Kontoor Brands, Inc.

Ladies and gentlemen, greetings and welcome to the Contour Brands Q3 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 and zero on the telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Karapetian. Please go ahead.

Thank you, Operator, and welcome to Contour Brand's third 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 defined in the news release that was issued earlier this morning. Our outlook is presented on an adjusted dollar basis. Additionally, participants should note that comparability with prior periods is impacted by the previously disclosed 13 million out-of-period duty charge recorded in the third quarter of 2023. Accordingly, in our following comments, comparisons to 2023 gross margin, operating income, and EPS do not include the impact of the 2023 duty charge. 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. Our third quarter results exceeded expectations driven by accelerating revenue growth, improving profitability, and strong cash generation. We anticipated a top-line inflection starting in the third quarter, and I am pleased to share we delivered. Our investments in product innovation and demand creation are driving continued market share gains and a strong foundation for future growth. In what remains an uncertain environment, our strategies are working and we are executing at a high level. With that, let's discuss highlights from the quarter. Wrangler revenue grew 4%, including 5% growth in the U.S. and 10% growth in global D2C. There are several exciting wins from the quarter, but I want to start with an important milestone. In our core bottoms and shorts business, Wrangler gained 90 basis points of market share in the U.S., according to Cercana. This marks our 10th consecutive quarter of market share gains in our largest market. It takes more than one thing to drive this level of consistent performance. but it starts with our people and our incredible product stories that are resonating with our consumers. Let's get to a few of those now. Starting with outdoor, during the quarter, we launched our Cliffside Utility Pant and Outdoor Chino, and both are off to a strong start. We continue to advance our product development capabilities that are driving increased penetration in this large and growing category, as well as expanded distribution opportunities within sporting goods retailers. Year-to-date, outdoor has grown 12%, and we continue to expect double-digit increases for the year. Turning to Bespoke, our new female fit innovation, as I shared in prior quarters, early market response was very encouraging. Today, I am pleased to share demand exceeded our high expectations. We launched across D2C and specialty retail, with many styles quickly selling out. We will build on this momentum and look to scale this platform in 2025. Staying within female, we also launched our collection with Laney Wilson, and as expected, was our single largest collaboration to date. This was also a great opportunity to leverage our new e-commerce capabilities, including early access for loyalty members. In fact, we saw a 100% increase in daily sign-ups, and loyalty members accounted for a third of purchases. Laney has been a fantastic partner, and we are excited to continue this momentum in 25. Taken together, Wrangler's female business grew double digits. We also debuted the Wrangler Global Equity Campaign late in the quarter. If you have not seen it, I encourage you to do so. This was our first campaign of this scale as a public company. With Wrangler's building momentum and strong pipeline of new innovation, the timing was right to play offense. And market response has been fantastic. We have received strong feedback from our retail partners, as well as numerous accolades. In Beyond the Energy, this is created for the brand, this campaign is a unique success story. Leveraging the investments we are making as part of our new multi-brand structure, it was developed almost entirely in-house, allowing for greater potential ROI. Finally, the relaunch of Denim at Target is off to a great start. While it is still early, performance has exceeded our expectations. Wrangler is closing out the year from a position of strength and will be entering 25 with great momentum. Joe will provide more detail, but we have good visibility to the front half of the year. As a result, we have provided preliminary guidance for total revenue growth of 4% in the first half of 25. Turning to Lee, revenue decreased 3% sequentially, improving from the second quarter. Uneven macro conditions in Europe and Asia have continued to pressure the international business. In the U.S., Revenue inflected positive, driven by 2% growth in wholesale, and we were encouraged to see POS accelerate as the quarter progressed. We are seeing particular strength in our female business, which grew 10%. As we discussed last quarter, our consumer insights work and refreshed brand segmentation is yielding green shoots with younger and female consumers. As an example, our work led to the development of Lee Layers, which was the top-performing new program of the season, and our premium EverFit platform also drove nice growth in the quarter. We also had several successful collaborations during the quarter with Forever 21, Oliver Cabell, and Studenheim aimed at reaching younger consumers while driving category extensions. As a result, we are seeing increases in perceived brand equity and purchase consideration. This is translating to improved sell-through. As measured by Cercana, POS for female increased mid-single digits and gained 60 basis points of market share. Over the near term, we expect Lee's U.S. business to further accelerate in the fourth quarter. To support this acceleration, we are excited about the upcoming launch of LeeX. In the fourth quarter, we will be launching the LeeX move collection of denim, non-denim, and tops. This will be followed by LeeX Lite in the first half of 2025. LIEX is a true platform that will provide innovation at scale and support our return to growth. Finally, I will provide an update on our global transformation initiative. Project Genius is progressing well, and we remain on track to deliver $100 million of combined gross margin and SG&A savings. We have identified three major areas for improvement. Our global sourcing transformation, where we will optimize our business for category growth and our evolving growth strategies, drive greater efficiency in our sourced vendor network and enhance our planning organization. Second, back-end efficiencies, where we will leverage an improved share platform across both brands while standing up enhanced data capabilities. And third, commercial optimizations. where we will drive increased speed to market and improved product development. As I've stated in the past, Project Genius is one of our most significant and important undertakings as a public company. The work we are doing will transform our organization to a best-in-class global multi-brand platform while unlocking significant sources of value. We will see improved decision-making, faster speed to market, and a meaningfully higher profitability ceiling. We anticipate Project Genius to have a modest benefit to the first half of 25 with more meaningful benefits in the second half of 25 and into 26. Before I turn it over to Joe, let me provide some final perspective. Our business has great momentum. Revenue and profit are accelerating. We have raised our earnings and cash flow guidance, and we have significant capital allocation optionality. We have returned $168 million to shareholders year to date, and recently raised our dividend. While the environment remains dynamic, our brands are winning with the consumer, and we expect continued growth as we look to the new year, including 4% growth in the first half. We are operating from a position of strength, and I am confident we have a team in place to continue to drive strong value creation for all stakeholders.