBITDA margin on a reported basis decreased to (4.1) percent of revenue. Adjusted EBITDA margin decreased to 3.6 percent of revenue, primarily due to the impacts of COVID-19 outlined above.


Loss per share was $(0.58) on a reported basis. Adjusted loss per share was $(0.22).


June 27, 2020, Balance Sheet Review


The Company ended the second quarter of 2020 with $256 million in cash and equivalents, and approximately $1.1 billion in long-term debt.

The Company repaid $175 million against the revolver in conjunction with the closing of the amendment to the credit facility in May 2020. Due to the Company's strong cash generation, in June 2020, the Company made an additional discretionary repayment on its revolver of $75 million. As of June 2020, the Company had $225 million of outstanding borrowings under the Revolving Credit Facility and $273 million available for borrowing against this facility. The Company was in compliance with the terms of its amended credit facility at the end of the second quarter.


Inventory at the end of the second quarter of 2020 was $433 million, down $105 million or 20 percent compared to the prior year period.


Outlook


As previously announced, and as a result of the uncertainty and significant business impacts caused by COVID-19, Kontoor withdrew its 2020 guidance provided on March 5, 2020, and has not provided an updated outlook given the continued dynamic nature of the environment.


While the Company is not providing full-year 2020 guidance at this time, additional perspective and assumptions on revenues are as follows:


* The Company continues to take the necessary, proactive steps to accommodate a prolonged COVID-19 operating environment.

* Revenue in the second half of 2020 should experience sequential year-over-year improvement and is expected to benefit from new programs and distribution gains, as well as the timing shift of shipments.


Author: Kontoor

Original article: https://www.kontoorbrands.com/news-media/press-release/58/kontoor-brands-reports-second-quarter-2020-results


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