This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: 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.
spk05: 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?
spk03: 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?
spk02: Thank you, Scott, and thank you all for joining us on today's call. As Scott mentioned, we are very pleased with our first quarter results. results that came in above expectations driven by our catalyzing growth strategies. I will start with a review of the quarter before providing additional context on our outlook for the balance of the year. As a reminder, comparisons will be in constant currency unless otherwise stated. Additionally, my discussion of 2022 first quarter results are on a gap basis and will be compared with adjusted results from 2021. which we believe is the most relevant and accurate method for investors. My comments will focus on key highlights, and I will refer you to this morning's release for additional detail on the quarter. Beginning with revenue, global revenue increased 5 percent compared to the prior year. Growth was broad-based across brands, categories, channels, and geographies, reflecting the progress we are making against our initiatives. We saw particular strength in our digital businesses, as well as strategic growth categories, including the incredible performance in tees and workwear that Scott highlighted earlier. In addition, the growth we are seeing is healthy as we continue to chase demand in the marketplace. On a regional basis, U.S. revenues increased 4%, driven by continued momentum in key channels and categories. It is important to note domestic revenue, and corresponding profitability results were significantly tempered by year-over-year comparisons associated with timing shifts in advance of the North American ERP implementation in the first quarter last year. In our digital business, usown.com increased 43% compared to the prior year, supported by continued AUR increases across both brands, Our investments in our digital platforms are also helping to drive growth with new consumers. During the quarter, female had the number one selling style on Wrangler.com, and the female business on Lee.com saw similar success. International revenues increased 9%. We saw strength across most markets and channels, including 19% growth in EMEA and 18% growth in international D2C. Turning to our brands, global revenue of our Wrangler brand increased 4%. Growth was driven by continued strength in Western and workwear, as well as healthy contributions from tees and female. In addition, we saw sustained momentum in Wrangler's digital business, with USown.com increasing 57% in the quarter. Wrangler international revenue increased 20%, driven by digital. In China, revenues grew nearly 30% as we continue to make progress, scaling the brand across e-commerce and brick and mortar. Despite our expectations that mandatory lockdowns in key China markets will impact near-term results, our excellent progress with the Wrangler launch gives us tremendous confidence for the brand when conditions normalize in the region. In EMEA, revenues grew 26%, with growth in nearly all markets. As Scott mentioned earlier, Russia and Ukraine are de minimis to our overall revenue, and we do not own or operate direct business in these countries. Turning to Lee, global revenue increased 7%. Lee U.S. revenue increased 9%, driven by continued demand at wholesale, new distribution wins, and our digital business, with usown.com increasing 17%. Li international revenue increased 4%, driven by 13% growth in EMEA, partially offset by moderating trends in China as a result of COVID-related lockdowns starting in March. I will touch on our expectations for China later in my remarks, but we remain very confident in the long-term opportunities for the Li brand in the region. And finally, from a channel perspective, U.S. wholesale increased 3%, Non-U.S. wholesale grew 7%, and globalown.com increased 38%. Now on to gross margin. Gross margin decreased 140 basis points compared to adjusted gross margin last year. As you would expect, there are a number of structural and transitory dynamics impacting gross margin. So let me expand on this a bit. As we have discussed, we continue to see benefits from structural margin enhancements such as channel, geographic, and product mix, as well as ongoing supply chain initiatives. These structural drivers, combined with strategic pricing, contributed a positive 70 basis point of net margin improvement in the quarter and more than offset the impacts from inflation including cotton, ocean freight, and labor. However, as you would expect, we are also seeing elevated transitory costs such as air freight as we expedite shipments due to current supply chain constraints and as we chase demand. These factors resulted in a 210 basis point headwind in the quarter. We continue to have confidence in our ability to drive long-term gross margin expansion from our structural initiatives while working through these near-term transitory headwinds. I will provide additional color on our gross margin expectations for the balance of the year in our outlook. SG&A expense was $196 million, or a $15 million increase versus first quarter 2021 adjusted SG&A. Investments in demand creation, digital and IT investments, product