Kontoor Brands, Inc.

Greetings, and welcome to the Contour Brand's first quarter 2023 earnings conference 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Eric Tracy, Vice President of Corporate Finance and Investor Relations. Thank you. You may begin.

Thank you, Operator, and welcome to Contour Brand's first quarter of 2023 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. On today's call, we will make comparisons to prior year results. 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 Welton. Following our prepared remarks, we will open the call for questions. We anticipate this call will last about an hour. Scott?

Thanks, Eric, and thanks for all those joining us on today's call. I'm going to focus my comments today on three areas. First, I'll walk through a few select Q1 highlights, including our continued strength in POS, ongoing share gains, and momentum in D2C, which we believe most accurately reflect our brand's health and relative performance in the marketplace. Second, I'd like to provide an update on how our strategic investments and key enablers, including demand creation, should support more diversified and accretive growth across categories, channels, and geographies over time. And finally, before I turn it over to Rustin, I'll share some thoughts on why I'm confident about the Go Forward for Contour despite the uneven macro backdrop allowing us to reaffirm our 2023 guidance here today. Turning to the first quarter, I'm pleased to share that we delivered Q1 results consistent with both our expectations and commentary we provided on our fourth quarter call. Global contour revenue decreased 1% in line with our prior outlook as increases domestically were tempered by expected softness internationally, particularly in the China region. Within the U.S. market, we continue to see strong POS outpace shipments as retailers remain working through various inventory rebalancing efforts, muting domestic wholesale and top line upside for the quarter. But let me be clear. The Wrangler and Lee brands are winning in driving competitive separation in a challenging macro backdrop, as evidenced by the solid momentum in POS, as well as share gains in robust D2C performance during Q1. So let me further dimensionalize the great positives around share gains in D2C, both within the U.S. and international markets, that reflect improving brand equity on a global basis. From a share perspective, according to NPD, which focuses on the U.S. total measured market, both the Wrangler and Lee brands continue to outpace the market in largest competitor. A few brand-specific highlights. On a 12-month basis, POS for Wrangler and Lee men's bottoms have grown 10% and 8% respectively, significantly beating the market of 1% growth. And in denim bottoms, Wrangler and Lee men's outperformed our largest competitor by over 300 and 190 basis points, respectively. In women's, on a 12-month basis, Wrangler and Lee denim long bottoms have outpaced the largest competitor by over 90 and 70 basis points, respectively. But I think one overarching data point captures how Contour is winning in the marketplace. For the core U.S. long bottoms business, so denim and casual pants, Contour combined men's and women's have taken a significant share from our largest competitor on a three-month, six-month, and 12-month basis. In fact, over the last year, Contour has gained roughly 100 basis points of share, while our largest competitor has lost 150 points. So in approximate 250 basis point delta, we are unequivocally driving competitive separation in the market as we enhance our core through investments in innovation, elevated design, and demand creation. Augmenting these core share gains, category extensions continue to diversify our product portfolio while taking our brands to new points of distribution. Globally, non-denim long bottoms grew 15% in the quarter, while outdoor and workwear each increased 17% over last year. Further demonstrating that our brands are resonating with consumers, our D2C business delivered broad-based strength in the quarter. Globally, contoured D2C increased 15% with Own.com and Own Retail both growing double digits. In the U.S., D2C grew 13%. balanced across brands with Wrangler D2C increasing 16% and Lee up 8% versus last year. And D2C strength wasn't just confined to the U.S. With Contour International D2C up 17%, once again seeing great growth across both brands as Wrangler and Lee International D2C increased 22% and 15% respectively compared to Q1-22%. These first quarter results in D2C provide great proof points of not only brand health, but that our investments in building a world-class omni-channel ecosystem are paying off. And what I love is we remain in the early innings of this D2C journey and significantly under-penetrated relative to our competition. As we distort growth in the secretive channel, we diversify beyond wholesale while also driving enhanced connections with our consumer. As you know, demand creation has and will be a critical piece of these brand-elevating investments. The category expansion I spoke to earlier focused on casualization, comfort, and outdoor activities is only matched by our investments in demand creation that puts our consumers first, with both brands focusing on freedom, freedom for our consumers to express themselves how they want and where they want, So let me now share some examples from the first quarter, as well as upcoming highlights from our robust demand creation pipeline. First, with the Lee brand. During the quarter, we continued to drive momentum through strategic partnerships and targeted digital campaigns. Lee reinforced brand equity and category leadership, reintroducing one of our most iconic and original products, the Lee Rider Jacket. Partnering with world-class media platforms, we reintroduced the rider jacket to a brand new generation, with celebrities like Chris Stapleton organically showcasing the next-gen product as he performs around the