Kontoor Brands, Inc.

Greetings. Welcome to the Contour Brands Q1 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Eric Tracy, Senior Director of Investor Relations. Thank you. You may begin.

Thank you, Operator, and welcome to Contour Brand's first quarter 2022 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. First quarter 2022 results are on a GAAP basis. select comparisons to first quarter 2021 results will be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning and is available on our website at contourbrands.com. Reconciliations of gap measures to adjusted amounts can be found in these supplemental financial tables included in today's news release. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Comparisons will be in constant currency unless otherwise stated. Joining me on today's call are Contour Brands President, Chief Executive Officer and Chair, Scott Baxter, and Chief Financial Officer, Rustin Weldon. We anticipate this call will last about an hour. Scott?

Thanks, Eric. We appreciate all of you joining us on today's call. Before I speak to our first quarter results, I'd like to acknowledge the ongoing crisis in Ukraine. The tragic events that have unfolded in the last few months are having a profound impact on the world. Our priority continues to focus on supporting the health and safety of our team and community in the European region. From humanitarian aid donations to organically driven initiatives from our European leaders to simplifying organizational movements in the region, we will continue to do our part and hope for a fast and peaceful resolution to this unspeakable crisis. And beyond the war in Ukraine, we also recognize the many ongoing global macroeconomic challenges. The mandatory COVID lockdowns in China, inflationary pressures, and supply chain disruptions all weighing on the global operating environment. As we have consistently stated, Contour is not immune to these macro pressures. However, we rigorously pressure test our assumptions from inflationary pressures on input costs like cotton and oil or China lockdowns. in attempting to best capture how these macro factors could impact our outlook. To be clear, our confidence comes from what we control. With our contour-specific strategies and superior execution driving first quarter outperformance and supporting our raised guidance here today. Our first quarter results are a direct function of the incredible efforts of our colleagues around the world. Their resiliency and passion for Excellence allowed us to navigate the challenging environment to deliver strong Q1 performance. Turning now to our first quarter results, we once again saw broad fundamental strength across our portfolio with performance coming in above our expectations and guidance for both revenue and earnings. Global revenue came in above our plan, growing 5% over last year. These gains continue to be supported by investments in elevated design, demand creation, and innovation, all of which enhance our core business. Both Wrangler and Lee experienced positive global performance in the quarter, and as you can see from our Q2 and full-year guidance, we expect both brands to accelerate off the strong Q1 results. To augment our core, we continue to diversify our range of distribution into accretive new channels, such as outdoor, sporting goods, work, and premium specialty, as well as scaling our digital ecosystem. During the quarter, our global and U.S. digital wholesale business continued its great momentum, up 25% and 37% respectively. And our branded digital platform was even more impressive, with global and US-owned .com up 38% and 43% versus last year. Our digital platforms are significantly reshaping our model, driving deeper connections to both existing and, importantly, new consumers like never before. Helping drive this new channel expansion, we continue to broaden our product portfolio into new categories. As we've stated in the past, it's really important to understand the breadth of category strength beyond our core denim business across outdoor with our performance ATG line, work, tops, and t-shirts, Western and female. To give you some perspective on this dynamic, our core denim long bottoms business was up 8% reported in Q1, while additional categories such as workwear increased nearly 40% in t-shirts, were up over 70%. What we love is our strategies and investments are creating a virtuous cycle of top-line strength, with solid share gains and AUR increases in our core increasingly bolstered by the scaling of new categories, most of which remain in the very early days of their growth. Outside the US, despite the macro headwinds, we were able to outperform expectations. Europe was up 19%, driven by continued strength in digital and D2C. While we are on the topic of Europe, I want to reiterate that we shared in early March. We work with a small distributor in the region and do not operate directly in Russia. And as stated, the business is de minimis to our overall contour portfolio. We chose to suspend operations with this distributor during the first quarter. In China, even with COVID lockdowns, we were able to deliver gains during Q1, with revenue up 3% reported and 1% in constant currency. Rustin will take you through some of the specific building blocks, but our updated guidance reflects our expectations for continued macro challenges in Europe and mandatory lockdowns having a significant near-term impact in China, particularly in Q2. We will seek to optimize productivity in both of these key markets near-term while investing in and positioning our brands to capture the significant market opportunities long-term. I mentioned at the beginning that we have confidence in what we control, confidence in our strategies, and confidence that our investments will continue to support accelerating, sustainable, and more profitable top-line growth in the future. So while we expect macro obstacles will persist, we intend to continue to amplify investments in critical growth enablers such as digitization, demand creation, and talent, all of which we believe will help drive competitive separation both in the short and long run. Let me touch a bit more on these key areas. First, With respect to digital, as you've seen with the really strong results, not only in the quarter, but over the last year plus, our investments in digital are yielding great success. A perfect example of how these investments take form is our recently launched virtual stores for both the Lee and Wrangler brands. On each of the brand sites, our new platforms allow the consumer to navigate within an interactive three-dimensional