development, and distribution expenses more than offset fixed cost leverage on improving revenue and lower compensation-related expenses. As we have discussed, amplifying investments in strategic areas such as digital and demand creation are important drivers of our catalyzing growth strategy. and are expected to support strong demand in 2022 and beyond. Earnings per share was $1.40 compared to $1.43 in the same period in the prior year on an adjusted basis. Now turning to our balance sheet, first quarter inventories increased 24% compared to last year. As we have discussed, we continue to chase demand, with second quarter revenues expected to increase 30% to 32%. We are very encouraged by the broad-based momentum we are seeing in both Wrangler and Lee and anticipate improving inventory stock levels by the end of the second quarter. We finished the first quarter with net debt or long-term debt less cash of $598 million and $194 million in cash and equivalents. Our net leverage ratio, or net debt, divided by trailing 12-month adjusted EBITDA at the end of the first quarter was 1.6 times, within our targeted range of 1 to 2 times. Finally, during the quarter, we repurchased $23 million in common stock. And at the end of the quarter, we had approximately $100 million remaining under our share repurchase authorization. When combined with a strong dividend, we returned a total of $49 million to shareholders during Q1. Before getting to our outlook, and as a reminder, 2021 was affected by various factors, including ERP timing shifts, as well as temporary COVID shutdowns and supply chain disruptions that resulted in quarter to quarter volatility. These factors will primarily have an impact on first half year over year quarterly comparisons but are not expected to impact the full year. Given the impact of ERP timing shifts, we thought it was important to provide quarterly guidance for the first half, including an update to the second quarter here today. We do not intend to provide quarterly guidance moving forward. And now on to our 2022 outlook, starting with the second quarter. Consistent with prior guidance, Q2 revenue is expected to be in the range of $640 to $650 million, increasing 30% to 32% compared to last year. Momentum and incremental strength in the U.S. is offsetting headwinds from the COVID-related lockdowns in China, resulting in a meaningful shift in revenue composition from prior guidance. With that, given developments in China, a region that I know is top of mind for you Let me provide additional color. Our brands are well positioned and continue to resonate with the consumer, and we began the year with February year-to-date results considerably above prior year and our plans before slowing in March and April as traffic softened and lockdowns expanded. We have taken a conservative approach for the quarter and have adopted a more cautious view for the year in our outlook. but remain optimistic about the long-term prospects for our brands in the region. And finally, given geographic shifts and strength in the U.S., we anticipate gross margin headwinds in the quarter due to mix on lower China revenues, higher transportation inflation, and elevated transitory costs to meet consumer demand. Second quarter EPS is now expected to be in the range of $1.05 to $1.15 compared to prior guidance of $1.25 to $1.35. Now turning to our full year outlook, revenue is now expected to increase at approximately 10% to more than $2.7 billion, up from our prior guidance in the high single digit range. Importantly, this top line guidance assumes a few key factors, including a more cautious outlook in China, uncertainty in EMEA, cautious consumer demand in light of inflationary pressures, and conservative elasticity assumptions around price increases. We expect these factors will be more than offset by key contour-specific drivers, including momentum on both brands driving broad-based revenue growth, strong unit and AUR growth, and strategic price increases in the second half. Gross margin is still expected to be consistent with 2021 adjusted gross margin of 44.6%. As discussed earlier, improvements in structural gains are expected to be relatively offset by higher transitory costs. In terms of structural gains, we continue to anticipate the combination of strategic pricing actions, ongoing accretive mix improvements to digital, and cost savings initiatives to more than offset inflationary pressures. In fact, structural gains for the year are projected to modestly exceed our original estimate of up to 100 basis points of improvement. which has allowed us to absorb mixed pressures from COVID-related impacts in China and hold our original guidance for the year. In terms of transitory cost, and similar to my comments on the second quarter, we continue to expect higher expenses as we chase demand to remain through Q2 and then moderate as we move through the second half. These two elements are expected to largely offset for the full year. SG&A investments will continue to be made in our brands and capabilities. From a phasing perspective, compared to adjusted SG&A in 2021, we continue to expect SG&A growth to be relatively consistent with revenue growth for the full year, with second-half investment and inflation stronger than in the first half. EPS is now expected to be in