- Q2’22 revenue of $614 million increased 25 percent on a reported basis and 27 percent in constant currency compared to Q2’21, and compared to guidance of $640 million to $650 million
- Compared to H1’19, Wrangler and Lee U.S. revenues in H1’22 increased 19 percent and 14 percent, respectively
- Q2’22 GAAP EPS of $1.09 compared to Q2’21 GAAP EPS of $0.40, Q2’21 adjusted EPS of $0.70, and guidance of $1.05 to $1.15
- 2022 revenue is now expected to increase 6 percent compared to 2021 and prior guidance of increasing approximately 10 percent
- 2022 adjusted EPS is now expected to be in the range of $4.40 to $4.50, increasing 3 percent to 5 percent compared to 2021 adjusted EPS, and compared to prior guidance of $4.75 to $4.85
- The updated outlook excludes an estimated EPS charge of $0.25 for restructuring associated with actions to enhance growth by accelerating the transformation of the Company’s global operating model, including the relocation of its European headquarters
Kontoor Brands, Inc., a global lifestyle apparel company, with a portfolio led by two of the world’s most iconic consumer brands, Wrangler® and Lee®, reported financial results for its second quarter ended July 2, 2022.
“In a highly dynamic macroeconomic environment, supply chain challenges and inflationary pressures accelerated during the quarter. While these factors tempered our top line a bit sooner than expected, we were still able to deliver strong 27 percent revenue growth and 57 percent adjusted earnings growth, on a constant currency basis, in line with our EPS guidance. I am proud of our teams’ agility to navigate rapid changes, outperform on a relative basis in our largest market, and deliver on our second quarter profitability goals,” said Scott Baxter, President, Chief Executive Officer and Chair of Kontoor Brands.
“Looking forward, we anticipate that macro conditions will remain challenging, particularly as retailer inventories are rebalanced and inflation weighs on overall consumer demand. However, we are confident that our strategies, continued brand momentum and efficient operating model will fuel further competitive separation over time. Kontoor-specific drivers in accelerating diversified growth, when coupled with our proven strong cash generation, should allow us to continue to deliver industry-leading TSR,” added Baxter
This release refers to “adjusted” amounts from 2021 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.
As previously stated, the cutover and transition of the Company’s North American enterprise resource planning (ERP) system caused timing of shipments to benefit first quarter 2021 revenue and profitability, while negatively impacting second quarter 2021 revenue and profitability. In addition, second quarter 2021 revenue in the EMEA 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. These factors primarily impacted first half year-over-year quarterly comparisons but are not expected to impact the full year.
Second Quarter 2022 Income Statement Review
Revenue was $614 million, a 25 percent increase on a reported basis, and 27 percent in constant currency, over the same period in the prior year. Revenue increases were primarily driven by strength in the U.S., in both the Digital and wholesale channels. Strength domestically was somewhat offset by the international business, as COVID lockdowns negatively impacted the China region, while expected Europe declines were primarily due to timing shifts of shipments associated with the ERP implementation in the region last year. Despite international headwinds, reported global own.com revenue increased 8 percent, or 10 percent in constant currency, and digital wholesale increased 43 percent, or 46 percent in constant currency, compared to second quarter 2021.
U.S. revenue was $510 million, increasing 40 percent over last year, driven by strength in both the Wrangler and Lee brands. Gains were driven by growth in wholesale, including new business development wins, and strength in Digital, with U.S. own.com revenue increasing 24 percent and digital wholesale increasing 64 percent compared to the second quarter 2021. Compared to the first half of 2019, Wrangler and Lee U.S. revenues in the first half of 2022 increased 19 percent and 14 percent, respectively.
International revenue was $103 million, an 18 percent decrease over the same period in the prior year on a reported basis and down 11 percent in constant currency. As expected, due to COVID lockdowns in the region, China decreased 50 percent on a reported basis and 49 percent in constant currency compared to the second quarter 2021. Also as expected due primarily to the aforementioned ERP timing shifts, Europe decreased 25 percent on a reported basis and 14 percent in constant currency.
Wrangler brand global revenue was $418 million, a 34 percent increase over the same period in the prior year on a reported basis and was up 36 percent in constant currency. Wrangler U.S. revenue increased 40 percent compared to last year, with broad based strength across channels and categories, including Western, Workwear, Outdoor and Female. Comparisons to second quarter 2021 were positively impacted by timing shifts due to the North American ERP implementation. Wrangler international revenue was flat compared to the second quarter 2021 on a reported basis and increased 8 percent in constant currency.
Lee brand global revenue was $193 million, a 10 percent increase over the same period in the prior year on a reported basis and was up 12 percent in constant currency. Lee U.S. revenue increased 40 percent compared to last year, driven by strength in U.S. wholesale demand and increases in Digital. Comparisons to second quarter 2021 also benefitted from the timing shifts due to the North American ERP implementation. Lee international revenue decreased 27 percent over the second quarter 2021 on a reported basis and 22 percent in constant currency, driven primarily by the aforementioned COVID lockdowns in China and ERP timing shifts in Europe.
Other global revenue was $3 million, a 25 percent decrease compared to the same period in the prior year.
Gross margin decreased 260 basis points to 43.5 percent of revenue, compared to the second quarter 2021. As expected, near-term transitory expenses, which include air freight for expedited shipments to meet demand, contributed 170 basis points of decline. Further, geographic mix impacts, primarily from the COVID lockdowns in China and ERP timing shifts in Europe, contributed 150 basis points of decline. These declines were partially offset by strategic pricing that more than offset inflationary product cost pressures.
Selling, General & Administrative (SG&A) expenses were $178 million on a reported basis, or 29.0 percent of revenue, down 990 basis points compared to the same period in the prior year. SG&A decreased 510 basis points compared to second quarter 2021 adjusted SG&A. Tight control of non-strategic expenses, lower compensation costs and better fixed cost leverage on improving revenue more than offset product development and distribution expenses, while continuing to make strategic investments in higher demand creation, digital and IT investments.
Operating income was $89 million on a reported basis. Operating margin increased 730 basis points to 14.5 percent of revenue. Operating margin increased 250 basis points compared to second quarter 2021 adjusted operating margin, as tight control of non-strategic expenses, fixed cost leverage and benefits of strategic pricing more than offset strategic investments to drive future accelerating revenue growth, higher transitory impacts, product costs and negative impacts of geographic mix.
Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) was $95 million on a reported basis. EBITDA margin increased 650 basis points to 15.5 percent of revenue. EBITDA margin increased 180 basis points compared to second quarter 2021 adjusted EBITDA margin.
Earnings per share was $1.09 on a reported basis compared to reported EPS of $0.40 and adjusted EPS of $0.70, in the same period in the prior year.