Kontoor Brands, Inc.

Greetings and welcome to the Contour Brands Third Quarter 2023 Earnings Conference Call. At this time, all participants are on 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. Please go ahead.

Thank you, Operator, and welcome to Contour Brand's third 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 often be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning. Reconciliations of GAAP 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 this 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 newly appointed Chief Financial Officer, Joe Alkire. Following our prepared remarks, we will open the call for questions. We anticipate the call will last about an hour. Scott?

Thanks, Eric, and thanks everybody for joining us on our call. I'm pleased to share that we delivered Q3 results above our expectations, most notably with upside to our top line. Our strategic playbook is working and is why I'm so confident in the next phase of Contour's evolution, even as we assume a more challenging macroeconomic backdrop. And on the bottom line, excluding the duty charge, which Joe will provide more detail on in a bit, operating results also exceeded our plan. Global contour revenue increased 8%, including about a point of FX benefit, with particular strength in the U.S. across both wholesale and D2C. Within the U.S. market, ongoing strong POS and share gains were driven by accelerating shipments during the quarter. From a share perspective, according to Circona, 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 third quarter and here to start Q4. A few notable call-offs. For the last three months, contour brands outperformed the market by approximately 140 basis points. And in men's bottoms, we outperformed the market and our largest competitor by 170 and over 250 basis points, respectively. And in women's, our lead business gained over 60 points of share to the market, outpacing our closest competitor by 30 basis points. Importantly, even after aggressive pricing actions taken by select peers, we've continued to see market share gains. For example, over the last month, our Wrangler men's bottoms business outpaced our largest competitor by over 250 points, while Lee's men's outperformed by roughly 150 points. Our share gains in the core are, in large part, due to the strategic investments in our brands across innovation, design, and demand creation. That drives competitive separation. I'll touch on examples of our elevated demand creation in innovation platforms in a bit. This strength in our core is complemented by category extensions. As we diversify our product assortment beyond denim bottoms, global highlights on a reported basis include outdoor, up more than 30% in Q3, while Western and Female also saw positive momentum. Further proof points of our brand's health, our D2C business once again delivered broad-based strength in the quarter. Globally, Contour D2C increased 6%, led by our Own.com, up 10%. In the U.S., Own.com increased 11%, balanced across brands, with Wrangler and Lee both experiencing double-digit gains. And international DTC remained healthy in Q3, increasing 5% with Wrangler increasing 21% and Li increasing 2% or up 15% ex-China. And within international, we did see choppiness during the quarter with expected softness in China more than offsetting reported gains in Europe. Importantly, we are seeing China trends accelerate here in Q4 and continue to anticipate the region to return to significant growth in the quarter. up 20% plus. D2C and international are key areas of growth for contour going forward with significant white space in each as these segments represent only 12 and 21% of our last 12-month mix, respectively. The KTB investment thesis remains highly differentiated relative to many of our peers that operate more mature D2C and international businesses. And the diversified and accretive growth that these opportunities afford is still very much ahead of us. And we will use ongoing structural gross margin accretion from these areas to help fund amplified investments in critical growth enablers such as talent, innovation, and demand creation, creating a virtuous cycle for sustained top-line growth over the long term. So let me touch on these a bit more in detail. First, with demand creation. Starting with Wrangler, simply put, Q3 was as big of a demand creation quarter the brand has ever experienced in its 75-year history. Strategic partnerships with Sandro, Staud, Mini Rodini, and Barbie not only support our efforts to reach the female and youth demos, but does so in an elevated, brand-enhancing manner across the globe. The Wrangler and Barbie collection was our best and fastest-selling collaboration ever. Inspired by powerful cowgirls, the collection combines heritage denim with bold prints, further advancing Wrangler's diversification strategies to attract new and younger consumers while remaining authentic to the brand. Also in Q3, Made by Cowboys for Cowboys took on a whole new meaning as Wrangler became the official jeans of America's team, the Dallas Cowboys. The sponsorship will run over the next three years, amplified via an integrated media platform signage and activations at AT&T Stadium, social content featuring players and cheerleaders, retail promotions, and a monthly concert series. This connection of two iconic American brands doubles down on our Texas heartland, and