the range of $4.75 to $4.85 per share, up from $4.65 to $4.75. This EPS guidance does not assume the benefit of any future share repurchases. As I stated in my opening remarks, we are very pleased with the momentum we are seeing in the business. Without question, the environment remains highly dynamic. But simply put, our strategies are working. as reflected in our raised guidance for the year. Moreover, we remain confident in our improving capital allocation optionality, which is particularly important in an uncertain environment. As we have discussed, our approach is multifaceted, meaning it does not have to be either or as we consider these options, but as you are seeing, will be a combination. This is allowing us to return cash to shareholders through our superior dividend and increasingly opportunistic buybacks, which combined have returned over $270 million since the start of 2020. And to fortify our balance sheet with over $200 million of net debt reduction over the same period, ending the first quarter in a considerably stronger financial position. And To invest in our business to support future growth, such as the talent and demand creation investment Scott touched on earlier. And to pursue potential accretive M&A. The combination of this optionality with improving fundamentals is powerful. And as Scott mentioned, gives us great confidence that Contour is on an excellent path. We look forward to sharing more on these initiatives in the coming quarters. This concludes our prepared remarks, and I will now turn the call back to our operator. Operator?
spk09: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Jay Sol with UBS. Please proceed with your question.
spk00: Great. Thank you so much. You know, Scott, you talked about your confidence in raising the full year guidance given macro uncertainty. Maybe if you could just elaborate a little bit more on some other aspects that give you the confidence to raise that full-year guidance, especially with some of the challenges on supply chain costs. And also, maybe if you could tell us a little bit more about your assumptions for global and U.S. consumer demand that are embedded in the guidance. Thank you.
spk03: Sure. Hey, Jay, how are you? Thanks for the question. Good to hear from you. You know, Jay, it stems from the momentum that we had last year. And that momentum carried into the first quarter this year, which we felt really good about. And obviously, we've got a nice view of the second quarter and the rest of the year that gives us confidence in our business. But I got to tell you, the single most important thing is this is not the company it was four years ago. We've made so many structural changes. You know, we were landlocked a few years ago as far as the channels that we were in. But now the channel work that our team has done across the globe, the categories that we've expanded into, If you think about what's happening now globally as people go back to work and people go back to leisure, think about how we structure the company and how we're set up with people going back to leisure with our outdoor and T-shirt line, people going back to work with our denim line, which has been fantastic because consumers have now gone to casual workwear attire, which has been really important for us. You know, obviously, China is closed right now. But, you know, all of us know and all of us have been doing this a long time. China is going to reopen again and there's going to be some pent up demand there. And prior to their closing, our business was really strong, as we've talked about. And most importantly, our brand is really healthy there and our team is really healthy there. So it gives me really good confidence. And the fact that since we've come back. out as a public company, we have navigated some incredibly difficult waters, and we continue to do that. And that's a testament to the team that we've put together. But I like the work that we've done, the investments that we're making in our business. We've been conservative in our elasticity assumptions, and we put ourselves in a position to win from the strategies that we invest in, whether it be digital innovation, our people. So I feel pretty confident there. And then a little bit about demand. Right now, relative to the consumer that we see globally, in the North American consumer, we see really good demand. We see a strong consumer. We see a consumer that I mentioned earlier that's going back to work, that's getting back into the leisure world, that's going to ballgames and picnics and doing those things again, which are all really good for our business. We think that Europe and China will get healthy again, and we think, of course, that China will open up, so we feel good about that. But it's what we can control, and that's the most important thing. And what we've controlled is our new business development, The great product that we're putting out there, the demand creation, you know, the work that we talked about that Wrangler has done with Fender, the big campaign that we have right now with both of the brands around the globe, the work that we just did with Smiley from a collaboration. So we're controlling our own destiny, and I like how we're doing that. We'll continue to do that going forward. Thanks, Jack.
spk00: Got it. Okay. Thank you so much.
