Kontoor Brands, Inc.

Greetings and welcome to the Contour Brand's first quarter 2024 earnings 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. It is now my pleasure to introduce Michael Karapetian, Vice President, Corporate Development, Strategy, and Investor Relations. Thank you, Michael. You may begin.

Thank you, Operator, and welcome to Contour Brand's first quarter 2024 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 defined in the news release that was issued earlier this morning. Our outlook is presented on an adjusted dollar basis. 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 Branch President, Chief Executive Officer and Chair Scott Baxter, and Chief Financial Officer Joe Alkire. Following our 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. We are pleased with our better-than-expected start to the year. Compared to our outlook provided in February, we saw a broad-based upside from revenue, gross margin, and earnings. Joe will unpack the details, but our relative strength in the quarter, combined with improving visibility, gives us confidence to raise our full-year guidance. I will step through the highlights in a bit, but first, let me start with the organizational announcements we made in March. As we discussed last quarter, we have commenced Project Genius to transform our organization. This multi-year project is focused on driving three things. First, create a global best-in-class multi-brand platform. Second, simplify the organization to increase speed and efficiency. And third, free up investment capacity to accelerate growth and increase profitability. As part of these actions, Tom Waldron has been appointed COO. You've had a chance to hear from Tom during our year-end calls. He is an incredibly talented leader who has led the return to growth and strong profitability for Wrangler. From 19 to 23, Wrangler has grown revenue at a mid-single-digit CAGR and expanded reported profit margins by over 300 basis points. In his new role, Tom will amplify our strategic playbook across both brands to drive improvements throughout the organization, from our commercial and go-to-market teams to global operations. We have also elevated Jenny Broyles to EVP and Global Brands President of Wrangler and Lee, and Ezio Garcia-Mendez to EVP and Chief Supply Chain Officer. Congratulations to both Jenny and Ezio, who have joined our executive leadership team. The team we have in place has a proven track record of success at every position, and I am confident will drive the next leg of our value creation journey. Now, let me touch on highlights from the quarter. Wrangler's momentum continues with product and demand creation platforms that are elevating the brand like never before. While wholesale pressures are impacting the near-term as expected, the strength of our D2C business and point-of-sale outperformance are real proof points Wrangler is winning with the consumer. During the quarter, Wrangler's global D2C business grew 8% and we gained 60 basis points of market share in denim longs according to Circona. This marks the eighth consecutive quarter of market share gains for the brand. To support this momentum, Wrangler continues to diversify beyond denim. In fact, approximately half the business is now outside of denim bottoms, reflecting the success we have had expanding into new categories. Outdoor is a great example, which is now an approximately $200 million business. The investments we are making in the team and our product development capabilities are helping to drive further penetration in this large and growing category, leading to successes like the outdoor performance cargo, which is one of the fastest growing pants in Contours history. And Wrangler ATG is elevating the brand into newer channels of distribution, such as specialty sporting goods, supported by new launches like the ATG Chino and Cliffside Utility this fall. as we are on track for another year of double digit growth in outdoor. We are also advancing our consumer insights and research capabilities as part of our evolution to a more data driven organization, allowing us to better align with changing consumer buying habits and behaviors. This behind the scenes work is a great example of how we are becoming a more efficient organization with targeted investments that generate higher returns. And finally, we have a strong pipeline of demand creation platforms and collaborations. Laney Wilson's first collection launches later this year, and based on early reads, is on track to become the largest global collaboration to date. We are also continuing our very successful collaboration with Stodd in the second quarter, which is helping to bring the right balance of newness while reaching a younger female consumer. And we are amplifying the brand with events at the ACM Awards and Stagecoach, where we are the official Denim sponsor. These are great examples of how we are building momentum throughout the year with demand creation investments that fit together and deepen the connection with our consumers. Turning to Lee. Similar to Wrangler, Lee experienced softness at wholesale as retailers tightly managed inventory levels. As we discussed last quarter, the business was also impacted by conservatism on seasonals. That said, we are seeing green shoots from our innovation platforms and with our younger female consumer. On the men's side, we continue to advance our innovations focused on comfort. These platforms now account for two-thirds of our U.S. men's business and are a genuine distinction in the market. And within female, our heritage collection and iconic rider platform is expanding the brand's reach while being supported by new equity campaigns. This is translating to share gains and growth at point of sale. During the quarter, POS in the U.S. increased 2%. And market share in Denim Longs gained 40 basis points as measured by Cercana. Looking ahead, we have several initiatives that give us confidence. First, our improving product development capabilities are enabling category expansion. Our TOPS business has been a great success story, is on track to deliver strong double-digit growth for the year. And Lee Golf launches in the second quarter with innovative fabrications that are appealing to a broad range of male consumers. We are excited about the potential in this growing category as part of Lee's office to outdoor evolution. Second, our innovation pipeline is getting the most significant addition in years. Lee X will launch later this year and combines elite comfort with world-class aesthetic. This will be a true platform that crosses denim and non-denim tops and bottoms at a price point that simply does not exist for this level of performance. And last but not least, we are getting sharper with our brand positioning in the marketplace. This foundational level work is a significant focus for the second half of the year and is part of the new multi-brand platform we are developing. We are conducting an end-to-end assessment to ensure alignment with our refreshed consumer segmentation, brand investments, and product development. We are confident this will pay significant dividends in the years ahead. Before I turn it over to Joe, let me close with perspective on the balance of the year. Since we spoke in February, point of sale has improved for both brands, we have continued to gain share, the wholesale channel has found better balance, and gross margin expansion exceeded our expectations. We also made further progress working down our inventory position, ending the quarter 24% below prior year levels. Combined with our better than expected profitability, we now expect to generate more than $335 million in cash from operations this year. As a result, our capital allocation optionality continues to improve, allowing us to return 48 million to shareholders during the quarter, including 20 million in share repurchases under our new $300 million authorization. Longer term, Project Genius planning is well underway, with impacts expected to start in the fourth quarter. We have a line of sight to the higher end of the 50 to 100 million of annualized run rate savings, none of which are included in our guidance. That will structurally raise our profitability ceiling while significantly increasing our investment capacity to drive more profitable growth over time. While the near-term environment remains dynamic, we are operating from an offensive position. We are off to a better-than-expected start and have improving visibility to the balance of the year. I am confident we are on a path to drive strong value creation for all stakeholders.