Kontoor Brands, Inc.

And welcome to the CONTU Brands Q2 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Gracie, VP Corporate Finance and Investor Relations. Thank you. You may begin, sir.

Thank you, Operator, and welcome to Contour Brand's second quarter 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. Amounts referred to on today's call will be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning. Adjusted amounts exclude the impact of restructuring costs. Reconciliations of gap measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which 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. Unless otherwise noted, amounts referred to on today's call will be in constant currency, which exclude the translation impact of changes in foreign currency exchange rates. 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 your questions. We anticipate the call will last about an hour.

Scott? Thanks, Eric, and thanks for all of those joining us on today's call. I'm going to focus my comments today on three areas. First, I'll discuss key highlights from the second quarter, including our continued share gains in the U.S., momentum in D2C, which we believe provides the best indication of brand health. and the strong results of our international business led by APAC. Most importantly, I'll touch on why we believe the KTV investment thesis is so uniquely positioned, given how under-indexed we are in D2C and international. Second, I'd like to share how strategic investments and key growth pillars, including demand creation, have, and are expected to support our market outperformance in the near term, but also drive increasingly diversified and accretive growth across categories, channels, and geographies over time. And how we took amplified action here in the second quarter to reduce non-strategic spend and improve operating efficiencies, both of which help fund these critical growth enablers And lastly, before I pass it to Rustin, I'll provide perspective on why I'm confident in Contour's glide path. Despite the uneven macro environment, this is evidenced in not only our reaffirmed 23 guidance, excluding the restructuring charges, but in our accelerating top line we anticipate here in the third quarter. Let me start with highlights from our second quarter. I'm pleased to share that we delivered Q2 results largely consistent with both our expectations and commentary we provided on our first quarter call. Global contour revenue was essentially flat year over year as strength internationally, particularly in the China region, was offset by a low single-digit decrease in U.S. wholesale. Within the U.S. market, continued strong POS and share gains were tempered by challenges in seasonal product and softer shipments during the quarter, as retailers remained cautious with their open to buys. I'll touch on this a bit later, but fortunately, this dynamic has begun to turn more positive here in the third quarter. From a share perspective, according to Cercana, which focuses on the U.S. total measured market, we continued to outpace the market in our U.S. wholesale and core denim business during the second quarter. A few key call-ups. For the last three months, contour brands outperformed the market by approximately 100 basis points, and in men's bottoms, contour outperformed the market and our largest competitor by over 160 and 200 basis points, respectively. Our share gains in the core are a direct function of a few key factors. First, it reflects the incremental investments in our brands across innovation, design, and demand creation. That drives competitive separation. And second, we were very mindful with strategic pricing, including both where we priced and how much we priced, understanding the elasticity of our consumer with a focus on using innovation and newness to support incremental pricing. In terms of pricing, I appreciate why this may be top of mind for the investment community, and I will expand in more detail when I discuss our outlook. However, I want to highlight that the full year guidance we provided in March of this year already assumed a more aggressive pricing and promotional environment in the second half of 23. Beyond share gains in the core, we also saw a nice category expansion during the second quarter as we continue to diversify the product portfolio and extend our reach to new points of distribution. Global highlights on a reported basis included non-denim long bottoms and t-shirts increasing 12% and 24% respectively, while outdoor was up high single digits. Further indication of our brand's health and consumer wallet share, our D2C business once again delivered broad-based strength in the quarter. Globally, Contour D2C increased 15% with Own.com and Own Retail both growing mid-teens. In the U.S., D2C grew 9%, balanced across brands, with Wrangler increasing 10% and Lee increasing 8% versus last year. And international D2C accelerated in Q2, increasing 25%, with Wrangler increasing 14% and Lee increasing 28%. And speaking of our international business, the second quarter saw a return to growth overall up 13%, as continued choppiness in Europe and wholesale was offset by D2C, as well as broad gains in APAC. China in particular saw significant recovery, increasing 93% compared to last year. Rustin will touch on this a bit later, but while growth rates in the quarter and in future periods will be impacted by prior year lockdowns and restrictions, we are encouraged by the overall healthier marketplace and ongoing investments that will support material improvements in both our wholesale and retail businesses over time. As you all know, D2C and international are key areas of growth for Contour going forward. And given the significant white space that still remains ahead B2C and international make up only 12% and 21% of our last 12-month mix, respectively. The contour investment thesis is uniquely positioned relative to many in our competitive set. We have more mature B2C and international operations. The diversified and accretive growth that B2C and international affords is still very much ahead of us. This supports a more profitable growth algorithm over time. And we will continue to use ongoing