spk09: Our next question comes from the line of Adrian Yee with Barclays. Please proceed with your question. Great. Thank you very much.
spk08: Good morning, and nice job on the first quarter. I guess, Scott, can you – I'm going to stay on the topic of China for a second. Can you remind us, you know, how many lead stores are there in China, and what's the proportion of your sales that are sort of in Tier 1 or, say, the impacted cities? What's the expectation for quote-unquote normalization or kind of like when you would see that demand normalize? And then for Rustin, a couple questions here. Pricing power, how does the order book look for fall holiday? And, you know, any improvement in sort of like pricing power to your channel partners? My last question is more broadly on transportation prices. spot pricing on intramodals coming down. You don't have a lot of exposure to the, you know, China Far East manufacturing. So just wondering if you're embedding that into the back half in any way. Thank you very much.
spk03: Thanks, Adrienne. Adrienne, I'll go ahead and start on China, and then I'll hand the ball over to Rustin. He can go ahead and talk about the other pieces. But from a China standpoint, you know, I look at it like this. Our business there has been extremely healthy. We introduced the Wrangler brand last year. during a difficult time to introduce it there during the pandemic, but it has caught on with the consumer and they're really now starting to get it. Our network is really stable there as far as our franchisees and our own stores. Our team is really stable. We really like the team. We really like the leadership. Most importantly, as I mentioned, brand health is exceptional. We had a really good last year. We had great momentum going in this year. We were really strong in January and February. And then obviously the lockdown. If you think about our business, as we've stated before, we are really strong on the tier one cities, the Beijing, the Shanghai's, the Hong Kong's. And then that's where the opportunity lies. So as we build our model out and as China's tier two, three and four cities get larger and more metropolitan and sophisticated. We have an opportunity to go ahead and build our model out in those cities. So we think that there's really, really big green space opportunity going forward in China in a pretty significant way. And again, it's a top of the line brand with extremely good brand health with a very young consumer. and a brand that's very well known. We've been there 20 plus years, have a really strong leadership position there. So feel really good about China going forward. And, you know, like everything else, you know, these things happen, but China will open and we will continue to grow there and feel good about the team. Great.
spk02: Yeah. Thanks. And good morning, Adrian. It's Rustin. I'll go ahead and talk a little bit about the pricing power order book, as well as the intermodal that you mentioned. So, you know, as we think about You know, certainly every inflationary cycle has its own kind of nuances. But as Scott talked about earlier, our brands are in a meaningfully different place versus the last cycle. And we feel like we're really well positioned for several important reasons. You know, first is the strength of our brands that Scott talked about. You know, our efforts around strategic product categories like Western, like Workwear, And brand-enhancing collaborations that Scott talked about are really driving that brand strength and that momentum that we see moving into that second half. And it's providing a great opportunity for us to strategically price. You know, second, the investments in demand creation are just improving the engagement with new and existing customers. And we're seeing that in strength in areas like female that we talked about in our prepared remarks. So we saw that on the first quarter results, and it's really helping support our confidence in providing our raised guidance. You know, but I will dimensionalize this a little bit. You know, we want to make sure that we're prudent, and you heard us talk about that in our remarks here as well as our prepared remarks. You know, we feel like we've been prudently cautious on China, on EMEA, consumer demand, as Scott spoke of earlier, and then on the elasticity. So we've reflected that in, and when you look at our guidance, Our first half revenues are now expected to be up mid-teens versus the low teens that we talked about in the prior guide, and full year at 10% approximately. So that implies a second half of mid-single digit on the revenue side. So we're factoring in those elements but feel really good about the strength of the brands and the momentum we have. In terms of your question on intermodal, certainly we're watching every day all of the supply chain movements on distribution transportation, whether it's ocean, air, inland, parcels, et cetera, and, you know, certainly are blessed to have, you know, kind of what we believe is the world-class supply chain that's helping us navigate these items. You know, you saw in the first quarter we talked about transitory headwinds near term of 210 basis points that's really chasing that demand that we're seeing in the market. So we've factored in the latest thinking around intermodal as well as the other elements of transportation here into the guide. And again, holding that full year gross margin at that 44.6% consistent with prior year.