world. During the quarter, we also saw Channing Tatum outfitted in Lee overalls in Vanity Fair and Pedro Pascal in our iconic rider jeans in Esquire. Simply put, cultural influencers are seeking the brand like never before. Lee continues to fuel its digital business through increasingly seamless connections, expanding the brand's audience and engaging newer, younger brand loyalists. Our social community grew 255% year-over-year in Q1, and our strategies drove 62% growth in social traffic to our own .com during the quarter. And we are continuing to reinforce Li's leadership and legacy across the globe, launching two powerful collaborations in our APAC region with Disney and 7-Up. We're excited to bring compelling alliances to the China region, driving newness and authenticity with consumers both online and at our elevated retail stores. These collabs demonstrate the brand's leading position in the market. And Li is just getting started. 23 will see more incredible collaborations with global and culturally relevant brands, such as recently launched Dragon Ball Z, and upcoming partnerships with Bearbrick and Elevated Storytelling with partners like Whalebone and sponsorship of music events such as Rock the Bells, all propelling the brand heat that supports sustained longer-term growth. Similarly, the Wrangler demand creation platform is only gaining momentum as we start 2023. In the first quarter, Wrangler partnered with the iconic guitar brand Fender with the second drop of this highly successful collaboration hitting the market in Q1. The product collection skewed more female with key styles globally selling out in the first week. Additionally, select products such as neat guitar accessories, including shoulder straps, picks, and denim guitar cases sold on Wrangler.com and in national retailer Guitar Center across the U.S. And just two days ago, we formally announced Wrangler's new Women's Brand Ambassador with the signing of reigning CMA Female Vocalist of the Year, most nominated female at the 2023 ACM Awards, and Yellowstone actress Lainey Wilson. As the most recognized female artist in recent country music history and a leading voice in the Western movement, we're thrilled to have her represent Wrangler as our first female country music endorsee. Lainey continues our legacy of partnering with authentic brand ambassadors that embrace the core while simultaneously broadening and enhancing Wrangler's reach to a whole new audience. The brand will deepen its focus on the music scene in 2023 by continuing to activate unique brand partnerships. And we're excited to announce today that Wrangler has been named the official denim sponsor of the Academy of Country Music Awards, as well as the Academy of Country Music. The ACM Awards show will air on May 11, and the Wrangler brand will have unique on-site programming leading up to and during the show, including having our own Wrangler Network team on the red carpet doing interviews with the biggest names in country music. Wrangler's connection to country music has never been stronger. Our artists are nominated for multiple awards, including Album and Song of the Year. We will continue our partnership with Live Nation throughout the year at key summer festivals across the U.S. And looking forward, Wrangler's upcoming 2023 pipeline of collaborations and partnerships is more robust than any time in history. Alliances with premium brands, such as Lucchese, Pull and Bear and Buffalo Trace are all natural extensions that continue to elevate Wrangler's positioning and reach with new consumers. As you can see, the current breadth and depth of our demand creation efforts for both brands are tremendous. Just one of the reasons that gives me confidence in the Contour story. So let me close with some thoughts on the go-forward. While we expect macroeconomic pressures to remain prevalent, our Q1 results, particularly in brand-relevant areas such as share gains and B2C, provide us with solid evidence that when we execute on our strategies, we increasingly strengthen our position, regardless of the environment. Rustin will give more detail on our reaffirmed full-year 23 guidance in a bit, but continued execution of these strategies will be key in support of 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 domestic POS share in AUR gains continue in the first quarter. As I stated earlier, we've seen some lag in wholesale shipments relative to the solid sell-through as retailers normalize their order patterns, and we have factored that into our plans accordingly. And we are amplifying our actions with our own inventory, managing our internal production with plans to have year-over-year growth in line with revenue growth during the third quarter. So while U.S. wholesale may be a bit more tempered near-term as demand and supply find equilibrium, we will continue to focus on what we can control in driving POS, in diversifying our growth in B2C, and internationally. And within international, we are seeing great signs in Q2 that China is recovering at a faster pace than we previously expected, and we now anticipate significant gains in the second quarter, with momentum carrying to the second half. These actions, improving fundamentals when coupled with our fortified balance sheet and strong cash generation, afford us great flexibility to deliver in the face of uneven conditions. A solid start to the year is a direct function of our team's amazing efforts day in and day out. I want to thank all of our people around the world for the resilience, adaptability, and commitment to executing our strategies, both in managing through the near term, but also in building the foundation for our future success. This unwavering dedication to excellence is what gives me confidence that we can continue to yield superior returns all KTP stakeholders, and we look forward to sharing the next evolution of our long-term strategic vision at our next Investor Day. Stay tuned for details in the coming months.