Kontoor Brands, Inc.

Greetings and welcome to the Contour Brands fourth quarter and fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Tracy, Vice President, Corporate Finance and Investor Relations. Thank you, Eric. You may begin.

Thank you, Operator, and welcome to Contour Brand's fourth quarter and fiscal year 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. Select comparisons to 2021 results will be on an adjusted basis, and in certain cases, we will make comparisons to 2019 adjusted results. Reconciliations of gap measures to adjusted amounts can be found in the supplemental financial tables included in the news release that was issued early this morning and is available on our website at contourbrands.com. 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, with the exception of comparisons to the 2019 period. Joining me on today's call are Contour Brands President, Chief Executive Officer and Chair, Scott Baxter, and Chief Financial Officer, Rustin Welton. In addition, we will also be joined by Tom Waldron, Co-Chief Operating Officer and Global Brand President of Wrangler, and Chris Waldeck, Co-Chief Operating Officer and Global Brand President of Leigh. Following our prepared remarks, we will open the call for questions. We anticipate this call will last about an hour. Scott?

Thanks, Eric, and thank you all for joining us today. As Eric mentioned, Tom and Chris will be joining us as usual for this year-end review. We believe these year-end calls provide a great opportunity to have them share insights from the past year, as well as go-forward strategies for each of their respective brands and functional areas. You'll hear more from them in a bit. Let me first provide some thoughts at a contour level, as I'm pleased to share our strong results for the fourth quarter, as I'm even more excited to discuss our incredible opportunities ahead, as we begin 2023 from a position of strength. While we expect macroeconomic challenges to persist, our results afford us great proof points that when we execute on our playbook, all of our key stakeholders win. Beginning with some highlights from the fourth quarter in full year 2022, in Q4, global contour revenue grew 9%, well above our internal forecast as shipments in the U.S. accelerated, augmented by continued share gains and AUR growth. And profitability in the quarter was outstanding, with adjusted operating income increasing 19%. Despite the significant macro pressures during 2022, we were able to deliver another year of healthy growth with revenue increasing high single digits. And we returned a total of $166 million to shareholders through a combination of dividend payouts, which you will recall we increased last quarter, as well as share repurchases. And stepping back a bit. We think it's important to note, relative to pre-pandemic 2019 levels during 2022, we were able to grow revenue mid-single digits or double-digit growth, excluding proactive actions to exit our VFO fleet and lower quality points of distribution, expand reported gross margin 230 basis points compared to adjusted 2019 gross margin, even with the impacts of inflation, supply chain challenges, retailer inventory rebalancing, and COVID lockdowns in China. And finally, we've grown adjusted earnings 17% over 2019. These results are a direct function of our catalyzed growth strategies we laid out at our last Investor Day. Let me remind everyone of these focus areas and some great proof points for how we are tracking. First, enhancing our core U.S. denim business. In 2022, our U.S. business grew 11%, again, with broad-based strength and share gains. Second, diversifying our categories with expansion across outdoor work and tees. During the year, our non-denim business grew 13% and now stands at 38% of our global mix. Third, amplifying the connection to our consumers through channel expansion focused on digital in more recently owned retail. In 2022, globaldigitalowned.com grew 17%. And revenue in this important growth vehicle has doubled since 2019. And lastly, driving accretive growth geographically, broadening our reach beyond domestic borders, excluding China, international markets grew 7% in 2022. Rustin will go through our full year 23 guidance in more detail in a bit, but continued execution of these strategies will be critical in driving this year's performance, even as we assume macro challenges will weigh on consumer demand throughout 2023. And we want to prudently account for this in our full year guide. I'm excited that our domestic POS, share, and AUR gains have continued here in the first quarter. As you would expect, we've seen some lag in wholesale shipments relative to the solid sell-through as retailers normalized their order patterns, and we have factored that into our plans accordingly. But the combination of strong quarter-to-date POS coupled with robust gains in our own D2C with U.S. comps up 20% year-to-date gives us confidence that the wrangler and lee brands are healthy and well positioned in the marketplace as we begin 2023 in addition i would note we expect these positive u.s trends to be somewhat subdued by near-term softness in the international markets particularly china chris and rustin will touch on this later but the overall healthy fundamental performance coupled with the significant actions taken over the last several years to fortify our balance sheet and enhance our capital structure, provide us increased flexibility to deliver in the face of uneven conditions. This is reflected in our strong returns to shareholders, totaling $455 million since becoming a publicly traded company. And while the individual components of our fundamental outlook may differ a bit from the long-term targets we laid out at our investor day back in May of 21, I'm pleased to share that 2022 revenue and earnings came in ahead of those strategic targets, despite the incremental impacts from 40-year inflation highs, massive supply chain disruptions, and significant regional lockdowns due to COVID. These operational results are a testament to the incredible efforts of our amazing colleagues that I'm fortunate to partner with every day. I want to close by thanking each and every one of our people around the world for their agility, perseverance, and dedication to Contour, both in navigating the near term and in setting the foundation for our future success.