spk08: Fantastic. Super helpful. That's good luck.
spk02: Thanks, Adrian.
spk09: Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
spk07: Good morning and thank you so much for taking our question. There's a lot of moving pieces within the margin profile of the business, but I heard in the prepared remarks that you're now anticipating even better sequential improvement in your structural gross margin drivers relative to the last call. And I was wondering if you could talk to the drivers of that sequential improvement in the structural gross margin gain. What is it that's driving that improvement? And then perhaps on offsetting that, can you quantify the pressure that you anticipate in 2Q and into second half between China, AUC, and air freight? Thank you.
spk02: Sure. Brooke, good morning. Let me go ahead and take those. You know, I'll say we were pleased. Our first quarter gross margins came in above our plans. So certainly that's encouraging. We talked in our guide about how we expected on an annual basis up to 100 basis points of transitory headwinds, almost exclusively front half affected as we chase demand here. So certainly you're seeing that play out, you know, in the first quarter here. You know, in terms of the full year and our prepared remarks, we said up to 100 basis points previously of structural margin gains, You know, given the first quarter, given what we're seeing now, the fact that we've got, you know, raw material input cost really projected to impact the 22 P&L that are largely finalized. You know, we said we saw an opportunity to be modestly above that 100 basis points improvement on the structural prior to the mix impact. from China. So again, that pulls us back into that range of up to 100 basis points on the structural piece and allows us to absorb that unanticipated mixed impact coming from China. So that's how the pieces play out a little bit. You know, as you think about Q2 specifically, you know, certainly not going to guide an individual market here in China, but you know, we talked a little bit about taking a more conservative view to Q2 and a cautious view on a full year basis to China. So certainly that's, we're fortunate to be able to offset with the strength in the U.S., that top line impact from China in Q2 and hold our prior guidance of 640 to 650 in the second quarter. But it does create a mix issue, as you certainly know. And so that's putting some pressure on, on Q2 gross margins, and certainly we've seen some movements on oil prices, et cetera, that have continued to move. So we factored all of those into our guidance here in Q2, and that's what's driving a little bit of the pressure from an EPS perspective in the second quarter. But, again, would draw back the first half EPS largely consistent with our prior guide and certainly on a full-year basis raising the EPS given the confidence we have.
spk07: Thank you. And then maybe just a follow-up for Scott. As you look across your network of the business across the U.S., can you talk to the areas of the portfolio where you're seeing the most strength in demand and where that demand is really coming through as a result of the increased demand creation spend that you've been putting into that market? Thank you.
spk03: Yeah. Yeah, I sure can do that, Brooke. So if you think about some of the things that we've talked about, one of the things is that we have a really strong core denim business, as you know, and we've seen really good demand there. It has to do with a couple of things. It has to do with the fact that, as we've talked about, we have really increased our investment in demand creation. So people are much more aware of our brands. And then, of course, from a channel standpoint, we've increased that. But in addition to that, you've got a new world that's happening relative to how people dress and go to work and socialize. And that's that casual world. So we're going to be one of the great benefiters from playing in that category in that world. So we're pleased with that. And you know what? At the end of the day, we're building some really great product, too, with our teams. And that really resonates in a pretty strong fashion. And when you go ahead and start at the top of the pyramid, the Nordstroms and places like that, and then you have a really good offering, a segmented offering all the way through, it really lends to your brand health, which is important for us. But I'll tell you the other places that we're really seeing really strong demand, and this is important for our brands, is that when you introduce these new categories like T-shirts and outdoor and workwear, and you put some really significant investments behind them, you need those engines to work. And we've got those engines really firing right now. So the consumer loves our outdoor category. They love the value in our brands. They love the name, and they love how those products perform outdoors. This t-shirt segment of ours that we've talked about has been dynamite. We really love that. And in addition to that, the workwear segment, I mean, we are a workwear brand. It's the ethos of our brand from a long time ago for both brands. So being in there in a significant way has really helped us. Two other things that I would be remiss if I didn't mention. One is the fact that When we started this journey, we said one of the most important things that we would do is we would get this brand to the point where it was a digitally growing and a digitally driven brand. And you heard some of the results from some of our prepared remarks today on our digital business, how significant it's becoming, and how we're way ahead of the curve as far as what we laid out in Investor Day. And how we put a team together that understands the consumer, how the consumer is now migrating to us online and how that helps us to, you know, average up and our mix up. So really pleased with that. But we're going to continue to grow that and continue to push that hard. And I'll leave you with this. There is a very strong momentum in the Western business around North America right now. I think people are wanting to be outside, wanting to be in the great outdoors, wanting to be in the big spaces. And there seems to be, you know, this is going to be long-lasting, in my opinion. And as you know, Wrangler was born as a Western business and is benefiting from being in, you know, that big, strong category. So we really like our positioning in the Western business also. So I hope that helps.