retail space, browsing items in a store or and setting before seamlessly adding them to their shopping cart. Drawing from an extensive portfolio of products available online and in stores, the virtual stores feature the brand's latest innovative design, top-selling items, and current seasonal styles. Digital evolution is a critical component of our growth strategy as we enhance the overall omnichannel consumer experience. Through these new virtual stores, we are offering consumers a more immersive experience with our core products and the opportunity to engage with our brands in a curated store experience that brings to life the unique characteristics of each of our brands. This is just one example of our ongoing digital evolution, leveraging a consumer-centric approach to engaging existing customers and acquire new, younger audiences. The second key growth enabler I want to touch on is demand creation. Last year, you heard us talk about ramping investments in advertising to support not only second half 21 growth, but the 22 top line as well. And the returns from these investments are evident in accelerating revenue growth, anticipated to be up mid-teens in the first half of 22 and roughly 10% for the year. This again, despite the difficult operating environment. The Lee Originals equity campaign that launched late last year continues to build globally, having a tremendous halo effect on our core business, while also generating new business in more elevated premium points of distribution. Beyond our equity campaign, Lee is partnering with key influencers that sparked heightened brand awareness from Soho to London to Shanghai. And these partnerships extend to brand-relevant collaborations, including our most recent, with the iconic Smiley brand. To celebrate the 50th anniversary of Smiley, Lee has joined hands with the renowned brand on a new global lifestyle collection, bringing to life the original Smiley campaign, Take the Time to Smile. The curated capsule blends iconic Lee silhouettes and Smiley positivity for a much needed feeling of hope and optimism that is perfectly positioned for spring 2022. And finally, we are really excited to announce that LEED will be sponsoring the Bonnaroo Music Festival this June, reinforcing the brand's long-standing relationship with music, culture, and original expression. With Wrangler in the brand's 75th anniversary celebration this year, we are enhancing demand creation efforts through our For the Ride of Life campaign in elevated social media platforms, allowing the brand to reach new consumers like never before. Our brand ambassadors, including Georgia May Jagger in female and Leon Bridges in men's, further support this enhanced reach to younger and more diverse consumers. And authentic collaborations, such as our recent partnership with the iconic music brand Fender, highlights how the Wrangler brand plays at the heart of cultural influence with a focus on freedom, self-expression, and independence. I know some of you will be joining us in a few weeks down in Texas, and we're really excited to share how these brands' investments come to life, including in our Fort Worth Stockyards Wrangler store. This full-price concept door showcases the pinnacle expression of the brand in a really elegant way and serves as a bit of a test lab and blueprint for how we think about the beginning to layer of brick-and-mortar stores within our D2C strategy. The third critical growth enabler I want to touch on is talent. As you saw us make some significant organizational announcements during the first quarter, we feel that this is exactly the right time to further invest in our people, and we did just that in promoting Tom Waldron and Chris Waldeck to co-COOs, augmenting their existing responsibilities as global brand presidents. We understand the natural questions around why co-COOs, so let me provide some insight to our rationale. With the completion of our ERP implementation, we now have the tools and processes in place to amplify the globalization of our operating model. Now is precisely the right time to elevate and broaden Chris and Tom's roles. Chris is taking on more leadership for go-to-market strategies in all international markets as well as global D2C, while Tom has greater oversight of certain operational aspects of the business, including supply chain, product development, innovation, and procurement. And importantly, I look forward to partnering with them in the years to come to help drive this next phase of the journey. This also afforded us the opportunity to elevate other key members of our senior team, rewarding them for their incredible leadership and execution over the last few years, while ensuring our go-forward organizational mindset continues to pivot towards growth. These incremental investments in growth enablers, not only digital, demand creation and talent, but also in supply chains, Innovation, ESG, and enhanced product design capabilities all support our brand's health and, importantly, improved pricing power. We've talked about this in the past, but I think it's really crucial that folks understand how these investments have positioned the Lee and Wrangler brands differently than in prior years, especially relevant given today's inflationary environment. The combination of our quality of sales efforts and cleaning up distribution and amplified brand investments has and will continue to drive a mixing up of AURs, while also supporting a greater ability to strategically price. Before I turn it over to Rustin, let me close with this. The operating environment remains challenging. But I would note that since we became an independent company nearly three years ago, we've yet to operate in anything but a challenging environment. Even with the macro obstacles and even with our proactive actions to exit over $200 million of revenue and implement a new global ERP platform, our 22 guidance implies revenue growth in the high single-digit range and EPS growth of greater than 20% over 2019 levels. And despite the macro, since the start of 2020, we've generated over $600 million in operating cash flow, allowing us to materially de-lever the balance sheet while simultaneously paying a superior dividend and initiating a share repurchase program, returning $274 million to shareholders over the same period. These accelerating fundamentals and improving capital allocation optionality are a testament to our team's incredible execution through this period. This ability to navigate through difficult times while still investing for the future is powerful and gives me great confidence that Contour is on an excellent path. Rustin?