structural gross margin accretion to help fund amplified investments in critical growth enablers such as talent, technology, innovation, and demand creation, creating a virtuous cycle for the sustained top-line growth long-term. We see opportunities to lean into these areas in the third quarter, the upcoming holiday, and into 24. We also will be proactive with strategic actions that help evolve our operating model for the go forward, including the restructuring measures taken during the second quarter. Rustin will provide more detail, but I want to be clear. The steps we've taken are not in reaction to a challenging market, but because we're in a different stage of growth relative to where we were at the start, With our global operating model and ERP implementation complete, we are increasingly focused on driving efficiencies and reducing non-strategic spend, augmenting the gross margin accretion to reallocate capital towards TSR bolstering investments. With respect to demand creation, I'd like to share some examples of our brand elevating activations from the second quarter and future pipeline. First, With the Leigh brand, the team continues to build momentum with tastemakers and trendsetters, attracting younger, new-to-file consumers into the brand. Our LA-based stylist showroom continues to yield strong engagement with some of the world's leading celebrities and influencers. And later this month, Leigh is preparing its first-ever women's-focused partnership with Daydreamer, a female-founded brand that celebrates American-made graphic storytelling. Product will be offered at premium points of distribution as well as D2C, including select product made in Los Angeles. Lee is also leaning into its history of innovation by expanding key platforms, including Extreme Motion. By year end, we expect Extreme Motion will grow to over half our men's denim sales in the U.S. as consumers look to fit the fit and comfort it provides. And we plan to build on this momentum next year with Lee's 100 years of denim anniversary. Stay tuned as we share exciting details over the coming quarters. Pivoting to Asia, Lee is partnering with leading celebrities and artists in countries such as India and South Korea to amplify our local voice in these important growth markets. And our upcoming collaboration with the rising China-based streetwear brand Roaring Wild is slated to be featured during Shanghai Fashion Week and taken globally. A great example of Lee's ability to leverage its platform to bring differentiated product to markets around the world. Turning to Wrangler. As you know, in May, we kicked off our inaugural sponsorship with the Academy of Country Music Awards with three incredible days of denim customization, artist interviews, and music performances. Leading up to the award show, the Wrangler brand was in the heart of artist activity with prominent placement on Media Row and the Red Carpet, as well as musical performances from Wrangler country music endorses Cody Johnson and female brand ambassador Lainey Wilson. And we were thrilled to see Laney take home four awards, including Album of the Year and Female Artist of the Year. Wrangler's momentum only continues in the back half of the year. I'm particularly excited about our new female and kids initiatives, including partnerships with Stodd and Mini Rodini. These platforms further advance Wrangler's diversification strategies to attract new and younger consumers while staying true to the brand. And as you saw earlier this week, we announced Wrangler is the official denim brand of the Dallas Cowboys. The sponsorship will be featured throughout the upcoming season and will include activations throughout AT&T Stadium, social media, and a monthly concert series. I recently had a chance to see what is planned around the Cowboys Stadium, and it is truly incredible. This authentic connection is a natural fit for two American icons, and we couldn't be more excited for the launch in the coming weeks. And finally, let me provide some perspective on our unique positioning going forward. During the second quarter, we took proactive strategic actions to enhance our operating model, drive greater efficiencies, and improve our inventory levels. For the balance of 23, we have reaffirmed our guidance, excluding the restructuring actions taken in Q2, despite our continued assumption for a more challenging macro backdrop, particularly here in the U.S., In the face of these macro headwinds, our strategic investments are helping drive competitive separation as evidenced by our solid share gains, POS, and improving shipments. Given these factors and strong proof points from quarter-to-date trends, we expect Q3 revenue growth to accelerate driven by the U.S. up mid-single digits and above our full-year algorithm. Along with the improving top line, our gross margin drivers are intact. including moderating input cost pressures, reduced production downtime, unhealthier inventory, and ongoing structurally accreted mix shifts to D2C and international. Combined, this provides optionality to lean into strategic investments to support both near and long-term opportunities. Rustin will provide greater detail on our assumptions, but as I stated earlier, this outlook assumes a more deflationary and more promotional landscape. and importantly we intend to exit 23 clean well positioned to catalyze more sustained and profitable growth long term we will remain laser focused on working down inventory which coupled with improving fundamentals should support significant cash generation and increasing capital allocation optionality as we move through the balance of the year and into 2024. finally in closing Our results in go-forward performance always depends on our incredible colleagues around the globe. I want to especially thank our team's efforts to drive strategic actions during the quarter that help position Contour for future success. I'm confident that their continued commitment to the execution of our strategic playbook will help drive superior returns for all KTB stakeholders. We look forward to sharing the next phase of our long-term strategic vision at our Investor Day, which is tentatively targeted for early 2024.