spk07: Thank you so much. I'll pass it on.
spk09: Our next question comes from the line of Bob Durable with Guggenheim Securities. Please proceed with your question.
spk01: Hi, good morning. Just a couple of questions. First, on the European sort of performance and or outlook, can you give us a little bit more color, like by country, what you're seeing? And I guess just have you moderated your plans around the expectations in the back half of the year? Just trying to understand exactly how you're looking at it. and if you've seen any major changes over the last few months. I think the second question is, just back on the gross margin, when you consider the air freight that you have, I just want to make sure, are you done with significant air freight for the year in your gross margin expectations? And then my third question would just be, you could give us a little more updates on Capital allocation, you know, specifically around the share price and, you know, the levels of the shares and where we are today. That would be great. Share repurchase program. Thanks.
spk02: Okay. Thanks. I'll go ahead and start off, Bob, and take the questions on Europe and gross margin and then pass to Scott for the capital allocation one. You know, if you step back and you look at our European business, as you know, Bob, we are predominantly Western European focused in our businesses. You know, we've certainly talked in the prepared remarks about, you know, Russia and Ukraine being de minimis to our overall business. You know, we did see a strong first quarter here, up 19% in constant currency again in Europe. You know, certainly I think it'll be a little bit sawtooth as we go through the year. You know, in Q2, you'll recall that Europe actually went live on their ERP implementation at the beginning of Q3. So, Certainly some timing shifts associated with Europe as well. Q2 in Europe will be a little more pressured given the timing shifts in 21 in that market, whereas Q3 we anticipate will be stronger, certainly comping the go-live from the prior year. So wanted to dimensionalize that. Certainly a much less magnitude, as you know, Europe relative to our U.S. business that's out there. But Again, focusing on what we can control in that market. And again, you know, certainly we saw great strength, as we mentioned, in our Wrangler business and almost all markets in Europe, but predominantly Western European focused. You know, as you think about air freight, Bob, we said up to 100 basis points of transitory, incremental transitory cost here in 2022, almost exclusively front half loaded. So, certainly, if you go back to the back half of 21, you know, certainly the supply chain disruptions really started at the beginning, Q3 and Q4 of last year. So, we had incremental transitory costs there. But, again, the additional transitory we expect really in the front half here as we chase demand and anticipate being in a stronger inventory position at the end of the second quarter.
spk03: Hey, Bob, how are you? Good, Scott.
spk01: Thanks, Hugh.