we couldn't be more excited about future opportunities to build on the partnership. And as we begin few four, The demand creation momentum for Wrangler continues. Just yesterday, we teased the launch of our collab with iconic premium bourbon brand Buffalo Trace. Fittingly, it kicks off with a launch party next week at New York City hotspot Ray's Bar. And then in December, the brand once again takes over Las Vegas at the Wrangler National Finals Rodeo. However, this year promises to be even more special as country music superstar and our first female music endorsee, Lainey Wilson, hot off her record-breaking nine CMA nominations, is scheduled to open the rodeo on December 15th. Laney will also host a four-night concert series sponsored by Wrangler to close out the biggest weekend in rodeo, wearing her iconic Wrangler flares and bell-bottoms on and off stage. Now turning to the Lee brand, Q3 saw another quarter of tremendous return on marketing investment, and importantly, manifested on a global scale. During the third quarter, the Lee brand launched its newest and most iconic female fit, the Ryder jean, which was inspired by our very first women's denim line, the Lady Lee Ryder, and made modern for today's woman. The global campaign, shot by Mark Seliger and set to the Donna's Who Invited You, launched mid-September and has sparked new excitement in our women's premium denim collection. In addition, Trend Right collaborations with culturally relevant brands such as Dragon Ball Z, Roaring Wild, and Daydreamer also continue to extend Lee's reach to a younger, more diverse audience. During Q3, Lee turned up the heat across Southern California as the Lee and Daydreamer partnership took over the iconic Fred Siegel shop on Sunset Boulevard with a two-week showcase of the collection. This launch leaned heavily into Daydreamer's L.A. cool aesthetic through the key premium distribution in Fred Siegel and Revolve. And then in September, the brand hosted a unique, one-of-a-kind experiential event at the Ed Sheeran Concert at SoFi Stadium in L.A. with attendees spanning tastemakers, influencers, and celebrities from all over the world. And the momentum has carried into Q4 as Lee is currently ramping digital campaigns in support of Ultralux and Extreme Motion innovation platforms. To further drive brand separation in the marketplace, we are also amplifying our focus on innovation. As our pipeline is healthy and accelerating, a perfect example of innovation that cuts across both product and manufacturing, our IndiGood platform continues to scale, delivering water and cost savings. We recently announced that we surpassed our 2025 water savings goal of over 10 billion liters of fresh water, two years earlier than was targeted. This accelerated accomplishment demonstrates our commitment to sustainability and to the effectiveness of the Indigood program, which also creates an important industry standard for others to follow. I am proud of the work we are doing to save water with platforms like Indigood and other cutting edge technologies, such as digital printing, driving towards a future where all genes can be created using zero fresh water. Other innovation platforms, such as Extreme Motion, Everfit and Ultralux for Lee, as well as ATG in a performance specialty fishing line, Wrangler Angler, not only diversify our offering, but does so in an elevated way that mixes up AURs and gives the brands increasing permission to play in more premium points of distribution. Needless to say, we have a ton of brand momentum for the balance of the year and into 2024. Just one of the factors that gives me great confidence in the go forward. You don't develop this heat without investing behind the brands in a highly productive way, from talent to design to innovation to demand creation, and we will continue to amplify strategic spend in support of diversified growth across categories, channels, and geographies. But make no mistake, we love how we are positioned in taking share within core U.S. wholesale with incredible partners such as Walmart, Amazon, and Target, as well as Western Specialty. Retailers that align and support our brand's value proposition with consumers, especially important given the macro challenges around the world. Structurally accretive growth, particularly in D2C and international, helps fund these key investments, as does constantly evaluating our operating model, finding ways to reduce non-strategic spend, simplify processes, and enhance efficiencies, including within our supply chain. Our proactive restructuring actions last quarter and amplified inventory actions we are taking now are good examples of investments with a healthier foundation of which to build. But rest assured, we are just in the beginning stages of transforming our model for the future, with substantial opportunity to unlock value over time. Stay tuned for more here. And these actions also help accelerate cash generation, creating significant opportunity to return cash to shareholders, as evidenced by our recently announced increase to the dividend. Our capital allocation optionality remains robust. This cash flow optionality, when taken with our resilient fundamentals, even during a challenging macro environment, creates a powerful combination that should support superior TSR over time. We look forward to sharing more on our long-term strategic vision at our investor day.