Kontoor Brands, Inc.

Greetings and welcome to the Contour Brands fourth quarter and fiscal year 2023 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, Michael Carpedian, Vice President, Corporate Development Strategy and Investor Relations. Please proceed.

Thank you, Operator, and welcome to Contour Brand's fourth quarter and fiscal year 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 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 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 Chief Financial Officer Joe Alkire. In addition, we will 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 Lee. Following up prepared remarks, we will open the call for questions. We anticipate this call will last about one hour. Scott?

Thanks, Mike. And thank you to everybody joining us on today's call. Before I discuss our results, I'd like to start with the announcement we made this morning on our global transformation project. Project Genius is one of our most significant and important undertakings as a public company. The work we are doing will transform our organization from the legacy clone-and-go structure required at the spin to a truly best-in-class global multi-brand platform while unlocking significant sources of value. Let me first start with what this project is not. This is not a cost-cutting exercise. Expense discipline is a foundational strength of our business and one that we prioritize regardless of market conditions. Rather, we are pursuing this proactively and from a position of strength. The steps we are taking will fundamentally improve our organization and structurally raise our profitability ceiling, creating more investment capacity to pursue growth, enhanced capital allocation, and improve our overall financial profile. Unpacking this a bit more, when we first spun as a public company, our organization was set up to mirror our legacy structure. This was required to ensure continuity in the business while we focused on our Horizon One priorities including delivering our balance sheet, paying a superior dividend, and stabilizing our brands. After successfully completing Horizon 1, we embarked on Horizon 2 with a solid foundation now in place. As a result, we have grown our top line, gained market share, and improved operating margins from 2019 levels. But as an organization, we do not rest on our laurels. The leadership team we have in place is tailor-made for this strategy. and our next phase of growth. I am highly confident now is the right time to pursue this transformational initiative. A word you hear from us a lot is optionality. It provides the flexibility to pursue sources of value for our stakeholders, wherever that may be, while providing the resiliency to respond to the types of disruption we have seen over the last five years. Project Genius will add optionality well above what we've been able to deliver in the past. It will also simplify our organization. This will result in greater visibility into the business, improved decision making, faster speed to market, and better leverage of our global ERP system. We are also establishing a true multi-brand platform from which our brands can grow. This new structure will allow for our brand investment at a level we simply have not been able to achieve under our prior structure. To put some specifics to this, Project Genius is expected to result in $50 to $100 million of combined gross margin improvement in SG&A savings. We expect the benefits to start in the fourth quarter of this year and ramp in 25 and 26. A question I expect you will want to know is whether we will invest these savings back into the business or let it flow to the bottom line. The answer is both, and that is precisely the type of optionality that will separate us in the marketplace. We will be sharing more in the coming quarters, and I am confident this will drive accelerating growth over the coming years in the next chapter of our value creation journey. Let's now turn to our results. 2023 was a landmark year for Contour. We connected with more consumers, introduced powerful new product stories, and launched one-of-a-kind brand campaigns and partnerships. At the same time, the market had its share of challenges, particularly in US wholesale, where macro uncertainty is impacting retail inventory levels. And we are seeing the impact of global events internationally, particularly in Europe, where consumer sentiment and spending has been uneven. We anticipate these headwinds will continue into 2024 particularly in the first half. We also have an opportunity to better diversify our business into large and growing categories while expanding beyond our core channels of distribution. As we outlined at our 21 investor day, these are significant white space opportunities for us. That said, we have not achieved the targets we set out three years ago. This is an important area of focus for us going forward and initiatives like Project Genius will be key in unlocking this potential. So what gives me confidence we can deliver? First and foremost, our brands are winning in the marketplace. In the fourth quarter, Denim's sell-through of both Wrangler and Lee in U.S. wholesale increased 2% as measured by Cercana, outpacing the market by 500 basis points. And for the year, we saw a similar story with sell-through increasing 1% and outpacing the market by a combined 350 points. Importantly, this is not just a one-year story. Over the last two years, we have consistently outperformed the market by an average of three full percentage points. While we have seen periods of lag between sell-in and sell-through, the bottom line is consumers continue to choose our brands. As you will hear from Tom and Chris, each brand has its own unique story to tell that is resonating in the market. And finally, as Joe will discuss later, we made significant financial progress in 23. We successfully worked on our inventory position, ending the year 16% below prior year levels. Gross margin has inflected with a long runway for continued expansion ahead, and our cash generation accelerated. This supports increasing capital allocation optionality, including the $139 million we returned to shareholders through dividends in share repurchases last year, as well as our new $300 million repurchase program. I'd like to close by reiterating my earlier comments. While the market remains dynamic, we are not standing still, and I am confident we have the team and strategy to deliver on the incredible opportunities ahead. The actions we announced today will fundamentally improve how we operate and drive the next phase of accelerating value creation for all our stakeholders.