spk03: good thanks i would say for us really you think about capital allocation and how we think about it we paid our debt back much quicker than we thought because we create so much cash that we put ourselves in a really great position so if you think about how we kind of positioned ourselves think back to last year we increased our dividend we already had a very strong dividend and increased it 15 on top of that so the yield today with a very attractive stock price is really significant you know obviously because of that increase in the dividend and what was already there In addition to that, creating a billion dollars of cash over a three-year period puts us in a position where if we wanted to pay back some more debt, although we feel like we're in a really good position there, we could. We've been buying back shares, as you know. We bought back last year and we bought back this quarter. We still have dollars available in our share repurchase program that's out there right now. So we still have a big incremental piece that we can do. We do like the stock at the price it is now. Obviously, we were buying back in the first quarter. But we're also still thinking about M&A, too. But M&A has got to be right. It's got to be the right price. It's got to be the right fit. It's got to work with our company and our brand. And we have to be able to add value to it and really be able to show the investor world why and how and make sure it adds value. But I think most importantly is that we're going to continue to create this cash market And we don't have to do just one thing. That is probably the most important thing. We're creating so much cash that we could do everything I just said and still be in really good shape and execute in all of them. And quite frankly, as you know, we're executing on a few of them right now as we speak and still generating aggressive cash. So, You know, we're going to continue to be aggressive in our share buyback going forward. We're going to continue to do everything we can to make sure we're running a really good business and investing back in the business and investing back in the brands and the people. So hopefully that answers your question. But I really like where we sit right now.
spk01: Thank you, Scott. It does.
spk03: Thanks, Bob.
spk09: Our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.
spk04: Thank you for taking my question. Good morning. I have a handful here. Number one on China, you mentioned that it was strong in January and February. Can you give us some like a little more specific on what you were seeing then, you know, so we can sort of, you know, and what it sort of turned to or, you know, or what you're anticipating it will be for the second quarter relative to the strong start of the year?
spk02: Yeah, Sam, good morning. It's Rustin. I'll go ahead and take that one. You know, we mentioned in our prepared remarks, we did see strength at the start of the year, significantly above prior year and our plans February year to date. Certainly, we saw softness start in March and April as the lockdowns spread. So, We're very confident that it's, you know, the softness that we saw was not a result of our strategies or our brands in any way. It's the traffic that's been affected. You know, we're continuing to monitor the situation there. We've taken a conservative approach to our Q2 outlook relative to China, given the current situation. But as you know, it's very fluid. So hopefully that helps provide a little context.
spk04: Well, no, I mean, you said that all before. I'm wondering sort of like what does significantly mean? Were you up 20% going in and then it fell to low single-digit when negative? I mean, I'm trying to just sort of get some context to sort of the definition of significantly.
spk02: Yeah, I understand, Sam. I'm not going to break out individual numbers by market, but certainly you know that our China growth rate is out there on a long-term basis. we're investing heavily in the region. And so certainly have, you know, growth expectations that are out there in that double digit range longer term, as we've talked about. So certainly we're taking a more conservative look on Q2 and a cautious look on the full year, but not going to provide specific numbers.
spk04: Okay. And then you mentioned, you know, this investment in the demand creation sort of across the board and that it was working. Can you give us some idea of in the first quarter, if you sort of had a number like a like an expectation of what you would drive from that demand creation versus what you actually drove it doesn't need I mean sort of like did did that demand creation drive 10 more than what you originally anticipated or you know like what can you attribute what kind what part of the beat in the first quarter can you attribute to the demand creation
spk02: Yeah, when we think about demand creation, as you know, Sam, everything we do, we take a total shareholder return lens to it. And we don't measure it on a quarter-by-quarter basis. I mean, we do, but we don't set expectations and plans on a quarter-by-quarter basis. We look at it on a program basis. So when we accelerated some demand creation in the fourth quarter, last year. As we've talked about before, that was intended not only to support holiday, but to support the front half of 2022 as well. So we're certainly in the middle of that now. Scott talked a little bit about the campaigns. We feel really good about the campaigns. Again, that mid-teen growth in the front half, demand creation is certainly a key element of that and keeping the brand strong, but not going to split out any specific return numbers today.
spk03: Yeah, and Sam, this is the first time our consumer in the last three years since we've taken over the business has seen a consistent pulse of us from an advertising standpoint. Before, years ago, we would come in and do something, and it would be quick. It would be a quick hitter. We'd move on, we'd move out, and we didn't have the budgets to go ahead and do something consistent and long-term. But now our consumer is seeing us do different exciting things, and we're testing things, and we're doing things digitally. We're doing things like we haven't done before, but it's a consistent message, and I think that's been really helpful and I think it's been beneficial with the consumer globally too, which is really the key component.
