Kontoor Brands, Inc. — Q2 FY2022 Form 10-Q
Period: Fiscal second quarter ended July 2, 2022, with six-month results through that date; financial statements are unaudited. The request metadata says “2021 Q2,” but the filing is for Q2 FY2022.
Business and financial performance
Kontoor designs and sells apparel and accessories, primarily under Wrangler and Lee. Q2 revenue growth was concentrated in U.S. wholesale, while international wholesale and direct-to-consumer sales declined.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $613.6m | $490.8m | $1,293.3m | $1,142.5m |
| Gross margin | 43.5% | 46.1% | 44.2% | 46.1% |
| Operating income | $88.7m | $35.2m | $197.0m | $128.4m |
| Net income | $62.0m | $23.6m | $142.8m | $88.1m |
| Diluted EPS | $1.09 | $0.40 | $2.49 | $1.49 |
| Operating cash flow | Not presented quarterly | $99.4m | $120.2m |
Q2 revenue rose 25%; six-month revenue rose 13%. Q2 Wrangler revenue increased 34% and Lee increased 10%. U.S. wholesale revenue grew 44% in Q2, while non-U.S. wholesale fell 17% and direct-to-consumer fell 6%. Q2 operating margin was 14.5%, versus 7.2% a year earlier; six-month operating margin was 15.2%, versus 11.2%. SG&A fell to 29.0% of revenue from 38.9% in Q2, partly reflecting lower ERP and IT implementation costs and lower compensation-related expense.
Liquidity, debt and capital allocation
- At quarter-end, cash and cash equivalents were $145.3m; inventory was $537.9m, up from $363.0m at year-end 2021. Six-month operating cash flow declined year over year, with inventory and accrued liabilities among the unfavorable working-capital movements.
- Long-term debt was $792.0m, plus $4.8m of short-term borrowings. The company had no revolver borrowings and $487.9m of available capacity after letters of credit. It reported compliance with credit-facility covenants and expected to remain compliant for at least one year from the financial-statement issuance date.
- Six-month investing cash outflow was $11.6m. Financing cash outflow was $120.7m, including $62.5m of share repurchases and $51.5m of dividends. The company repurchased about 1.49m shares during the six months; $62.0m remained under the $200m authorization at June-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects 2022 capital expenditures of $35m–$40m, mainly for manufacturing, distribution and IT, and said cash, operating flows and borrowing capacity should support obligations and planned investments.
- Management expects COVID-related restrictions in parts of China, supply-chain disruption, higher freight and distribution costs, inflationary input costs and softer consumer demand to remain challenges in the second half of 2022. China restrictions significantly affected Q2 APAC sales; foreign exchange also reduced reported revenue.
- Management noted prior-year ERP implementation shipment timing shifts distort quarterly comparisons: North American shipments shifted from Q2 to Q1 2021, and EMEA shipments shifted from Q3 to Q2 2021. Q2 revenue growth should be considered in that context.
- In July 2022, the company approved plans to globalize its operating model and relocate its EMEA headquarters to Switzerland, expecting approximately $18m in restructuring charges in the second half of 2022. No restructuring charges were recorded in the first half of 2022.
- The board declared a $0.46-per-share quarterly dividend payable September 19, 2022. Management said future dividends remain subject to financial, covenant and other considerations. Ordinary-course legal claims were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth persists after accounting for ERP-related shipment timing shifts and whether China/APAC demand recovers.
- How inventory levels, inflation, air freight and distribution costs affect margins and cash generation.
- Actual timing and total cost of the planned $18m restructuring, and progress against the $35m–$40m capital-expenditure outlook.
- Debt, covenant headroom, available liquidity and the sustainability of dividends and share repurchases.
- The filing reports $212.8m of receivables sold and still outstanding at quarter-end; investors may wish to assess the role of this program in working-capital and cash-flow trends.