Kontoor Brands, Inc. — Form 10-Q summary
Reporting period: First quarter of fiscal 2020, ended March 28, 2020; filed May 8, 2020. The filing covers Q1 2020, not Q1 2019 as indicated in the request metadata. Kontoor designs and sells apparel primarily under the Wrangler and Lee brands. Its May 2019 spin-off from VF means the 2019 comparison is a carve-out period, while 2020 reflects Kontoor as a standalone company; the filing cautions that results are not fully comparable.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $504.5 million | $648.3 million |
| Gross margin | 37.8% | 38.1% |
| Operating income (loss) | $(0.2) million | $25.2 million |
| Net income (loss) | $(2.7) million | $15.4 million |
| Diluted EPS | $(0.05) | $0.27 |
| Operating cash flow | $(45.4) million | $206.5 million |
| Capital expenditures and software purchases | $19.2 million | $5.3 million |
Revenue declined 22%, with decreases across channels, brands, and geographies. Wrangler revenue was $303.4 million, down 18%; Lee revenue was $182.8 million, down 24%. Wrangler segment profit rose to $33.9 million from $23.7 million, while Lee segment profit fell to $1.0 million from $17.6 million. SG&A was 37.8% of revenue versus 34.3%, reflecting fixed-cost deleverage and higher credit-loss allowances. The effective tax rate was 75.6%, including a $7.7 million net discrete tax benefit.
Cash and equivalents were $479.4 million at quarter-end. Long-term debt was $1.389 billion, including $475.0 million drawn on the revolving facility; $23.7 million remained available under that facility at March 28. Current liabilities were $366.7 million. The quarter’s cash increase was mainly financed by net revolving-credit borrowings of $475.0 million. Dividends of $31.9 million were paid during the quarter.
Material changes and drivers
- COVID-19 drove significant sales and profit declines in March, particularly in the U.S. and Europe, amid customer and company store closures, reduced traffic, and stay-at-home orders. Management said early-quarter trends had been consistent with plans before the pandemic’s spread.
- International revenue fell 37%; U.S. wholesale revenue fell 13%; and branded direct-to-consumer revenue fell 21%. Planned exits from lower-margin business and quality-of-sales actions also reduced revenue. Digital wholesale growth partly offset declines.
- Gross margin declined 30 basis points, principally due to higher inventory provisions and unfavorable geographic mix. The allowance for doubtful accounts increased from $11.9 million to $20.1 million, including a $9.3 million provision for expected credit losses.
- Corporate and other expenses rose to $33.2 million from $14.0 million, largely reflecting standalone-company costs and ERP implementation. Interest expense increased to $10.9 million from $0.1 million following post-spin debt financing.
- Other comprehensive loss was $53.8 million, including foreign-currency translation and derivative losses; comprehensive loss was $56.5 million.
Outlook, liquidity, and risks
Management expected COVID-19’s operating impact to be most pronounced in Q2 2020 and anticipated continued effects for the remainder of 2020. The filing provides no revenue or earnings forecast. Expected 2020 capital expenditures were $55 million to $65 million, primarily for the global ERP implementation.
On May 5, 2020, after quarter-end, Kontoor amended its credit agreement to provide temporary covenant relief. The amendment sets a $200 million minimum liquidity floor, limits available cash to $250 million, tightens certain restrictions, and increases borrowing costs during the relief period. It sets maximum leverage ratios of 5.50x for the June and September 2020 quarters, 5.00x for December 2020, and 4.50x for March 2021. The company said it was compliant at quarter-end and expected compliance for at least one year, but warned that a more prolonged downturn could require further amendments and, if unavailable, could lead to default and debt repayment demands.
Management took measures to preserve liquidity, including cost and capital-spending reductions, workforce actions, production adjustments, and working-capital management. Dividends were suspended for Q2 and Q3 2020 under the amendment, with reconsideration possible after Q3 subject to covenant compliance. Management cautioned that the pandemic could worsen sales, profitability, inventory, receivable collection, supply-chain continuity, financing access, and covenant compliance. No significant COVID-related impairment charge was recorded in the quarter. Routine legal claims were not expected by management to materially affect results or financial condition.
Important facts for investors to verify
- Subsequent quarterly revenue, margins, cash generation, and recovery in wholesale and direct-to-consumer demand, especially at Lee.
- Compliance with amended leverage and liquidity covenants, borrowing availability, and the cost and timing of debt repayment.
- Receivable collections, credit-loss allowances, inventory levels and valuation, and cash-flow performance.
- Whether planned cost reductions and ERP spending deliver expected savings without additional disruption or impairment.
- Dividend reinstatement prospects and the effect of the temporary restrictions in the amended credit agreement.