spk04: Thanks. One last one. When you updated the first half guidance on March 8th, a lot of the numbers changed. For instance, a lot of the combined estimates on the street were pretty close to where you ended up in and the estimates for Q2 were fairly close to what the guidance is for Q2. So can you define, like can you give us some specifics as to what drove the results in the last three and a half weeks of March that had you beat that number and why and what changed to lower Q2 just because, you know, Somebody mentioned the sawtooth. It feels like a little sawtooth for us. So if you could help us or just give us some context to that, that would be great.
spk02: Yeah, absolutely, Sam. So, you know, in the first quarter, again, we provided a revenue guidance on March 8th, as you indicated, 650 to 660. You know, we've talked for several quarters. We're chasing demand and we're chasing product and managing through global supply chain challenges that certainly are very fluid, Sam. So, you know, we've said that the demand is out there for our products. And if we have the product availability, that, you know, certainly we feel like demand is there. And you saw that in the first quarter. So as we were able to expedite product in, you saw 210 basis points of transitory cost in the first quarter. Expediting that product in, we were able to ship out and exceed the 650 to 660 range that we had previously provided. As for the second quarter, it's very simple as to what changed in the second quarter, and that's China. Certainly, we saw some oil prices continue to move a little bit, but for the most part, it was China. And we held the top line because of that strength that we're seeing in the demand with the product availability that we have, Sam, the demand creation we talked about, the categories Scott talked about. We were able to absorb and offset the China softness. given the lockdowns that were there. But from a profitability perspective, we wanted to make sure that we were reflecting the mixed impact of shifting between China and the U.S. as well as some of the inflationary pressures in the guide. So hopefully that explains the change from the March 8th. Thanks for the question. Appreciate it, Sam.
spk03: Thanks, Sam.
spk09: Our final question comes from the line of Jim Duffy with Stiefel. Please proceed with your question.
spk06: Hi guys, this is Peter McGoldrick on for Jim. Thanks for taking my question. I was just curious on the brand outlook into second quarter and the rest of the year. Lee obviously is impacted by outside China exposure, but how do you think of the building blocks to your updated guidance? What has changed over the last few months on a brand growth perspective?
spk02: Yeah, you know, Peter, thanks for the question. It's Reston. I'll go ahead and take that with the outlook. You know, certainly first quarter and as we've talked about, you know, we see strength in both brands moving forward as we laid out at our investor day. So feel really good about both brands. You're correct that certainly, you know, China today is much larger in Li than it is in Wrangler. So we'll have a little bit more of an impact from that perspective. But again, the strength you saw in the first quarter here with the brands being up mid-single digits to high single digits, depending upon the brand, we see strength and momentum moving forward with both brands. But Li will be more impacted by China.
spk06: Okay. Okay. And then finally, just looking at the embedded assumptions for AURs and unit costs and their influence on gross margin for the balance of the year, what's your capacity to adjust for the rest of the year on the pricing side of the equation, and how should we expect that to progress quarterly?
spk02: Yeah, certainly we've passed strategic price and we've reflected that in our outlook here, Peter. You know, we're going to continue to monitor the situation as everyone is doing and certainly we'll adjust accordingly. But feel good about kind of the price, the combination of that strategic pricing and Mix, improvement, the cost savings, we talked about that, the ability of that combination of those three to be able to offset inflation that we see today, and that's what's reflected in our guidance. Certainly, we'll continue to monitor the environment as we do every day. Thanks, Peter.
spk06: Thank you.
spk09: Ladies and gentlemen, we have reached the end of the question and answer session. I'm announcing a call over to Scott Baxter for closing remarks.
spk03: I just wanted to thank everybody for joining us on the call today. I know these are difficult times globally right now, but obviously you can see we here at Contour, all of our employees globally are doing everything that we can to control our environment and to have great outcomes for our shareholders going forward. And hopefully you've seen the leadership that our team is providing across the globe to do just that for all of us. Thanks again, and we'll look forward to touching base with you again next quarter. Thank you.
spk09: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Disclaimer