Kontoor Brands, Inc.

Greetings and welcome to the Contour Brands second quarter 2024 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 Karapetian, Vice President, Corporate Development

enterprise strategy and investor relations thank you you may begin thank you operator and welcome to contour brands second 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 be in constant currency unless otherwise noted, and often on an adjusted dollar basis, which we clearly define 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. Joining me on today's call are Contour Brands 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. I'm pleased to share that we delivered second quarter results above our expectations. Our results were driven by continued market share gains, gross margin expansion, and strong earnings growth in cash generation. In what remains an uncertain environment, the consistency of our execution and power of our model is driving competitive separation and improving fundamentals. We are entering the second half of the year with great momentum. Our brands are winning with the consumer and we expect revenue growth to accelerate for both brands through the balance of the year. Based on our improving visibility and stronger profit outlook, we are raising our full year gross margin, earnings, and cash flow guidance, including incremental investments we are making in both brands. Midway through the year, we have executed our plan well, and I am confident our best is still ahead of us. With that, let me review highlights from the quarter. Wrangler revenue grew 1%, with growth in nearly every channel and region fueled by continued share gains and expansion into new categories. In our core bottoms and shorts business, we gained nearly 100 basis points of market share in the U.S., according to Cercana. And our non-denim business, which includes outdoor MTs, grew 14% in the quarter. This broad strength demonstrates the power of the brand and the momentum we are carrying into the second half of the year. POS trends in the U.S. also accelerated through the second quarter, increasing 4% in June, our strongest month year to date. Behind this strength is a combination of product and demand creation platforms that are resonating with consumers like never before. Starting with outdoor, which grew 25% in the quarter, we are bringing great product and value to the market. And the consumer is responding. As an example, our utility pant grew triple digits in the quarter. And we saw similar strength in shorts. Our investment in talent, design, and product development are advancing our penetration in this large and growing category. And we have visibility to this momentum continuing, supported by new launches this fall, such as the ATG Chino and Cliffside Utility Pant. We believe we are just getting started and have a long runway for outsized growth. including double-digit increases this year. In our Western business, U.S. revenue grew 8%. Wrangler is rooted in Western culture, which has been part of its DNA since its founding in 1947. Our collaborations with artists such as Laney Wilson and Cody Johnson are bringing a new generation of consumers into the brand. In George Strait, who we've collaborated with since 2003, recently set the record for the largest ticketed event in U.S. history. And most recently, we partnered with the summer blockbuster Twisters, showcasing Wrangler's deep connection to America's heartland. We get asked if Western travels around the world, and the answer is a clear yes. In Europe, we are seeing similar strength with the consumer across Western bottoms and tops, which is attracting a younger and more female consumer into the brand. Looking at the balance of the year, our pipeline is the strongest we've had. The Laney Wilson Collection is on track to be our largest collaboration to date. The market response to Bespoke, our new female fit innovation, has been fantastic. We enter our second year with the Dallas Cowboys, and we are planning our first equity campaign in years across broadcast TV and live sports. The early reads on the campaign have been incredibly strong, And we can't wait for its public debut in September. Taken together, we expect second half revenue for the brand to accelerate to low to mid single digit growth. Turning to Lee, as expected, revenue in the quarter decreased 6%, reflecting sequential improvement. A decline in U.S. wholesale and macro pressures in Europe and Asia more than offset global growth in digital. That said, the reported figures don't tell the full story. So let me share details on what's behind the numbers. First, we saw encouraging signs as the quarter progressed, including U.S. POS accelerating to 6% growth in June. This was the strongest POS performance all year. In addition, our core bottoms and shorts business gained approximately 20 basis points of market share in the U.S. Conservative retailer inventory management and the slow start to seasonal negatively impacted sell-ins. but the momentum we are seeing with sell-through gives us confidence the brand is resonating with consumers. Our consumer insights work is also advancing our end-to-end brand assessment in refreshed segmentation. In particular, we are seeing green shoots with younger and female consumers. In Gen Z, Lee Female saw a 42% increase in perceived brand equity and a 36% increase in purchase consideration over the last 12 months. As we discussed last quarter, this is a significant focus for the second half of the year, and we are confident the work will pay dividends in the coming years. We know we need to capitalize on the opportunity to improve Lee's top line performance. The foundational work on consumer insights, segmentation, product development, and demand creation gives us confidence we are on the right path. And over the near term, we have several initiatives that support the second half acceleration. In June, We launched the exciting collaboration with Hey Dude across both apparel and footwear. And just yesterday, we followed up with the Lee Forever 21 collaboration, tying into the consumer work I just shared. These collaborations speak to the younger consumer that is seeking the brand while expanding Lee into new categories. And our biggest platform of the year, Lee X, is on track for its global launch. This performance innovation combines elite comfort with world-class aesthetic at incredible value. It is launching as a true platform at wholesale and D2C and will include bottoms, tops, and non-denim. It will launch later this year in scale in 2025. And we are excited to share an upcoming collaboration with legendary designer Paul Smith. He has worked with some of the world's most iconic brands and speaks to the rich heritage Lee has around the globe. This will launch as a premium collection in spring 2025. Supporting these initiatives, we will be making incremental demand creation investments in the second half of the year, which has been incorporated into our raised earnings guidance. Putting it together, we expect second half revenue to improve to low single digit growth. Finally, let me provide an update on Project Genius. The planning phase is going well, and we have started to move into the execution phase on several initiatives. We have a line of sight to approximately 100 million of annualized savings at full run rate, none of which are included in our guidance. This will structurally increase our profitability ceiling while adding significant investment capacity and optionality. We will be sharing more details over the coming quarters. Before I turn it over to Joe, let me reiterate the confidence we have in achieving our 24 plan. Our brands are winning with the consumer, revenue is accelerating, and we expect to generate double-digit operating profit growth over the balance of the year. We have also raised our earnings guidance to the top of our prior range and now expect to generate over $350 million in cash from operations, reflecting our significant capital allocation optionality, including over $100 million returned to shareholders year-to-date through our dividend and share repurchases. We are sensitive to the current operating environment, which remains challenging much as it's been for the last five years. But our teams are executing at a high level, inventory levels at retail are in good shape, and we like the fundamentals of our brand positioning as high value and essential to the lives of many of our consumers. We are operating from a position of strength, and we enter the second half of the year with great momentum to drive value creation for all stakeholders. Joe?