American apparel company Kontoor Brands' revenue down 7% in Q3 2022

Revenue decreases were primarily driven by significant US retailer inventory rebalancing efforts in the quarter and the impacts of lockdowns in China. Challenges in domestic wholesale and China were somewhat offset by continued strength in the digital platform, as well as gains in the EMEA region.

US revenue was $452 million, decreasing 8 per cent over last year, with reductions in both the Wrangler and Lee brands. Lower shipments due to retailer inventory rebalancing weighed on US wholesale, which was down 9 per cent compared to the third quarter 2021. These pressures were somewhat offset by continued strength in the digital platform, with US platform revenue increasing 14 per cent compared to last year, the company said in a media release.

International revenue was $154 million, a 3 per cent decrease (7 per cent increase in constant currency) over the same period in the prior year. As expected, due to COVID lockdowns in the region, China decreased 24 per cent (20 per cent decrease in constant currency) compared to the third quarter 2021, sequentially improving from decreases of 50 per cent in the second quarter of 2022. Europe increased 7 per cent (27 per cent increase in constant currency), driven by digital and aided by a shift in the timing of shipments associated with the ERP implementation last year, from the third quarter to the second quarter of 2021.

Wrangler brand global revenue was $406 million, a 4 per cent decrease (2 per cent decrease in constant currency) from the same period in the prior year. Wrangler US revenue decreased 5 per cent compared to last year, primarily driven by the aforementioned reduction of shipments in US wholesale due to significant retailer inventory rebalancing, somewhat offset by broad-based channel and category strength including Western, Workwear, T-shirts and Female. US Wrangler.com increased 16 per cent compared to last year. Wrangler international revenue increased 3 per cent (15 per cent increase in constant currency) compared to the third quarter 2021.

Lee brand global revenue was $198 million, a 13 per cent decrease (9 per cent decrease in constant currency) from the same period in the prior year. Lee US revenue decreased 19 per cent compared to last year, primarily driven by the aforementioned reduction of shipments due to significant retailer inventory rebalancing. Globally, non-denim categories such as T-shirts experienced significant year-over-year gains in the quarter. US Lee.com increased 10 per cent compared to last year. Lee international revenue decreased 6 per cent (3 per cent increase in constant currency) from the third quarter 2021. Strength in Europe was offset by expected reductions in China due to the impact of COVID lockdowns.

Other global revenue of the company was $2 million, a 33 per cent decrease compared to the same period in the prior year.

Gross margin decreased to 43.5 per cent, a decrease of 90 basis points on a reported basis and 60 basis points on an adjusted basis, compared to the third quarter 2021. Higher inflationary pressures on input costs, inventory provisions, elevated ocean freight rates and foreign currency primarily drove the decline. The decline was partially offset by strategic pricing, channel and product mix, as well as moderating transitory costs such as air freight.

Selling, General & Administrative (SG&A) expenses were $189 million on a reported basis, and $174 million on an adjusted basis. As a percent of revenue, adjusted SG&A was 28.7 per cent, increasing 20 basis points compared to adjusted SG&A during the same period in the prior year.

Operating income was $75 million on a reported basis and $90 million on an adjusted basis. Adjusted operating margin of 14.8 per cent decreased 80 basis points compared to adjusted operating margin during the same period in the prior year. Higher inflationary pressures on input costs, inventory provisions and elevated ocean freight more than offset the benefits of strategic pricing and tight control of expenses.

Earnings before interest, tax, depreciation and amortization (EBITDA) was $82 million on a reported basis and $97 million on an adjusted basis. Adjusted EBITDA margin of 15.9 per cent decreased 100 basis points compared to adjusted EBITDA margin during the same period in the prior year.

Earnings per share was $0.90 on a reported basis and $1.11 on an adjusted basis compared to reported EPS of $1.07 and adjusted EPS of $1.28, in the same period in the prior year.

“We expect challenging global macroeconomic conditions, particularly inflation, should continue to weigh on consumer discretionary spend, and ongoing inventory reduction actions will pressure near-term margins. However, we anticipate revenue to sequentially accelerate in the fourth quarter due to improved U.S. retail inventory levels, continued POS momentum, share gains and new business development activities. Further, our cash generation is expected to remain strong over time, giving us confidence in our capital allocation flexibility, as evidenced by our recently announced dividend increase,” said Scott Baxter, president, chief executive officer and chair of Kontoor Brands.

In consideration of impacts from retailer inventory rebalancing in the third quarter, inflation, ongoing lockdowns in China and foreign currency, the company has revised its 2022 outlook. Revenue is now expected to increase approximately 4 per cent (increase 6 per cent in constant currency) compared to 2021 and compared to prior guidance of up approximately 6 per cent. The updated revenue guidance includes an incremental 1-point negative impact from foreign currency, the release added.

Gross margin is now expected to approximate 43.0 per cent compared to adjusted gross margin of 44.6 per cent achieved in 2021 and compared with prior guidance of 43.5 per cent. Adjusted SG&A is expected to increase at a low single-digit rate compared to adjusted SG&A in 2021. Adjusted EPS is expected to be in the range of $4.35 to $4.40, compared to prior guidance of $4.40 to $4.50.

Kontoor Brands’ capital expenditures are expected to be in the range of $30 million to $35 million, primarily to support manufacturing, distribution, and information technology projects, down from $35 million to $40 million prior. It expects an effective tax rate of approximately 20 per cent in 2022. Interest expense is expected to be in the range of $30 million to $35 million in 2022.

Fibre2Fashion News Desk (KD)